Cisco loves containers. There’s no question that container and software-related acquisitions have dominated Cisco’s recent M&A, but it’s sure reasonable to wonder what they hope to gain. Does Cisco think they can become a competitor to cloud software and server companies, are they betting on hosted network elements, or what? Cisco’s Banzai acquisition last month is perhaps a “tell” regarding Cisco’s direction.
Cisco has been in the server business since 2009, with its Unified Computing System (UCS) line. At first, UCS was pretty much a server story, but since then, and especially within the last couple years, Cisco has been picking up platform software to augment their hardware position. Given that Cisco always tells whatever story seems likely to gather the most PR momentum, it’s never been really clear where they wanted to go with the stuff.
I think that, early on, Cisco’s foray into servers came out of their data center switching business. Cisco is, and always has been, a very sales-directed company. The IT organization tends to be the buyer of data center switching rather than the networking organization, and so Cisco’s salespeople were calling on a new cadre of prospects for their rack switching. Given that data center switches in general, and top-of-rack systems in particular, connect server farms, the demand for them comes as a result of an expansion in the server area. Salespeople ran back to Chambers (CEO of Cisco at the time) and suggested Cisco get into the server business.
UCS has generated respectable but not spectacular revenue for Cisco, but it reached its peak growth around 2015, and the largest number of UCS customers were in the software and technology space. UCS has fallen in market share in the last several years according to most analysts’ reports. This coincides with the sudden growth in cloud computing and containers, and that’s what raises our questions regarding Cisco’s motives.
Cisco might be doing nothing more than aligning UCS with current platform directions. Users increasingly want to buy hosting platforms, which include both the servers and the necessary operating system and middleware tools. Even more significant is the user’s focus on the platform software for the hosting value proposition; the servers are just cost centers to be negotiated into “margin marginalization”. Since Cisco doesn’t want to be in a commodity business, it makes sense to build the value-add.
The Banzai deal may be the “tell” for this view, as I’ve already suggested. Banzai was focusing on enterprise cloud-native development and deployment. If Cisco wants to be a hosting platform player for the enterprise, building their credibility in the original UCS mission, then jumping out ahead of the current market is critical; there’s too much competition for vanilla containers. Differentiation would help Cisco sustain margins.
The only problem with this is that IBM/Red Hat and VMware are also jumping into the cloud-native space, and from a position of an established data center vendor. Their approach is to replace the software platform while being server agnostic, meaning that to compete with them, Cisco would have to either sell software without UCS servers, or displace existing servers to move UCS servers in. The former means going head-to-head with established vendors, and the latter would be a tough sell to enterprise CFOs.
So, what are they doing? A second possibility is that Cisco is shifting its focus to a future convergence of network and cloud. Remember that Cisco’s revenues are overwhelmingly from network equipment, and their best profit margins have been in the router space. With routers under price pressure, and with network operators and enterprises both looking at open-model networks, Cisco’s core business is under pressure. Could it be that Cisco is looking to sell servers to buyers who have new network missions that involve servers and network equipment? Think “carrier cloud”.
Carrier cloud is kind of like the Seven Cities of Gold; everyone “knew” they were out there, but nobody ever found them. The potential of carrier cloud is enormous, over 100,000 data centers by 2030, containing millions of servers. It would be, if deployed, the largest single source of new server purchases in the global market. Best of all, from Cisco’s perspective, carrier cloud is sold to carriers, people Cisco have been selling to for decades.
The problem with this is that operators are far from a strong financial commitment to carrier cloud. Most of them see applications of “carrier cloud”, but few of them are confident at this point that they can make a business case for them, or even assign a cost to them, given a lack of understanding of just how the applications would work. NFV was the only carrier cloud driver that operators really understood, and it failed to develop any credibility. It’s not like Cisco, sales-driven as it is, to spend a lot of sales resources educating a market that they know will be competitive if buyers learn the ropes.
5G and Open RAN might be the next opportunity for carrier cloud, and for Cisco. Here, the opportunity and the execution on it develop pretty quickly, there’s funding/budget in place, and there’s clear market momentum. Cisco could well see an opportunity to grab ahold of this next driver, and by doing so gain control over carrier cloud. They might also be able to use 5G and Open RAN to cement a position in the “separate control plane” model. Cisco disaggregates IOS and its router hardware, but to make their position real, they need to separate the control plane and extend it, at least in part, to the cloud.
The problem with this is that it’s still a big reach for a company that’s never been a software innovator. I think it’s more likely that a Cisco competitor would jump on this opportunity, in which case Cisco likely sees it the same way and would probably not invest a lot of resources at this point. Fast-follower is their role of choice.
What does that leave? “Eliminate the impossible, and what’s left, however improbable, must be the answer.” I think that while none of the possible Cisco motives for container interest are impossible, the one least improbable is the first one, that Cisco is seeking broader data center traction. A recent Network World piece seems to reinforce Cisco’s interest in the enterprise data center as their primary motivator.
One good reason is the one already cited; Cisco has engagement with the buyer in that space already. Another good reason is that Cisco thinks the enterprise, or at least the leading-edge players in that space, are likely to move faster than the service providers. Service provider profit per bit challenges are profound, and it may take years for them to evolve a strategy and fund it.
A final, possibly critical point is that carrier cloud is more “cloud” than “carrier”. If there is a credible market for carrier cloud in the future, it will involve service features based more on traditional public cloud technology than on network technology. Thus, a Cisco initiative to address near-term cloud-native opportunity for the enterprise today could pay dividends for carrier cloud initiatives in the future.