Cisco announced a pretty good quarter, but its guidance suggested its profit margins would be impacted by a decision to absorb increased chip prices rather than pass them along. All that is true, but there’s still a lot to be learned from looking at their earnings call transcript, and also exploring their recent M&A decisions and other announcements. In summary, there’s more at stake here than chips.
The first thing we can pick out from the call’s transcript is that Cisco expects that the network market, and their own portfolio, will undergo radical changes. “Cisco’s end-to-end portfolio will serve as the foundation for next-generation infrastructure solutions as well as cloud enabled delivery models and innovation, allowing our customers to move with even greater speed and agility. This will require a significant investment cycle and reinforces the strength of our strategy while driving greater opportunity to create a world that is more connected, inclusive and secure.”
Routing-as-usual, then, is not a viable long-term strategy, then. That shouldn’t be a surprise given that both service providers and enterprises have been slow-rolling capital programs, largely because the benefits can’t justify greater spending. When that happens, vendors like Cisco have two broad options. One is to try to tweak their sales model to accommodate the buyers’ inertia, and the other is to try to transform their business. Obviously the former is easier, so let’s look at it first.
Cisco hopes to address buyer reluctance by “simplifying the adoption of our offerings with network-wide automation, analytics and flexible-as-a-service consumption models, all aimed at improving our customers’ network performance capabilities and security which we believe will drive tremendous long-term opportunities for us.” Network automation is aimed at reducing opex, which is good for equipment sales because, loosely speaking, ROI equals benefits divided by capex plus opex. Lower opex and you can raise capex without impacting the business case of the buyer.
Another near-term, low-apple, approach is to discourage buyers from hunkering down on a past purchase long after it would normally be depreciated and replaced. The subscription software model is an example; new features that address things like performance are much easier to introduce in software, but if users won’t buy new hardware/software bundles they may simply sit on old features. By separating software as a subscription, Cisco can encourage buyers to keep paying for new stuff without having to fork-lift hardware.
Security is a kind of transition between the low and higher-apple items on Cisco’s list. Once you’ve worn out the easy paths, the next things to look at would be increasing their total addressable market (TAM) by encroaching on someone else’s space, or finding new benefits that would justify additional spending. Security is an obvious target of opportunity, largely because buyers have persisted in gluing on layers of new stuff rather than addressing their security model in a holistic way. That may not prove true forever, but for now, Cisco has an opportunity.
What’s lacking in Cisco’s story is a real and overall sense of innovation, and that shouldn’t be a surprise given that Cisco has always tried to be a “fast follower”, letting others take the risk and blaze the trail, then swooping down to do an interdiction. Even those swoops are often more marketing fluff than significant technology changes; enterprises I talk with rate Cisco below competitors like Juniper in terms of technical innovation, and they also see Cisco’s acquisitions made more for sales-tactical reasons than for strategic reasons.
The advantage of Cisco’s approach is that it magnifies incumbency. If you promote a change in technology, you tend to throw buyers open to new choices and give competitors a new shot at your base. You also challenge the technologists who, because they’ve certified with your existing products, may find their careers threatened by any major shifts. Over the years, I’ve found that any vendor’s certified technical cadre is more conservative than non-certified people, but it’s always been more true for Cisco than for other vendors.
The big question for Cisco, and one the company isn’t addressing on earnings calls or in any other public forum, is whether they can hold onto this approach in an industry that’s facing major changes and challenges. There are two things I think Cisco is going to need to do, and likely do quickly, and I’m not sure they’ll do either of them.
The first thing is to address the problem service providers have with profit per bit, which involves two specific steps. First, to provide near-term relief, Cisco needs to have an absolutely impeccable operations automation story, because they can’t sustain higher pricing without giving something back besides capex. Opex is the obvious answer. Second, to provide long-term relief, they need to be addressing the hosting piece of the service story to offer operators a path upward on the food chain.
Cisco’s position in operations automation has been a bit bicameral in the past. On the one hand, they generally reject standard approaches as pathways for competitors to mess up Cisco’s dominance, and operators tend to like standards. On the other hand, they’ve tacitly accepted standard strategies like ONAP even when they demonstrably aren’t working for operators, in terms of broad opex reduction.
Their higher-layer reluctance is harder to fathom, given that Cisco has sold servers for some time. Look a bit deeper, though, and you see that Cisco has never really tried to compete broadly with the “real” server vendors like HPE, and they’re not aggressive in developing their own software suites to support feature/function hosting. It’s likely they fear any sort of server hosting for its possible impact on router sales.
Demand pressure could derail Cisco’s past resistance to effectively addressing either of these areas, but competitive pressure is another growing risk for them. 5G mandates hosting, and if 5G hosting supports carrier cloud, then Cisco is on the outside looking in for what could be a massive spending wave. Nokia and Ericsson have effective 5G strategies, and as they expand their inventory of 5G platform tools, they raise the bar for Cisco to do anything at all.
Then there’s Juniper. Of all the network equipment vendors out there, Juniper has made the most strategic moves in M&A, especially relating to the very same two new goals that Cisco drags their feet on. They could revolutionize security with 128 Technology zero-trust capability. They could revolutionize higher-layer services through a combination of session-aware handling of traffic and the Apstra data center networking strategy, and their Mist and Netrounds acquisitions could form the heart of a powerful story on service lifecycle automation. If Juniper had positioned these assets optimally, Cisco could have been confronted with major competitive problems, but Juniper doesn’t even come close to matching Cisco’s marketing savvy, and let them off the hook.
Cisco has just hired a former VMware engineer and Cloud-Native Computing Foundation veteran to head up their open-source stuff, which suggests that Cisco finally realizes that they need foundation/platform software and they don’t have the right skills in-house. However, we’ve seen cloud providers do limited hiring to gain some traction in 5G hosting, and the initiatives don’t accomplish as much as they could if there were a deeper team and a specific awareness of the needs of the “telco cloud”. Might they build such a team? Sure, but not immediately, and all Cisco’s competitors have an opportunity to make things harder for Cisco now.
Cisco has also recently made some UCS data center platform announcements that focus on hybrid and multi-cloud, but again it’s not clear whether they represent a real initiative in the space or are simply positioning initiatives. They seem, in particular, to be taking aim at some of the Juniper cloud marketing and product announcements, and you can’t stay ahead of your competitors by counterpunching.
We may see signals of a Cisco strategic shift in their next earnings call, but I’d be surprised if we had any more than a hint before the end of this year. Their competitors may make a move sooner.