Those who read my blog know I follow Wall Street’s views carefully, so you’re not likely surprised that I want to reflect on a recent Street-centric analysis of Cisco, run on Seeking Alpha. The title, “Cisco Systems: More of the Same” sets the tone for the piece, and what we need to reflect on is first, whether the piece makes fair points, and second what it might mean for the industry if it does.
The basic problem for network equipment is that everyone who owns a network is trying to reduce what they spend on it. The product of “the network” is pushed bits, and pushed bits are a commodity. To operators, they offer shrinking ROI. Users want them to be both free and invisible. This alone is enough to make network equipment vendors hunger for something to sell that could offer durable, even growing, revenue and margins.
The basic problem for a market leader is that you really have nowhere to go but down. Everyone is chasing your current customers; all your competitors are united by their desire to wipe you off the face of the earth so they can grab the share of the market you control. It’s no wonder that market leaders are always keeping an eye out for something else they can dominate.
Cisco, obviously, fits both these problem-points. They also have a few Cisco-specific issues that impact their response to these problems.
The first of these issues is Cisco’s historical reluctance to rock the boat. No market leader likes to do things that could throw their current base up for grabs, but Cisco has been reluctant even to exploit related market/product areas. “Fast followership” trumps “market leadership” for Cisco.
Market leadership can lead you astray. Jump out in a new area, and if you’re Cisco you’re using your market credentials to validate a new space that, once validated, will be jumped on by competitors. Competitors who have the advantage of seeing what you’ve done and counter-punching. Wait for somebody else to take the risk, then, if the new area really shows promise, use your market might to crush them like a bug.
The second issue, almost surely in part a result of the first, is that Cisco is relentlessly sales-tactical in their thinking. “Sales” because the sales organization has always exercised more influence over senior management than engineering or product management. “Tactical” because Cisco thinks and plans a quarter at a time. Make your quota, make your numbers, show the Street something on the next earnings call. Something that takes a long time to bear fruit either has to be hyped into a shorter-term impact, or pushed aside.
Cisco used to be famous for meeting a new market interest with an announcement of a “five-phase plan”, and they were always in Phase Two when they made the announcement. This was a clever way to define a solution to that new market interest, but at the same time to show that getting to it was a process that had intermediate steps, that the process would take a long time, but that you could buy a step toward it right now from Cisco.
The summary line from the piece I’ve cited says “Cisco continues on the same path, pursuing bolt-on acquisitions to deliver on minimal revenue growth.” I think that’s a fair comment. Cisco has purchased companies but not to change their fundamental strategic position, but to augment revenues in the near term and give their sales force something new to sell. They’ve also, as the article suggests, done things like buy back their stock to keep earnings-per-share growth up while earnings were between down and modestly better.
I think Cisco’s “disaggregation” moves, it’s shift to “recurring” “software” as a focus, are also examples of a typical Cisco response. It placates the Street, it generates a new revenue source, but it avoids that uncomfortable market leadership role in some new area. Of course, you could wonder whether the current market conditions constitute a “new area” at all.
Operators have been talking about revenue per bit problems for two decades. In that same two decades, enterprises have shifted from a cyclical shift between simple modernization and advancing their technology, to hunkering down on the former of the two. In the past, major upswings in IT and network spending have come in distinct cycles, each lasting about 15 years from start to finish. We ended the last cycle in 1999, and none has come along since. That means that we’ve been in a modernization/consolidation mode for enterprises for over 20 years.
What drives investment by network operators and enterprises alike is ROI. You justify a project with some new benefit set whose value exceeds its cost. Once you’ve brought that gear in, sustaining it is just a matter of spending as little as you can for as much as you can get. Only new benefits will drive spending growth, and both operators and enterprises have been looking for new benefits for decades. I recounted both these points to Cisco in the early 2000s, so I know they at least knew of the situation. Market leadership would demand that you address them, but of course fast-followership poses no such requirement.
As the article points out, Cisco’s current financials are boosted by easy comparables, by the COVID mess that created the lowering tide that lowered the boats of the entire networking industry. Maybe new variants won’t stall a recovery and we’ll come out of the slump. Certainly, up until Omicron, the network buyers had been loosening their purse strings, which is why Cisco has an order backlog. Backlogs clear, and comparables eventually have to compare with upticks not downticks.
Vendors have to drive new benefits, through innovative ways of applying technology to improve buyers’ business models. A lack of innovation creates the current technology-buyer stagnation. Buyers don’t sit around figuring out what they could do if they had stuff that no vendor is offering them. Particularly if the new things that would jump-start benefit creation for networking are big changes, complex ecosystemic stuff that’s hard to explain and much harder to invent. Cisco, as a vendor, could be innovative, but so could all of their competitors.
At least two network rivals seem to be trying to polish up their crystal balls, and invest in what they see. Nokia seems to be taking a more open-model view of networking, accepting that the basics of pushing bits or lighting up cell towers with RF is a commodity, and that you need to manage costs accordingly. That leaves them free to think of what’s bigger and better, but we’re not yet hearing Nokia talk about what that might be.
Juniper, in some ways the arch-enemy for Cisco, has taken the M&A game Cisco is said to have played for time and near-term revenue in the exact opposite direction. Their acquisitions have been decidedly (and, for Juniper, uncharacteristically) strategic, and they now have the technology to support a vision of network evolution that’s as close to what I think we should demand as we can get. As I’ve said before, they also have had an articulation gap that limits their ability to leverage what they have.
The article is fair to Cisco in one sense; it presents what I think is a reasonable picture of Cisco’s behavior. It’s unfair in one sense too, in that it doesn’t note that Cisco isn’t the only one that’s doing “more of the same”. The industry has been marking time for two decades, and if vendors, service providers, and enterprises want something different, specific measures will be required.
Supply-side networking says “build it and they will come”. Cisco, suggests the article, has said “Come, and we’ll tell we’ve built its essential precursor, or maybe we’ll buy whoever really built it”. The right answer is “Speak the future, your vision, to the planners so they can plan to consume your products”. Tell people what you’ve done, where you’re going, and how that will create the benefits that justify buying your stuff. That’s what every vendor, every operator, in the industry needs to do, and what some may indeed be doing.
Network innovators need to look over their shoulders, though. They need to pursue their innovation with determination and speed, because the Cisco fast-follower freight train is right behind them, and the Cisco strategy may end up being right for them, after all.