Category Archives: Telepresence

For Huawei and ZTE, Suspicions Persist

About two weeks ago, the U.S. House Permanent Select Committee on Intelligence held a hearing on “the national-security threats posed by Chinese telecom companies doing business in the United States.” The Chinese telecom companies called to account were Huawei and ZTE, each of which is keen to expand its market reach into the United States.

It is difficult to know what to believe when it comes to the charges leveled against Huawei and ZTE. The accusations against the companies, which involve their alleged capacity to conduct electronic espionage for China and their relationships with China’s government, are serious and plausible but also largely unproven.

Frustrated Ambitions

One would hope these questions could be settled definitively and expeditiously, but this inquiry looks be a marathon rather than a sprint. Huawei and ZTE want to expand in the U.S. market, but their ambitions are thwarted by government concerns about national security.  As long as the concerns remain — and they show no signs of dissipating soon — the two Chinese technology companies face limited horizons in America.

Elsewhere, too, questions have been raised. Although Huawei recently announced a significant expansion in Britain, which received the endorsement of the government there, it was excluded from participating in Australia’s National Broadband Network (NBN). The company also is facing increased suspicion in India and in Canada, countries in which it already has made inroads.

Vehement Denials 

Huawei and ZTE say they’re facing discrimination and protectionism in the U.S.  Both seek to become bigger players globally in smartphones, and Huawei has its sights set on becoming a major force in enterprise networking and telepresence.

Obviously, Huawei and ZTE deny the allegations. Huawei has said it would be self-destructive for the company to function as an agent or proxy of Chinese-government espionage. Huawei SVP Charles Ding, as quoted in a post published on the Forbes website, had this to say:

 As a global company that earns a large part of its revenue from markets outside of China, we know that any improper behaviour would blemish our reputation, would have an adverse effect in the global market, and ultimately would strike a fatal blow to the company’s business operations. Our customers throughout the world trust Huawei. We will never do anything that undermines that trust. It would be immensely foolish for Huawei to risk involvement in national security or economic espionage.

Let me be clear – Huawei has not and will not jeopardise our global commercial success nor the integrity of our customers’ networks for any third party, government or otherwise. Ever.

A Telco Legacy 

Still, questions persist, perhaps because Western countries know, from their own experience, that telecommunications equipment and networks can be invaluable vectors for surveillance and intelligence-gathering activities. As Jim Armitage wrote in The Independent, telcos in Europe and the United States have been tapped repeatedly for skullduggery and eavesdropping.

In one instance, involving the tapping  of 100 mobile phones belonging to Greek politicians and senior civil servants in 2004 and 2005, a Vodafone executive was found dead of an apparent suicide. In another case, a former head of security at Telecom Italia fell off a Naples motorway bridge to his death in 2006 after discovering the illegal wiretapping of 5,000 Italian journalists, politicians, magistrates, and — yes — soccer players.

No question, there’s a long history of telco networks and the gear that runs them being exploited for “spookery” (my neologism of the day) gone wild. That historical context might explain at least some of the acute and ongoing suspicion directed at Chinese telco-gear vendors by U.S. authorities and politicians.

Understanding Cisco’s Relationship to SDN Market

Analysts and observers have variously applauded or denounced Cisco for its network-Cisco ONE programmability pronouncements last week.  Some pilloried the company for being tentative in its approach to SDN, contrasting the industry giant’s perceived reticence with its aggressive pursuit of previous emerging technology markets such as IP PBX, videoconferencing, and converged infrastructure (servers).

Conversely, others have lauded Cisco’s approach to SDN as far more aggressive than its lackluster reply to challenges in market segments such as application-delivery controllers (ADCs) and WAN optimization, where F5 and Riverbed, respectively, demonstrated how a tightly focused strategy and expertise above the network layer could pay off against Cisco.

Different This TIme

But I think they’ve missed a very important point about Cisco’s relationship to the emerging SDN market.  Analogies and comparisons should be handled with care. Close inspection reveals that SDN and the applications it enables represent a completely different proposition from the markets mentioned above.

Let’s break this down by examining Cisco’s aggressive pursuit of IP-based voice and video. It’s not a mystery as to why Cisco chose to charge headlong into those markets. They were opportunities for Cisco to pursue its classic market adjacencies in application-related extensions to its hegemony in routing and switching. Cisco also saw video as synergistic with its core network-infrastructure business because it generated bandwidth-intensive traffic that filled up existing pipes and required new, bigger ones.

Meanwhile, Cisco’s move into UCS servers was driven by strategic considerations. Cisco wanted the extra revenue servers provided, but it also wanted to preemptively seize the advantage over its former server partners (HP, Dell, IBM) before they decided to take the fight to Cisco. What’s more, all the aforementioned vendors confronted the challenge of continuing to grow their businesses and public-market stock prices in markets that were maturing and slowing.

Cisco’s reticence to charge into WAN optimization and ADCs also is explicable. Strategically, at the highest echelons within Cisco, the company viewed these markets as attractive, but not as essential extensions to its core business. The difficulty was not only that Cisco didn’t possess the DNA or the acumen to play in higher-layer network services — though that was definitely a problem — but also that Cisco did not perceive those markets as conferring sufficiently compelling rewards or strategic advantages to warrant the focus and resources necessary for market domination. Hence, we have F5 Networks and its ADC market leadership, though certainly F5’s razor-sharp focus and sustained execution factored heavily into the result.

To Be Continued

Now, let’s look at SDN. For Cisco, what sort of market does it represent? Is it an opportunity to extend its IP-based hegemony, like voice, video, and servers? No, not at all. Is it an adjunct market, such as ADCs and WAN optimization, that would be nice to own but isn’t seen as strategically critical or sufficiently large to move the networking giant’s stock-price needle? No, that’s not it, either.

So, what is SDN’s market relationship to Cisco?

Simply put, it is a potential existential threat, which makes it unlike IP PBXes, videoconferencing, compute hardware, ADCs, and WAN optimization. SDN is a different sort of beast, for reasons that have been covered here and elsewhere many times.  Therefore, it necessitates a different sort of response — carefully calculated, precisely measured, and thoroughly plotted. For Cisco, the ONF-sanctioned approach to SDN is not an opportunity that the networking giant can seize,  but an incipient threat to the lifeblood of its business that it must blunt and contain — and, whatever else, keep out of its enterprise redoubt.

Did Cisco achieve its objective? That’s for a subsequent post.

Cisco’s Storage Trap

Recent commentary from Barclays Capital analyst Jeff Kvaal has me wondering whether  Cisco might push into the storage market. In turn, I’ve begun to think about a strategic drift at Cisco that has been apparent for the last few years.

But let’s discuss Cisco and storage first, then consider the matter within a broader context.

Risks, Rewards, and Precedents

Obviously a move into storage would involve significant risks as well as potential rewards. Cisco would have to think carefully, as it presumably has done, about the likely consequences and implications of such a move. The stakes are high, and other parties — current competitors and partners alike — would not sit idly on their hands.

Then again, Cisco has been down this road before, when it chose to start selling servers rather than relying on boxes from partners, such as HP and Dell. Today, of course, Cisco partners with EMC and NetApp for storage gear. Citing the precedent of Cisco’s server incursion, one could make the case that Cisco might be tempted to call the same play .

After all, we’re entering a period of converged and virtualized infrastructure in the data center, where private and public clouds overlap and merge. In such a world, customers might wish to get well-integrated compute, networking, and storage infrastructure from a single vendor. That’s a premise already accepted at HP and Dell. Meanwhile, it seems increasingly likely data-center infrastructure is coming together, in one way or another, in service of application workloads.

Limits to Growth?

Cisco also has a growth problem. Despite attempts at strategic diversification, including failed ventures in consumer markets (Flip, anyone?), Cisco still hasn’t found a top-line driver that can help it expand the business while supporting its traditional margins. Cisco has pounded the table perennially for videoconferencing and telepresence, but it’s not clear that Cisco will see as much benefit from the proliferation of video collaboration as once was assumed.

To complicate matters, storm clouds are appearing on the horizon, with Cisco’s core businesses of switching and routing threatened by the interrelated developments of service-provider alienation and software-defined networking (SDN). Cisco’s revenues aren’t about to fall off a cliff by any means, but nor are they on the cusp of a second-wind surge.

Such uncertain prospects must concern Cisco’s board of directors, its CEO John Chambers, and its institutional investors.

Suspicious Minds

In storage, Cisco currently has marriages of mutual convenience with EMC (VBlocks and the sometimes-strained VCE joint venture) and with NetApp (the FlexPod reference architecture).  The lyrics of Mark James’ song Suspicious Minds are evocative of what’s transpiring between Cisco and these storage vendors. The problem is not only that Cisco is bigamous, but that the networking giant might have another arrangement in mind that leaves both partners jilted.

Neither EMC nor NetApp is oblivious to the danger, and each has taken care to reduce its strategic reliance on Cisco. Conversely, Cisco would be exposed to substantial risks if it were to abandon its existing partnership in favor of a go-it-alone approach to storage.

I think that’s particularly true in the case of EMC, which is the majority owner of server-virtualization market leader VMware as well as a storage vendor. The corporate tandem of VMware and EMC carries considerable enterprise clout, and Cisco is likely to be understandably reluctant to see the duo become its adversaries.

Caught in a Trap

Still, Cisco has boxed itself into a strategic corner. It needs growth, it hasn’t been able to find it from diversification away from the data center, and it could easily see the potential of broadening its reach from networking and servers to storage. A few years ago, the logical choice might have been for Cisco to acquire EMC. Cisco had the market capitalization and the onshore cash to pull it off five years ago, perhaps even three years ago.

Since then, though, the companies’ market fortunes have diverged. EMC now has a market capitalization of about $54 billion, while Cisco’s is slightly more than $90 billion. Even if Cisco could find a way of repatriating its offshore cash hoard without taking a stiff hit from the U.S. taxman, it wouldn’t have the cash to pull of an acquisition of EMC, whose shareholders doubtless would be disinclined to accept Cisco stock as part of a proposed transaction.

Therefore, even if it wanted to do so, Cisco cannot acquire EMC. It might have been a good move at one time, but it isn’t practical now.

Losing Control

Even NetApp, with a market capitalization of more than $12.1 billion, would rate as the biggest purchase by far in Cisco’s storied history of acquisitions. Cisco could pull it off, but then it would have to try to further counter and commoditize VMware’s virtualization and cloud-management presence through a fervent embrace of something like OpenStack or a potential acquisition of Citrix. I don’t know whether Cisco is ready for either option.

Actually, I don’t see an easy exit from this dilemma for Cisco. It’s mired in somewhat beneficial but inherently limiting and mutually distrustful relationships with two major storage players. It would probably like to own storage just as it owns servers, so that it might offer a full-fledged converged infrastructure stack, but it has let the data-center grass grow under its feet. Just as it missed a beat and failed to harness virtualization and cloud as well as it might have done, it has stumbled similarly on storage.

The status quo is likely to prevail until something breaks. As we all know, however, making no decision effectively is a decision, and it carries consequences. Increasingly, and to an extent that is unprecedented, Cisco is losing control of its strategic destiny.

Avaya IPO? Don’t Count On It

Reports now suggest that Avaya’s pending IPO, which once was mooted to occur this month, might not take place until 2013.

Sources who claim to be familiar with the matter told Reuters and Bloomberg that Avaya has deferred its IPO because of tepid demand amid competition for investment dollars from Facebook, the Carlyle Group, and Palo Alto Networks, among others.

Reconsidering the “Nortel Option

Well, if you are generously disposed, you might believe that particular interpretation of events. However, if you are more skeptical, you might wonder whether an Avaya IPO will ever materialize. If I were making book on the matter — and I’m not, because that sort of thing is illegal in many jurisdictions — I would probably skew the morning-line odds against Avaya bringing its long-deferred IPO to fruition.

Some of you found it amusing when I mooted the possibility of Avaya pursuing the “Nortel option” — that is, selling its assets piecemeal to various buyers — but I can easily envision it happening. Whether that occurs as part of bankruptcy proceedings is another question, though Avaya’s long-term debt remains disconcertingly and stubbornly high.

Despite recent acquisitions, including that of Radvision for $230 million earlier this month, I don’t see the prospect of compelling and sustained revenue growth that would allow Avaya to position itself as an attractive IPO vehicle.

Unconvincing Narrative

No matter where one looks, Avaya’s long-term prospects seem unimpressive if not inauspicious. In its core business of “global communications solutions” — comprising its unified-communications and contact-center product portfolios — it is facing strong rivals (Cisco, a Skype-fortified Microsoft) as well as market and technology trends that significantly inhibit meaningful growth. In networking, its next-biggest business, the company’s progress has been stalled by competition from entrenched market leaders (Cisco, Juniper, HP, etc.), the rise of aggressive enterprise-networking newcomers (Huawei), and a chronic inability to meaningful differentiate itself from the pack.

According to a quarterly financial report that Avaya filed with the Securities and Exchange Commission (SEC) last month, the company generated overall revenue of $1.387 billion during the three months ending on December 31, 2011. That was marginally better than the $1.366 billion in revenue Avaya derived during the corresponding quarter in the previous year. In the fourth quarter of 2011, products accounted for $749 million of revenue and services contributed $638 million, compared to product revenue of $722 million and services revenue of $644 million during the fourth quarter of 2010.

If we parse that product revenue, Avaya’s story doesn’t get any better. The aforementioned “global communications solutions” produced $667 million in revenue during the fourth quarter of 2011, up slightly over revenue of $645 million in the fourth quarter of 2010. Those growth numbers aren’t exactly eye popping, and the picture becomes less vibrant as we turn our attention to Avaya Networking. That business generated revenue of $82 million in the fourth quarter of 2011, a very slight improvement on the $78 million in revenue recorded during the fourth quarter of 2010.

Lofty Aspirations

Avaya can point to seasonality and other factors as extenuating circumstances, but, all things considered, most neutral parties would conclude that Avaya has a mountain to climb in networking. Unfortunately, it seems to be climbing that mountain without sensible footwear and with the questionable guidance of vertiginous  sherpas. I just don’t see Avaya scaling networking’s heights, especially as it pares its R&D spending and offloads sales costs to its channel partners.

True, Marc Randall, who now heads Avaya Networking, has lofty aspirations for the business unit he runs, but analysts and observers (including this one) are doubtful that Avaya can realize its objective of becoming a top-three vendor. Hard numbers validate that skepticism: Dell’Oro Group figures, as reported by Network World’s Jim Duffy, indicate that Avaya has lost half of its revenue share in the Ethernet switching market since taking ownership of Nortel’s enterprise business nearly three years ago. Furthermore, as we have seen, Avaya’s own numbers from its networking business confirm a pronounced lack of market momentum.

Avaya’s networking bullishness is predicated on a plan to align sales of network infrastructure with key applications in five target markets: campus, data center, branch, edge, and mobility. The applications with which it will align its networking gear include Avaya’s own unified communications and contact center solutions, its Web Alive collaboration software, and popular business applications that it neither owns nor controls.

Essentially, Avaya’s networking group is piling a lot of weight on the back of a core business that is more beast of burden than Triple Crown thoroughbred.

Growth by Acquisition?

Perhaps that explains why Avaya is searching for growth through acquisitions. In addition to the acquisition of Radvision this year, Avaya last year acquired Konftel (for $15 million), a vendor of collaboration and conferencing technologies; and Sipera, a purveyor of session-border controllers (SBCs). The Radvision acquisition extended Avaya’s product reach into video, but it probably will not do enough to make Avaya a leader in either videoconferencing or video-based collaboration. It seems like a long-term technology play rather than something that will pay immediate dividends in the market.

So the discussion comes full circle as we wonder just where and how Avaya will manage to produce a growth profile that will make it an attractive IPO prospect for investors. I’m not a soothsayer, but I am willing to predict that Avaya will sell off at least some assets well before it consummates an IPO.

Avaya IPO? Magic 8-ball says: Don’t count on it.

On Further Review, the Cius Still Looks Doomed

I’m returning to the topic of the Cisco Cius, but I promise I won’t make it an obsession.

My view of the commercial prospects for the Cius has shifted significantly during the past year, from when Cisco first announced the pseudo-tablet to now, as it prepares to ship the device, presumably in something approximating volumes. Back in the summer of 2010, I thought the Cisco Cius might have a fighting chance of currying favor within the company’s installed base, playing to IT decision makers with a practical and broad-based extension of its video-collaboration strategy.

Changing Landscape

Some things have changed since then. The Apple iPad franchise, as we all know, has gone from strength to strength. iPads now proliferate in small businesses and enterprises as well as in homes. They’ve crossed the computing rubicon from the consumer realm to the business world. They, like iPhones and other smartphones, also have helped to engender the much-discussed “consumerization of IT,” whereby consumers have insisted on bringing their favorite devices to the office, where they have been gradually and grudgingly accepted by enterprise IT departments under imperatives from CFOs to bring down IT-related capital and operating expenses.

That has cut into Cisco’s appeal. Cisco, as a big old-school enterprise player, didn’t count on consumerist employees having any appreciable say in the navigation of the enterprise IT ship. Cisco, as the Flip debacle, made obvious, is not exactly a popular consumer brand, notwithstanding the barrage of television commercials it has unleashed on couch potatoes during the last several years.

One could also argue that the commoditization of a broad swathe of enterprise-networking equipment, led by Cisco competitors, also is slashing into the giant’s dominance as well as its margins. Moreover, it remains to be seen how the inexorable march of virtualization and cloud computing will redefine the networking universe and Cisco’s role as the brightest star in that firmament.

 Penny-Pinching as New Normal

Then there are macroeconomic factors. Everywhere in the developed world, IT buyers at SMBs and large enterprises alike are trying to save hard-earned money. Cisco can wave cost-of-ownership studies all it wants, but most network and technology buyers do not perceive Cisco products as money savers. Consequently, there’s a big push from buyers, as perhaps never before, for open, standards-based, interoperable solutions that are — you guessed it — cheaper to buy than the proprietary solutions of yore.

So, it all amounts to a perfect storm driving right through the heart of John Chambers’ once-peaceful neighborhood. This is true for Cisco’s entire product portfolio, not just the Cius, but I’m writing about the Cius today — not that I’m obsessed with it, you understand — so let me pull things back into tighter focus now.

 Trying to Stop the Phones from Bleeding 

With the Cius, Cisco still seems to the think that the old rules, the old market dynamics, and its old customer control still apply. I thought more about this yesterday when I received an email message from a regular reader (imagine that!) who pointed out to me that Cisco is right about one thing: The Cius isn’t a tablet.

I’ll quote directly from his message:

The Cius isn’t a tablet  — it only looks like one.  It’s a desktop and video phone.  Cisco is in this business because PCs and wireless handsets are subsuming the function of the enterprise desktop phone (thanks to Microsoft Lync, Apple iPhone, Android, etc.).  Their phone business is a multi-billion dollar per year business.  I agree — the Cius is a distraction, but they have to do *something* to protect that desktop phone revenue stream.  Tough spot.

These are perceptive comments, and they’re borne out by recent articles and analysis on Cisco’s Cius push. All of which makes me feel, even more than when I wrote my Cius post of earlier this week, that the product is doomed to, as Mike Tyson said in one of his best malapropisms, “fade into Bolivian.” 

Gambit Won’t Work

Cisco has made a lot of money selling desktop IP phones, but that gravy train, like so many others, is drawing fewer passengers at each station. The trends I mentioned above — stronger consumer-oriented offerings from competitors in smartphone and tablets, the consumerization of IT, the enterprise focus on cutting IT costs wherever possible, and a concomitant pull away from premium proprietary technologies — are threatening to eviscerate Cisco’s IP phone franchise.

Hence, the Cius. But, even as a defensive bulwark, it doesn’t work. At the end of the day, CIsco might see an IP phone replacement when it looks at the Cius through its rose-colored glasses, but customers will see it for what it is — a relatively high-priced, seven-inch tablet running a smarphone-version of Android, and tied to proprietary video, voice, and collaboration solutions. Both the Cius and the AppHQ go strongly against the tide of IT consumerization and mobile-platform heterogeneity. That’s not a tide Cisco can reverse.

With sublime brevity, my reader-correspondent said it best: Tough spot.

Chambers’ Disconcerting Cius Pitch

In his keynote presentation to Cisco Live in Las Vegas earlier today, Cisco CEO John Chambers repented for his earlier sins against stakeholder value and vowed to make amends.

Devalued Credibility

A few short years ago, Chambers’ word would have been his bond, and his bonds would have traded at high value on any market. These days, Chambers’ words are met with skepticism.

If John Chambers has lost some luster, so has his company.  Cisco had been the worst-performing Dow stock this year until it staged a mild rally and edged past Bank of America earlier today. Even Ralph Nader, who is a Cisco shareholder as well a consumer activist, is unhappy with the company’s stock and the stewardship of its CEO.

Cisco customers, partners, suppliers, and investors now know that the networking giant and its braintrust aren’t infallible. That’s okay, of course. We all make mistakes. What’s important is that we learn from the mistakes we make, avoid repeating the same ones, and work diligently to be right more often than we are wrong. When we slip up, we want the miscues to be minor, the successes to be big.

Lessons Learned?

That’s what Cisco and Chambers will try to do now, but one wonders whether they’ve learned the lessons administered during the company’s humbling time in market purgatory.

It wasn’t long ago, just two years back to be exact, that John Chambers was lavishing praise upon the Flip video camera. Chambers proclaimed that the Flip, which came to Cisco through the acquisition of Pure Digital, was — along the video in general — the future of both consumer and enterprise communication.

We all know now that the Flip won’t play a part in Cisco’s future or the in the future of video communication. Cisco killed the Flip, realizing that it was destined to fail against smartphones that increasingly came equipped with video capabilities approximating those of the video-only Flip.

Chambers Says Cius is Hot, but it’s Not

If Chambers had learned from the Flip debacle, one could let him take the mulligan and move on. But I’m so sure the Flip was an aberration. Today, Chambers said the following about an overpriced Android tablet that appears to have much dimmer prospects than the Flip had back in 2009:

 “You’re beginning to see it (the Cius) launch in volume. I believe this product is going to be really hot.” 

I realize that the success or failure of the Cius will not seal Cisco’s fate. The Cius could go the way of the dinosaur, or the Flip, and Cisco would still endure. Cisco’s destiny will turn on how well it defends its core markets while finding and sustaining growth in, yes, those much-maligned market adjacencies. All the while, Cisco will have to outmaneuver competitors in adjusting to ongoing virtualization, cloud computing, increased mobility, and the growing cost-consciousness of enterprise and service-provider technology buyers in developed markets. It’s a daunting challenge.

Unnecessary Distraction

Cisco doesn’t need doomed distractions like the Cius. What’s more, what Cisco is trying to do with Cius — selling tablets to corporate IT departments to foist on their employees — goes against everything that we’re seeing today in the marketplace. The Cius lacks consumer appeal, does not run the latest tablet-optimized version of Android, is overpriced, has a less-than-optimal seven-inch display, and isn’t really designed to be anything more than a mobile access point, or adjunct, for Cisco’s proprietary collaboration and Telepresence technologies. It goes completely against the grain of the seemingly inexorable wave of IT consumerization.

It feels, well, outdated, like something an out-of-touch legacy vendor would try to force down the throats of its customers, failing to recognize that the rules and the game have changed.

Maybe Chambers was just switched to autopilot cheerleader mode and he was giving everything, including the Cius, the pitchman’s hard sell. In this case, one hopes he isn’t buying his own bluster.

How Cisco Arrived at the Crossroads

As reports of Cisco’s impending layoffs intensify and spread, I started thinking about how the networking giant got into its current predicament and whether it can escape from it.

One major problem for the company is that the challenges it faces aren’t entirely attributable to its own mistakes. If Cisco’s own bumbling was wholly responsible for the company’s middle-life crisis, one might think it could stop engaging in self-harm, right the ship, and chart a course to renewed prosperity.

Internal Missteps Exacerbated by External Factors

But, even though Cisco has contributed significantly to its own decline — with a byzantine bureaucratic management structure replete with a multitude of executive councils, half-baked forays into consumer markets about which it knew next to nothing, imperial overstretch into too many markets with too many diluted products, and the loss of far too many talented leaders — external factors also played a meaningful role in bringing the company to this crossroads.

Those external factors comprise market dynamics and increasingly effective incursions by competitors into Cisco’s core business of switching and routing, not just in the telco space but increasingly — and more significantly — in enterprise markets, where Cisco heretofore has maintained hegemonic dominance.

If we look into the recent past, we can see that Cisco saw one threat coming well before it actually arrived. Before cloud computing crashed the networking party and threatened to rearrange data-center infrastructure worldwide, Cisco faced the threat of network-gear commoditization from a number of vendors, including the “China-out” 3Com, which had completely remade itself into a Chinese company with an American name through its now-defunct H3C joint venture with Huawei.

Now, of course, 3Com is part of HP Networking, and a big draw for HP when it acquired 3Com was represented by the cost-effective products and low-priced engineering talent that H3C offered. HP reasoned that if Cisco wanted to come after its server market with Unified Computing System (UCS), HP would fight back by attacking the relatively robust margins in Cisco’s bread-and-butter business with aggressively priced networking gear.

Cisco Prescience

HP’s strategy, especially in a baleful macroeconomic world where cost-cutting in enterprises and governments is now an imperative rather than a prerogative, is beginning to bear fruit, as recent market-share gains attest.

Meanwhile, Cisco knew that Huawei, gradually eating into its telecommunications market share in markets outside North America, would eventually seek future growth in the enterprise. It was inevitable, and Cisco had to prepare for the same low-priced, value-based onslaught that Huawei waged so successfully against it in overseas carrier accounts. In the enterprise, Huawei would follow the same telco script, focusing first on overseas markets — in its home market, China, as well as in Asia, the Middle East, Europe, and South America — before making its push into a less-receptive North American market.

That is happening now, as I write this post, but Cisco had the prescience to see it on the horizon years before it actually occurred.

Explaining Drive for Diversification

What do you think that hit-and-miss diversification strategy — into consumer markets, into home networking, into enterprise collaboration with WebEx, into telepresence, into smart grids, into so much else besides — was all about? Cisco was looking to escape getting hit by the bullet train of network commoditization, aimed straight at its core business.

That Cisco has not excelled in its diversification strategy into new markets and technologies shouldn’t come as a surprise. Well before it make those moves, it had failed in diversification efforts much closer to home, in areas such as WAN optimization, where it had been largely unsuccessful against Riverbed, and in load balancing/application traffic management, where F5 had throughly beaten back the giant. The truth is, Cisco has a spotty record in truly adjacent or contiguous markets, so it’s no wonder that it has struggled to dominate markets that are further afield.

Game Gets More Complicated

Still, the salient point is that Cisco went into all those markets because it felt it needed to do so, for revenue growth, for margin support, for account control, for stakeholder benefit.

Now, cloud computing, with all its many implications for networking, is roiling the telco, service provider, and enterprise markets. It’s not certain that Cisco can respond successfully to cloud-centric threats posed by data-center networking vendors such Juniper Networks as Arista Networks or by technologies such as software-defined networking (as represented by the OpenFlow protocol).

Cisco was already fighting one battle, against the commoditizing Huaweis and 3Coms of the world, and now another front has opened.