Cisco Margins Threatened More Today by Chinese Vendors, but Open Source Looms

Over at ZDNet, Dana Blankenhorn asks whether Cisco is threatened by open source, which typically compresses margins in every market it enters.

After considering Cisco’s still-robust net profit margin of 19.5 percent, Blankenhorn deduces the following conclusion:

If Cisco margins are being hit by open source, the impact is, at best, marginal.

So far most of the talk about Cisco being dumped for open source comes from open source vendors themselves. Or it’s anecdotal.

I suspect Cisco worries a lot more about Chinese competitors like Huawei, whose 2006 sales target is one-third Cisco’s, than it does about open source.

Blankenhorn is right about Cisco’s biggest margin squeeze coming from Chinese networking players such as Huawei and ZTE. Nonetheless, taking a longer view, I am disinclined to dismiss the threat that open-source IP PBX and routing technologies might represent to Cisco’s juicy margins.

There’s a real danger to Cisco in open-source networking technologies. We’re seeing it today in IP PBX and VoIP products and technologies, from vendors such as Digium and Fonality, and we’ll see it gain steam in routing, too, as represented by relative newcomers such as Vyatta, which is leveraging the eXtensible Open Router Platform (XORP).

It’s early days for Vyatta and others like it, but I think network managers at SMEs, educational institutions, and non-profit organizations gradually will respond to the value proposition of lower prices and more extensibility that XORP-derived routing can deliver. As the code becomes easier to deploy and manage — coming in form factors such as appliances, and with improved user interfaces and simplified configurability options — other customers will begin to take the open-source leap.

How soon with this happen? It could take a few years, and, even then, Cisco will still be a strong player, if not as dominant as it’s been heretofore. So, no, Cisco’s quarterly results aren’t about to impacted materially by open-source networking.

Still, as evidenced by the growing success of Asterix IP PBXes, there is a precedent for inroads having been made against Cisco, Avaya, Nortel, and other vendors of proprietary networking technologies. With its fat margins built on a well-understood, maturing market, Cisco is — as Forbes’ Daniel Lyons has said — a target of the "cheap revolution."

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