Predicting the future is a difficult business. Even the best prognosticators get it wrong occasionally. What’s more, the further one reaches into the future with forecasts, the more likely one is to be humbled by events.
Cisco is projecting long-term revenue growth of 12 percent to 17 percent. The company has been vague about when that growth will occur, where it will come from (geographically and otherwise), how it will be attained and sustained, and why we should trust its projections.
I’m not here to tell you Cisco will fail. Its revenues have been declining on a year-to-year basis for numerous quarters, but it has not been alone in those struggles. As you might have noticed, we’ve been at the economic mercy of a global downturn that has affected — and not in a good way — practically everyone.
It’s quite possible, given the low market floor along which the computer-networking space seems to be scuttling, that a growth surge, measured on a year-to-year basis from the absolute nadir of this brutal downturn, will produce some initially impressive numbers. The challenge will come in sustaining heady percentage growth.
My feeling, for what’s its worth, is that Cisco will have to venture beyond its comfort zone to consistently and sustainably produce the sort of growth that its CEO John Chambers envisions. Cisco’s core markets, involving the sale of switches and routers to enterprises and services providers, aren’t going to get it done. For one thing, those markets are mature — Cisco itself is 25 years old, and some networking markets predate the company’s existence — and they don’t have the drive and vitality that they had in their youth. They’re slow-growth markets. Anything above middle single digits would be welcome.
Cisco probably wouldn’t argue that point. It isn’t for nothing that the networking giant has moved aggressively into its “market adjacencies,” which have included everything from network security, to VoIP PBXes, to unified communications, to its pushes into consumer networking (Linksys) and consumer electronics (the Flip), and now even into converged data centers and much else besides. (Cisco’s foray into the smart grid is something I will address at a later date.)
Like General Electric (GE) before it, Cisco aims to be number one or number two in every market in which it competes. Sometimes Cisco hasn’t attained that ambitious objective, but it usually has managed to reach its goal. In that respect, the company’s track record is reasonably good.
The challenge Cisco faces now is that the easiest market agencies, those closest to its core competencies and market strengths, have been claimed. It now is beginning to tread into territory that is less familiar, where other players have at least as much claim on the real estate as Cisco does.
If I might reach for a sports analogy, it’s as if Cisco were a racehorse that has built a wining streak and an unassailable reputation while running on the dirt at up to a mile and a quarter. Now, Cisco is moving to the turf, where it has yet to run, and stretching out to new distances, too. It doesn’t mean Cisco can’t win these new races, but it does mean new factors and variables have been introduced to the picture. They must be taken into account.
One example of that unfamiliar territory is the data center. Yes ,Cisco has provided the network infrastructure for data-center computing, but it has not supplied the requisite servers and storage. It’s getting directly into the server game, but choosing to partner with EMC for storage.
Can Cisco thrive as a vendor of what it calls its Unified Computing System (UCS)? It’s got a fighter’s chance, with more credibility than any other networking vendor would have in taking up the challenge. Still, there are questions.
Some of those questions relate to customer perceptions of Cisco. Will Cisco by given the mandate by customers to play a comprehensive role in their data centers? Not everybody in corporate IT departments is familiar with Cisco. Many data-center types are more familiar with HP, IBM, or Dell than with their incumbent networking vendor. Cisco has to win over these folks.
Another factor is margin. Servers typically sell at lower margins than networking gear such as routers and switches. The margin gap can be quite sizable. As in the consumer space, Cisco might find that selling servers, while boosting the top line, isn’t nearly as beneficial for its bottom line. This probably represents a bigger problem in the consumer realm, where the Flip will come under competitive pressure from video-capable iPhones and other devices, but it won’t be an immaterial consideration in the data center.
Broadly considered, and as counterintuitive as it might seem, Cisco’s data-center strategy might involve hastening the commodification of servers. If initial customer feedback is an indication, Cisco’s early adopters of its UCS model are reporting considerable capital-cost savings on servers. For these customers, servers have become nothing more than computing-module adjuncts to their integrated network infrastructure. It seems that Cisco’s game is to make the server a small component — in cost, price, and value — of the data-center equation.
Meanwhile, we have IBM and HP. IBM, I think, would be content to see every piece of hardware within the data center turn into a commodity. I think this is the approach Oracle would take, too, if it could manage to persuade the European Commission to approve its purchase of Sun Microsystems. The goal for IBM is to position its strengths — enterprise software, management software, orchestration software, and professional services — as the primary value-add assets that are required for the successful operation of the data center.
HP is somewhere in the middle, between IBM and Cisco. What’s interesting about HP’s approach, as revealed by its acquisition of 3Com, is that it seems to think it must commodify Cisco’s networking-hardware business before Cisco finishes the commodification of the server space.
As explained previously, I think a major motivation for HP’s acquisition of 3Com was the latter’s base of low-cost Chinese engineering. By lowering the cost of designing, developing, and delivering networking gear, HP can apply pricing pressure up and down Cisco’s product portfolio. I’m not sure it will work, but I understand the reasoning behind it. HP and Cisco are trying to beggar each other in a war of attrition.
Cisco won’t stand still. Like HP, it is doing more development in China, India, and points beyond Silicon Valley. Like its customers, Cisco is keeping a close eye on costs, realizing that lean times might be with us for a while, prattle about “jobless recovery” notwithstanding.
I’m not ready to declare a winner, a loser, or anything in between. As knowledgeable observers know, ti’s rarely that simple. The world, and markets, are dynamic, and we rarely deal with stark zero-sum scenarios.
The situation is fluid, and we need to pay close attention not only to the moves the players make, but also to the external conditions that are beyond their immediate control. No matter what happens, the narrative will be compelling.