Now that Cisco Systems has managed to placate Wall Street at least temporarily by slightly exceeding diminished expectations for its fourth-quarter earnings and first-quarter guidance, some observers have suggested that perhaps the worst is over for Cisco.
It’s possible, of course, that the Good Ship Cisco has weathered the storm and is slowly regaining its equilibrium, steadying its course, and preparing to reclaim its hegemony over networking’s high seas.
Calm . . . or the Calm Before a Perfect Storm?
That said, it’s also possible that what we’re seeing is the calm before a potential tsunami. It’s possible, in fact, that Cisco could struggle for years to come, worn down by a veritable perfect storm comprising a competitive war of attrition; market and technology changes that play more to the strengths of its rivals; an increasingly budget-conscious customer base that is less inclined to buy Cisco solutions at a premium; and the disaffection of a fickle channel.
That’s a Cisco dystopia that easily could come to pass, though it isn’t predestined by any means. Cisco can change. It can adapt to new realities and alter its strategic course, its philosophy, its product mix, its marketing messages, and its channel programs.
As we look ahead, though, let’s not underestimate the challenges. In the long run — as opposed to the myopic vista of day traders and stock flippers — Cisco confronts a number of unprecedented trials and tribulations.
No Irrational Exuberance These Days
Although Cisco successfully vanquished an array of enterprise-networking competitors in the 1990s, times have changed, and so has Cisco. It’s not the same company it was back then, not in size and not in culture, and our macroeconomic climate today — what some have called the “recovery-less recovery” — is a long way from the effervescent exuberance of the late 90s. (There’s no threat of Alan Greenspan having to warn us about “irrational exuberance” these days.)
One challenge Cisco faces is on the competitive front, where many of its rivals seem more attuned to the economic and technological zeitgeist. While Cisco has been content to demand its usual premiums and ample margins, competitors with lower cost structures, decent products, and aggressive pricing have been chipping away at the networking behemoth’s market share in enterprise switching and routing. Meanwhile, nimble high-end rivals, outpacing Cisco in organic innovation, are presenting compelling data-center solutions to customers in networking’s most lucrative vertical markets.
Cisco is being squeezed from above and below. Even in converged infrastructure for data centers, where Cisco thought it could establish a competitive edge, it isn’t clear that the company will thrive. It doesn’t have its own storage component, and it’s not obvious that Cisco can maintain an edge on options that are more open.
What About Huawei?
Then there’s Huawei, a still-opaque company that nevertheless has amassed $28 billion in annual revenue and has aspirations to become a $100-billion powerhouse within a decade. Still capturing as much carrier business as it can find with its telecom-equipment product portfolio, Huawei now is expanding into other areas, including smartphones — where it wants to be a top-five player — and enterprise networking.
Huawei doesn’t just want to be an enterprise-networking purveyor in China. No, it plans to compete vigorously worldwide, following the script it used so successfully in the telecommunications world. It will target developing markets and Europe first, leaving resistant North America as a last course. As reported by Bloomberg, Huawei aims to double annual sales at its enterprise group to $4 billion this year, from $2 billion last year. Within three to five years, Huawei forecasts enterprise-networking revenues of $15 billion to $20 billion.
For Cisco, the question is, how soon and how much will Huawei cut into its revenue and its margins? There’s no definitive answer yet. Much will depend on how well Huawei executes and how well Cisco responds to the threat, but a couple data points are worth noting.
First, Huawei is looking beyond just pushing low-priced boxes into the enterprise market. While I’m sure Huawei will compete and win its share of business on price, it also will be promoting a networking narrative that encompasses solutions for private and public cloud computing, security services, and mobile computing.
Engineers and R&D Galore
It will be interesting to see how the vision evolves and how the company executes on it. Remember, though, as Gartner’s Mark Fabbi pointed out, unlike many of its competitors these days Huawei is a private company with a vast R&D budget. To quote Fabbi:
“You can’t throw 1,000 engineers at a problem that might bear fruit five years from now. Huawei can.”
Finally, I’m hearing that Huawei is preparing to launch (or may have launched) a competitive trade-in program targeted at Cisco enterprise switches, much like HP Networking’s “A Catalyst for Change Trade-in Promotion.” I’m still trying to learn more about the specifics of this program, though.
All considered, Huawei’s foray into enterprise networking looks set to add to Cisco’s mounting woes.