John Chambers has been an icon in networking for decades, but at the same time the Street (and everyone else who can count years) realizes that at some point there will have to be a new Cisco CEO. Just who that might be and when it might happen has been, at times, a major distraction for Cisco and a major concern for the Street. One reason is that investors have long believed that Cisco is too big in terms of product scope. Networking has too many commoditizing sectors and the new stuff with margin potential would return more to investors were it split out of the glacial residue. Chambers is widely believed to oppose a break-up, so any such move would have to come when he’s gone.
It’s not at all clear that’s going to happen any time soon. Chambers suggests two to four years, which would be enough time for Cisco to solidify its position in some key emerging-technology spaces via acquisitions (Chambers mentions this) and also time to establish Cisco’s position relative to software-defined networking and the union of network and cloud. This is something Chambers has NOT talked about, but it’s something I think is really a key step not only for Cisco but for other network vendors as well.
For a bunch of reasons, networking is changing to a kind of inside/outside model that’s best visualized as a cloud-and-agent structure. A massive cloud, containing all of the information resources and processing power, is connected with extraordinarily high-capacity connections. This cloud extends all the way to the metro area, and in dense geographies all the way out to the central offices. At the edge of the cloud is a rim of hosts that can run agent processes representing users and their devices. When you want to do something you contact your agent, who gets it done by drawing on intra-cloud facilities and returns the result to you. That means that the cloud is served by a thin veneer of access infrastructure.
In this model, you quickly convert a hierarchical IP network into a simple aggregation network, and whatever you use to build that network the profit margins are lower because the differentiation is much lower. I’m of the view that this shift is inevitable, created by mobile services and consumerism. The technology manifestation of the trend will be toward what’s called “SDN” but SDN is simply the path of adapting network technology to what’s a completely new mission. However, because SDN is that path a vendor’s SDN position is the most important single thing in determining whether that vendor will stand or fall in the future. That’s why I want to look at these positions closely as they emerge, which (as I noted earlier this month) is likely to happen starting in October and extending through the 4th quarter.
All vendors are presented with a new balance of opportunity and risk. In general, the opportunities are greatest where a vendor has service-layer assets because making these assets compatible with our giant-cloud delivery model will be the central goal of all operators for the balance of this decade. The risks will be greatest where the vendor has a substantial exposure to traditional routing and, to a lesser degree, switching. Strong data center credentials will be an asset in cloud-building, and strong optical credentials an asset in building interior paths between data centers. Access technology, especially an enlightened backhaul and IP roaming strategy, will be strong assets too.
Among Cisco’s competitors, I think Ericsson has the best objective current model. They’re building up their OSS/BSS business, which if played right could give them a service-layer position. They have optical, they have access, and they have been quietly compelling in their SDN positioning. It’s the quiet part that puts them at risk; they need to sing a whole lot louder and better or they’ll have the best strategy nobody ever heard of. Alcatel-Lucent might be at the most risk, because they still haven’t taken an effective SDN stance and they have such a broad product family that it’s hard to win somewhere without losing elsewhere. Juniper has lots of piece-part assets but has never been known to put this sort of thing together to create a strategy. Huawei tends to avoid leading into new issues, so they’ll likely wait for the trends to mature. In any event, as the industry’s price leader, they have nowhere to go but up.
