Cisco had a disappointing quarter, and there’s no getting around it. The question then is whether Cisco can “get around it” in future quarters, and the situation in that regard is really complicated. It’s going to depend on just how radical Cisco is willing to be in facing the future.
Networking had a golden age, the period from the ‘80s through about 2017. Like virtually all golden ages, it’s now passed away, and candidly it’s never, ever, coming back. Yes, that’s right, we aren’t going to see any rebirth of double-digit sales growth for network equipment. That doesn’t mean that network companies are doomed, only that the golden-age-driven business models are doomed. The companies will follow the business models to the toilet only if they elect to stay with them too long.
Spending on network equipment has to be justified like everything else, meaning that the equipment has to produce enough benefit to cover costs plus the company’s internal rate of return margin (in total, their “target ROI”). On the service provider side, the benefit is the revenue paid by customers, and for enterprises, it’s the productivity benefit created by the services. The benefits driving procurement of network technology have been slowing for both enterprises and service providers, and that’s a problem that can’t be fixed on the network side. It would require deep thinking on applications that could drive networks, and there’s been little or no organized effort to even encourage much less create that kind of thinking.
Cisco’s Robbins gives us our starting point, then: “If the past year has taught us anything, it’s the need to always be nimble.” Actually, it’s the lesson of the last decade. That’s how long the trends that are impacting network purchases have been acting on the market, and my surveys have showed it (and these blogs have documented it). The market isn’t changing, it has changed. There is now no going back, because the demand-side transformation needed could never be done fast enough to allow vendors to cruise along on their old box-centric sales plans.
Cisco has recognized this for some time, but their recognition has been more one of recognizing symptoms than recognizing root causes. I actually offered Cisco a deep picture of IT spending and how it changed over macro periods, under various stimulus, almost 15 years ago, and they didn’t want to hear it (rival Juniper didn’t either). But even if Cisco can only see a symptomatic view of the future, they at least have recognized some of the band-aids needed based on the symptoms. You have to move more to an as-a-service approach. You have to do more software than hardware. All that is very true, but it would sure help Cisco if they understood why this was necessary. It could guide their response, and let them address the risks each response creates, because every response does create a risk.
Moving to as-a-service is a response to a combination of buyer fears of lock-in and buyer fears of stranded assets. If I can buy connectivity rather than buying technology, and do so on a short-contract basis, then I’m in the driver’s seat. Thus, I’d favor vendors who offered a more non-traditional expense-based approach to things, right? Yes, and vendors who supply what the buyer wants will then lose account control and participate in their own commoditization. That’s the risk.
The future of networking, at the low level, is virtualization, and in two dimensions. First, virtual networks which offer ad hoc connectivity in community form or overall, are the future of connections. SD-WAN (which Cisco does offer) is an example, but Cisco’s own offerings are functionally primitive in comparison with those of feature-leaders (like 128 Technology). Second, virtualization of the platforms to create white-box-and-software networking is inevitable, and that’s a game that no current box-network vendor can possibly win. Unless networking is transformed by new benefits, these trends will totally erase future opportunities for “network equipment”.
Does this mean Cisco and other vendors should lay down with a rose on their chests? Not necessarily. Let’s go back to a previous point: Lock-in. Nobody fears getting locked into the right answer, the best approach. The problem arises when there is no acknowledged right or best answer. The whole as-a-service thing is related to the fact that networks are really just pushing 1’s and 0’s in the end, which is not much of a basis for differentiation. But the fact is that buyers, as much as sellers, see the decline in network benefits and would like to address that decline. If networks can’t improve productivity, they’d like to know what can, not just dismiss network spending. The first thing that vendors like Cisco need to do is to elevate their pitches to the level of network applications, not network technology.
There have been vendors who have attempted this, of course, but “network applications” can’t mean stuff that, speculatively and with unspecified support from unspecified products/vendors, might be useful. What’s needed is a driver of actual benefits, realizable benefits that don’t depend on the cooperation of a vast and undeveloped community of products and vendors. Or, the vendor has to take steps to build that community and develop the applications.
Every one of the waves of increased network benefits and spending has been related to an IT development, not a network development. Even the growth of the Internet would have been impossible without the explosion in personal computing. Cisco should embrace this, because it’s one of the very few network vendors that has IT credentials. Cisco has under-exploited its servers and software business, and fixing that problem should be the highest priority for Cisco and a message to the other vendors in the industry. If the future is software, the spending is going to be more on stuff that looks more like IT gear than like big (or little) network boxes.
What will future service users pay for, meaning pay more for? Not bandwidth; we already know mobile users expect 5G to cost no more. Users tend to cluster at the low end of wireline broadband services to keep prices down. This, while they pay for streaming video, streaming music, games, and other experiences. That’s what the future of “networking” is about, moving up from being the delivery truck to being what somebody actually bought.
The real competition for network vendors like Cisco is therefore the IT vendors, and in particular the software and platform vendors like Red Hat and VMware, and the public cloud providers. The former occupies the space that network vendors have to get into in the long term, and the latter represents the as-a-service market model that Cisco and others are trying to adopt in the near term. Can Cisco, or any network vendor, conceptualize this IT-centric vision, productize it, and then reorient its sales/marketing to make it a success? Against established, credible, competitors?
I think Cisco has to try. There is no salvation for the big-box network business. Eventually, open-model networking will permeate even the enterprise and the data center. Cisco right now has a unique ability to bridge the past (glory days) and the future (experience networks not connection networks). They can’t hold onto that unique position for long.
