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» VIEW ALL POSTS Jul 21 2009   1:45AM GMT

How will Cisco’s core businesses fare as it expands?



Posted by: Shamus McGillicuddy
Tags:
Catalyst
Cisco
Networking
Nexus
Unified Computing System

In the early days of Barack Obama’s presidency, a new meme emerged among the pundits who make their living assembling straw men and tearing them down again on the various cable news networks. Is Obama trying to do too much? Shouldn’t he be focusing on the economy and leave things like health-care reform, etc., to another president?

I found this collective hand-wringing about a president working too hard kind of laughable. So, perhaps I will be guilty of doing the same thing when I ponder here whether Cisco is biting off more than it can chew.

Earlier this year CEO John Chambers made it clear that Cisco plans to move into 30 to 50 new markets over the next year or so. Chambers has preached that smart companies set themselves up in economic downturns to take over market share in new and existing markets when the economy rebounds. There is plenty of truth to that notion, I have no doubt. But I also wonder how much Cisco’s ambitions are driven by stock price.

The heady days of the dotcom boom, when Cisco’s stock price reached past $77, are gone and might as well be forgotten. The tech bubble overvalued even the best companies back then. But in more recent years, Cisco’s stock price has been rather stagnant. It passed $33 a share back in late 2007, but it has been hovering around $18-$23 since then. The best way to put some momentum back in a stock price is to grow revenue and increase profitability. Cisco is well into its campaign to reduce expenses by $1 billion this year. But, as Chambers noted, it is also moving rapidly into new markets, both adjacent and not so adjacent.

Unified Computing, Cisco’s foray into servers, has the potential to make Cisco a lot of money in an adjacent market, but it also puts it in direct competition with old friends like IBM and HP. Some experts have speculated that Cisco’s move to compete with IBM and HP in the server market could hurt it’s bread & butter switching and routing business, since HP and IBM’s consulting divisions have often resold quite a bit of Cisco’s networking gear.

Acquisitions like Pure Digital, maker of the Flip video camera, have pushed Cisco into new, not-so-adjacent markets. The Flip camera is a consumer device, and most analysts will tell you that Cisco has not quite found the recipe for success in the consumer market. Perhaps that’s why Cisco is trying to position the Flip as an enterprise device, talking up the notion that video is the future of enterprise communications and that consumer and enterprise technologies are converging. Cisco went so far as to hand out a free Flip to every channel partner who attended the recent Cisco Partner Summit in Boston.

And this brings me to my central question about Cisco’s future. How will Cisco’s ambitious plans to expand affect its ability to maintain its strong, often dominant, positions in the core markets it sells into? For instance, I am struck by this passage from colleague Michael Morisy’s analysis of Cisco and Juniper’s recent struggles in the WAN optimization market.  When asked why Cisco  and its WAAS product have slipped against competition from Blue Coat, Riverbed and Expand, a Cisco representative had this to say:

“It’s partly due to the fact that the UCS [Unified Computing System] platform was announced [that quarter], and a lot of our sales teams have been focused on that,” said Michael Leonard, a marketing manager with Cisco. “WAAS is sold by the same data center sales teams that sell Nexus and UCS, so that’s part of what we figure it is.”

Leonard said he was optimistic that, with the sales teams seeing the drop in an otherwise fast growing segment, Cisco would continue to remain a strong player in the WAN optimization market.

“That’s something we’re addressing. How that will turn out, I guess we’ll see,” he said. “I expect WAAS to come back. We have a lot of customer demand, and I’m seeing a lot of deals.”

This is an extraordinary statement. Cisco has stumbled in WAN optimization, in part, because sales resources have been focused on selling Nexus (a new line of data center switches that Cisco has positioned as a cousin to, not a replacement of, its venerable Catalyst switches) and the Unified Computing System, a new product line that Cisco announced just a few months ago.  Now Cisco will no doubt tell you that this is just a hiccup, that Cisco has plenty of resources available to tackle all of the markets it competes in today or will compete in tomorrow. But the company is also trimming $1 billion from its operations and laying off a hundreds of employees. Is Cisco stretching itself too thin? Its competitors argue that is the case. But it’s really up to customers and channel partners to make that determination for themselves. They will speak with their wallets.

UPDATE:

I have been informed that in the quotes by Cisco’s Leonard above, he is referring to an overlay sales force that is responsible for kickstarting new Cisco products, not the company’s general enterprise sales organization.

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