Cisco’s numbers were a big disappointment to investors, and they focused on two issues that are key for Cisco (and the market) at this point:
- Cisco’s gross margins were off, and that’s likely due to discounting forced on Cisco by the competition.
- Cisco suffered in the critical switching space, the place where most enterprise investments and the key data center investments would be likely made. Even service providers today are more likely to buy switches or switch/router gateways than pure routers. Thus, it seems likely that either the market is unexpectedly soft or that Cisco is losing share here.
I think it’s the latter. The problem Cisco has is the classic incumbent market leader problem. It can’t accept organic sector growth; it can’t hope to gain market share, and so it has to look for adjacent opportunities. The problem is that these are proving harder to grow quickly than Cisco had hoped, and in the meantime, the lack of focus on core business sectors has created a greater risk of market share loss. There are plenty of drivers for that outcome, too.
Switching, meaning Ethernet and lower-layer technology, is highly price-sensitive because it’s the largest category of network investment enterprises make. It’s also hard to differentiate because, well, bits are bits. Thus, while enterprises are eager to modernize their data centers, it’s proven difficult to demonstrate that switching features are relevant to that task. The goal, after all, is IT modernization, and switching doesn’t link well or even directly to IT features.
For service providers, switching is mostly about aggregation, which is also a hard application to differentiate. There’s no clear link between switching and the service layer where the money is, because vendors (including or even especially Cisco) haven’t worked hard enough to create one. Thus, going cheaper is a powerful motivation, and everyone is under pricing pressure.
This is bad for Cisco, of course, but it’s not a good sign for the market overall either. Gaining market share against Cisco based on price is a kind of hollow victory because you only set the stage for commoditization and loss to Huawei or ZTE.
I hate to keep beating the same drum, but the problem is that without new revenue hooks to pull through infrastructure, operators can’t keep investing, and they certainly can’t value small feature advantages over larger price advantages. Industry: beware!