Posted by: Tom Nolle
Alcatel-Lucent, Cisco, Juniper
Cisco reported its results, which the Street has described as those of a “company in transition.” I disagree; they’re the results of a market in transition and a company not yet transitioning. The signs of the conditions that have dumped Cisco’s stock and fortunes have been clearly visible for more than four years and alarmingly visible for two. You can’t hope your way out of market change; you have to do something proactive.
Financial analyst comments on the Cisco situation had some common themes. It’s clear, they say, that profit margins are collapsing under competitive pressure. It’s clear, they say, that Cisco can’t be a “growth company” any more. It’s clear that major cost-cutting is in order. Some say it’s clear that to obtain shareholder value, Cisco needs to split up.
None of this clarity is clear to me, frankly.
“Competitive pressure” is an effect, not a cause. Price differentiation comes out of the absence of feature differentiation. For years now, router and switching vendors have pushed more and more arcane bit-pushing tricks as “differentiators” when none of the buyers believed or even understood the points. All this time, buyers have cried for substantive strategies to lead them through the transitions of networking—and didn’t get them. Cisco more than its competitors relied on sales pressure and incumbency. That won’t work when all the buyer wants is the lowest price for a hamburger. If you want the buyer to get off the hamburger kick, you need to have a strategy driver to push.
A “growth company” is a company that can draw on new benefits to justify higher spending on the buyers’ part. That’s what fuels growth. Creating more traffic isn’t creating more benefit. Enterprises don’t get measured by Wall Street by how many bits they push, but by what their bottom line looks like. Cisco probably has a glimmering of this particular truth now, but it’s been worse than most at finding the real value in networking. It’s not a divine right or mandate. It’s a business tool, or a business, for Cisco’s buyers—for the market.
Cost-cutting? Cisco may as well lie down, put a rose on its collective chest and await the inevitable. Just as some economic problems demand you spend your way out of them, so do some market problems. Cisco is absolutely right in its determination to broaden its TAM. What it’s wrong about is how to go about that broadening. You can’t just say, “I’m a networking icon, so I’m an icon through and through.”
Fix the growth-company business case problem for your buyers. It’s as simple as that, and transport/connection networking is only a tool in improving productivity for enterprises or selling services for operators. There’s an application or service layer involved. Cisco took a huge stride toward service/application relevance with UCS, and it needs to staff the hell out of it and spend like a sailor to make it work.
Which is why breaking up is a bad strategy. Cisco dismembered is a bunch of mediocre business units that are as long on aspirations and as short on execution as Cisco as a unit has been and without the ability to cross-fund and cross-sell. You might get a bubble of stock growth fueled by speculation, but no value growth, and then the whole thing will collapse.
The Street is dissing Cisco by comparing its year over year growth with competitors like Alcatel-Lucent and Juniper. That would be fair if either of those guys were doing anything better at the market strategy level, but they aren’t.
Like Cisco, both companies have shown they see the Elephant, the “Life Fabric” we’re creating now with ubiquitous broadband. Both have launched initiatives that address little teeny network pieces of that, but neither has taken ownership of the movement of the market that’s creating those pieces. Both have the same chance Cisco had, both are making the same mistakes, and unless they change both will suffer the same fate—only likely much faster. Did you see how long it took for Cisco to change from market darling to goat? You ain’t seen nothing yet, as the song goes.