Perspective: Cisco at a crossroads?

You have to admire Cisco Systems. The company dominates enterprise networking to such an extent that it's even hard to remember who's No. 2.

Cisco has been so successful that it can simply outspend its adversaries to reinforce its messages and tie up would-be competitors. But Cisco may soon find itself at a crossroads because of impending changes to network architecture.

Let's start with the company's core switching and routing business, which made up 63 percent of Cisco's revenue in the third quarter. Over the next few years, there is going to be a lot of ripping and replacing of network pipes as companies deploy multigigabyte installations for their PCs and servers. And as with any big architectural transition, customers will naturally invite competitors such as Juniper, Nortel and 3Com to compete for their business.

CIOs know that Cisco's prices (and margins) are far higher than the industry norm.

CIOs know that Cisco's prices (and margins) are far higher than the industry norm. So don't be surprised if a fair number of them decide to buy competing products just to send a message. Don't think it will happen? Ask EMC. It got the same treatment a few years ago when Hitachi introduced a competitive product to Symmetrix.

Even Cisco's die-hard customers will be shocked when they compare Cisco's pricing to the competition's. Low-end guys such as D-Link, Netgear and SMC already have pretty sophisticated 10Gb equipment available at bargain pricing. Meanwhile, the 3Com-Huawei partnership will likely result in core switches and routers that offer 90 percent of the functionality of Cisco technology for half the price.

There's another major challenge ahead for Cisco. LANs and WANs (local and wide-area networks) are moving away from so-called dumb pipes at an unbelievably rapid pace. Loads of companies are now using lightning-fast, cheap hardware to add layered intelligence for services such as security, identity management, application-layer switching and network acceleration.

But each new network layer opens a door for the competition and threatens Cisco account control. Industry heavies see this opening--just look at Juniper's acquisitions over the past few years. First it grabbed NetScreen to jump into the enterprise network security market. Then it bought Peribit and Redline Networks to get into the application and WAN acceleration space.

This is a classic seed-and-harvest strategy. Juniper establishes a beachhead in a few tactical areas, surrounds the Cisco architecture and positions itself for those strategic network architecture deals down the line.

By no means is the sky falling for Cisco.

Cisco sees this coming and continues to enhance its portfolio with its own acquisitions. The problem is that Cisco can't integrate the piece-parts any faster than anyone else.

What's more, there is evidence to suggest that users aren't willing to wait around for Cisco anymore. In a recent ESG Research security survey, respondents were asked to rank their security device purchasing criteria. Users overwhelmingly rated product attributes such as architecture, scalability and feature/function on top and vendor characteristics at the bottom.

By no means is the sky falling for Cisco. Its incumbent status means it will get in on every opportunity while others still have to scratch, claw and find an opening. Cisco also has a rich portfolio of products, killer sales and marketing, top support, deep pockets and a focus on key growth areas such as security and VoIP. Nevertheless, it's facing a much tougher fight ahead where it's likely to lose its share of deals and have to live with lower margins.

Last December, CEO John Chambers hinted to analysts that Cisco needs to offer more business solutions and consulting services. Perhaps he is taking a page from IBM's 1990s playbook. That strategy probably saved IBM, which was paying the price for overreliance on the mainframe while ignoring the industrywide embrace of client-server computing.

Chambers' statements demonstrate that he recognizes the ongoing architectural and economic transitions--and that Cisco must adapt accordingly. Good thing. The game is changing far faster than most could have anticipated.

Biography
Jon Oltsik is a senior analyst at the Enterprise Strategy Group.

More Perspectives

Cisco Cost vs Reliability

After reading this article I would have to agree that Cisco does possess a higher cost compared to their competitors, but in contrast to the cost Cisco offsets this with superior products and support. Never in my 9 years of IT have a had an issue with any Cisco product that wasn't corrected with a call to support. Their service and support along with a long track record of hardware reliability and security have made them a market leader in their area of expertise. Possibly the lower prices of their competition will force the hand of Cisco to lower costs and therefore prices, but with lower costs come the possibility of less reliable hardware.

Cisco Cost vs Reliability

After reading this article I would have to agree that Cisco does possess a higher cost compared to their competitors, but in contrast to the cost Cisco offsets this with superior products and support. Never in my 9 years of IT have a had an issue with any Cisco product that wasn't corrected with a call to support. Their service and support along with a long track record of hardware reliability and security have made them a market leader in their area of expertise. Possibly the lower prices of their competition will force the hand of Cisco to lower costs and therefore prices, but with lower costs come the possibility of less reliable hardware.

Error in article

The article uses the term "10GB" which is incorrect in this context because GB means gigabytes. No vendor makes a gigabyte or 10 gigabyte switch. The correct term is Gb which is gigabits.

Error in article

The article uses the term "10GB" which is incorrect in this context because GB means gigabytes. No vendor makes a gigabyte or 10 gigabyte switch. The correct term is Gb which is gigabits.

[chriswong]

The headline should be "Cisco needs to reduce prices"

Cisco needs to reduce prices. Everyone knows that if anyone put together a computing device with the same power as one of their routers, it would cost no more than $50 nowadays...

[chriswong]

The headline should be "Cisco needs to reduce prices"

Cisco needs to reduce prices. Everyone knows that if anyone put together a computing device with the same power as one of their routers, it would cost no more than $50 nowadays...

This explains Cisco's emphasis on security

This article accurately describes the issues in the network infrastructure market, and correctly identifies Cisco's most valuable attribute...account control. What it doesn't capture is the fact that Cisco recognized this scenario two years ago and put in place an overall strategy to change the game from "network infrastructure" to "SECURE network infrastructure". Take a closer look at any of the vendors mentioned, and you'll see that they are all trailing Cisco in terms of their overall security story. Some, like Juniper, have excellent point products (the former NetScreen line), but none have come close when it comes to communicating an overall security strategy that takes a fundamentally proprietary approach and persuades the industry to build an ecosystem around it. Cisco is leveraging its position at the core of most enterprise networks to put in place a highly proprietary security architecture that only works when EVERYTHING is Cisco. To the extent that enterprise buyers see the value in adopting an enterprise-wide security strategy, other networking equipment vendors are sitting ducks.

As in real estate, only three things matter in netowrking...location, location, location. Cisco has three "locations" its pulled into its security strategy. The network core, the network edge, and the spot in front of the buyers desk where the Cisco rep is camped out.

I wouldn't count these guys out just yet.

This explains Cisco's emphasis on security

This article accurately describes the issues in the network infrastructure market, and correctly identifies Cisco's most valuable attribute...account control. What it doesn't capture is the fact that Cisco recognized this scenario two years ago and put in place an overall strategy to change the game from "network infrastructure" to "SECURE network infrastructure". Take a closer look at any of the vendors mentioned, and you'll see that they are all trailing Cisco in terms of their overall security story. Some, like Juniper, have excellent point products (the former NetScreen line), but none have come close when it comes to communicating an overall security strategy that takes a fundamentally proprietary approach and persuades the industry to build an ecosystem around it. Cisco is leveraging its position at the core of most enterprise networks to put in place a highly proprietary security architecture that only works when EVERYTHING is Cisco. To the extent that enterprise buyers see the value in adopting an enterprise-wide security strategy, other networking equipment vendors are sitting ducks.

As in real estate, only three things matter in netowrking...location, location, location. Cisco has three "locations" its pulled into its security strategy. The network core, the network edge, and the spot in front of the buyers desk where the Cisco rep is camped out.

I wouldn't count these guys out just yet.

[bvandussen]

mobility threats to cisco's core business

Imagine an office in which 90% of the workforce has a 3G/4G card or wireless smarphone. Why would such a place need a router?

While this may image may be a long horizon, I believe its legitimate. I welcome your thoughts

[bvandussen]

mobility threats to cisco's core business

Imagine an office in which 90% of the workforce has a 3G/4G card or wireless smarphone. Why would such a place need a router?

While this may image may be a long horizon, I believe its legitimate. I welcome your thoughts