January 27, 2008 9:00 PM PST

The business end of Cisco

The business end of Cisco
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Cisco Systems might be trying to win the hearts and minds of consumers, but it hasn't forgotten that its large business customers still pay the bills.

On Monday, the company plans to announce its most significant switching product for large companies since it introduced its Catalyst line of Ethernet switches in 1994. The new Nexus 7000 is a modular chassis that combines IP routing, Ethernet switching, security, and storage into a single hardware and software platform. The product, which is expected to have a life cycle of decades rather than years, will serve as the centerpiece of Cisco's strategy to help large companies build new and more-efficient data centers using its technology.

For more than 20 years Cisco has provided networking infrastructure to businesses large and small. The company has enjoyed over 80 percent market share in IP routing and Ethernet switching for several years, beating out competition at almost every turn. But as the company aims to grow its revenue to $50 billion a year or more, it needs to find new markets to energize growth--and so it has. The company has been bulking up its service provider business and taking bold steps into new markets like the consumer electronics industry.

"The amount of data going over networks today is in orders of magnitude greater than it was a few years ago--and all of that information has to be stored somewhere."
--Arun Taneja, founder, Taneja Group

But the enterprise market still makes up more than 50 percent of Cisco's sales. And some industry experts warn that Cisco's traditional routing and switching revenue stream may be losing steam. Not only is it difficult for the company to grow the business in which it already dominates, but the networking gear that it sells could become commoditized, with falling prices eating into Cisco's enviable profit margins.

The data center, which is on the cusp of major change, is Cisco's opportunity to tap into a market that could be just as big as its Ethernet switching business. But to pull this off, the company will have to convince IT managers to take a new network-centered approach to building their data centers, a move that will likely pit the company against some of its biggest partners.

"The enterprise is Cisco's cash cow," said Zeus Kerravala, senior vice president at Yankee Group Research. "It's what allows them to do other things like go after the consumer market. But Cisco also needs to find new markets within the enterprise to drive future growth. And that's what the data center is about."

The data center in transition
As consumers and businesses move to more Web-based applications, the amount of data being accessed and stored in the network has ballooned. On the consumer side, there are the social-networking sites like MySpace.com and Facebook that are accessed constantly and where photos and video are stored and shared. On the corporate side, companies are moving toward more Web-based applications to access client information or collaborate with partners and between different groups.

"The amount of data going over networks today is in orders of magnitude greater than it was a few years ago," said Arun Taneja, founder and consulting analyst for the Taneja Group. "And all of that information has to be stored somewhere--and it has to be accessible to people."

More servers and storage devices are added to the data center all the time to keep up with demand. But adding devices adds capital and operational costs. And often the servers and storage devices are only 25 percent to 35 percent utilized. To keep up with demand while managing operational and capital costs, a trend toward virtualization has emerged. For the most part, this has meant consolidating multiple servers or storage devices onto a single machine.

Cisco is taking advantage of this trend as it consolidates the functions of multiple devices into one. The new Nexus 7000 switch combines switching, IP routing, storage, and security into a single device. And while it doesn't necessarily take over the functions of servers or storage area devices in the data center, it will allow companies to use their servers and storage devices more efficiently.

"Right now the data center is going through a massive transformation," said Jayshree Ullal, senior vice president of the data center switching and services group at Cisco. "And we see a big opportunity. In fact, we think the data center along with unified communications will be the two fastest-growing sectors in the enterprise over the next three to five years."

But Cisco's view of the new data center is very different from those of other companies. IBM and Hewlett-Packard are more server-centric. And EMC is more focused on the issue from a storage angle. Meanwhile, Cisco sees the intelligent network, with its Nexus 7000 sitting in the center, as the best answer for virtualizing the data center.

CONTINUED: Buying into Cisco's vision…
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