September 1, 2014

How Will Cisco Recover From The Consumer Strategy Blunder?

Cisco made a massive strategic blunder in the last decade, aggressively moving into consumer devices rather than focusing on their core enterprise and service provider markets. It seems that Cisco is now in the process of rectifying this mistake, but charting a path to growth is an entirely different matter!

A Cisco Cius at Cisco Live 2011, with iPhones in the background

Cisco’s Consumer Blunder

Cisco is not HP, Dell, or IBM. Cisco is not EMC, NetApp, or Oracle. Cisco occupies a unique place in the IT market, ruling the network for two decades. This is undoubtedly a blessing and a curse, since the enterprise and service provider networking space is only worth so much. What do you do when you dominate the only niche in which you play?

Cisco’s answer was to move into the consumer space. The company purchased Scientific Atlanta, Linksys, Flip, and introduced the Cius and Ūmi product lines, all focused on the consumer side of networking. We now see that this move was a mistake. Cisco simply did not compete effectively with companies like Apple, Dell, and Samsung or even Belkin! This is not to say that it was an impossible dream, only that Cisco failed to execute.

There was some strategic synergy in consumer networks devices, of course. Flip and Linksys could have given the company control at both ends of the network, cementing dominance for another decade at least.

Unfortunately, Apple was there to thwart Cisco in the consumer space, scooping up the lion’s share of profits in tablets, consumer access points, and derailing Cisco’s pre-existing iPhone concept! One could even argue that it was Apple that thwarted Cisco’s Scientific Atlanta moves, with iTunes changing the way consumers approach video at home. Set-top boxes just aren’t a strong technology area anymore.

Admittedly, the consumer strategy was probably better than some of the alternatives. Cisco could have tried to enter the PC market for example, but it is unlikely they would have had any more success here. At the same time, Cisco made pushes into WiFi, servers, and security that have worked out well. But these markets have not proved large enough to “move the needle” for a gorilla the size of Cisco. The company needed a stronger market and mistakenly felt that consumer devices were the door to meaningful growth.

An actual Cisco-branded “iPhone” on the left, shown with an Apple iPhone 3G at Cisco Live 2011

Cisco’s New Strategy: Be Cisco!

Cisco has now admitted that the consumer strategy was a mistake. They killed off Flip and Ūmi and have put Linksys up for sale. Scientific Atlanta hasn’t been a failure for Cisco, but it amounts to a tiny percentage of the company’s value and does not seem strategic to them. Although the Linksys sale will net a profit for Cisco, it will be insignificant for the huge company.

Cisco has already begun to double down on existing markets. They have been busy acquiring assets in data center (vCider, Cloupia), wireless (Meraki, ThinkSmart), service provider (Cariden, BroadHop), and video (NDS). These are all areas where Cisco has been successful recently, and these acquisitions will do more to cement leadership than expand it.

While part of Cisco was busy dallying with consumers, another was expanding in the data center. Cisco’s UCS now accounts for almost 20% of server sales, a massive, unqualified success that few (including me) thought possible. Cisco still makes the majority of their profit from network switches and routers, but servers are an opportunity that the consumer space never was.

Where should Cisco go? Strategically, Cisco should focus on being Cisco instead of challenging Apple or Samsung in the consumer space. Cisco has a long history of controlling the “back end” of the enterprise and service provider space, and this should be their primary mission.

The Cisco Data Center Stack

Service providers and enterprise data centers are coming around to the idea of integrated data center hardware, with “converged infrastructure” a major buzzword. Cisco hasn’t seen any reward from VCE, their partnership with EMC, VMware and Intel, but they must see the opportunity there.

If they were to cut out EMC and sell an in-house “stack” of server, switch, and storage for VMware, Microsoft, and Citrix, Cisco might see some actual profit from this space. But Cisco needs to have their own storage to make this happen. Cisco must acquire serious storage hardware and software assets. This will inevitably lead to the end of VCE and a divorce with EMC, while still playing nice for the sake of VMware and heterogeneous environments.

Although an EMC acquisition is an amusing thought, that company is just too big for Cisco to take on. Perhaps if EMC was split up, with VMware and the security assets spun off, such a deal might be possible. But that’s not a likely scenario.

Barring that, Cisco will likely pick up some affordable, next-generation storage technology. Companies like Nimble Storage and Whiptail already have a relationship with Cisco and would provide solid technology for a UCS-like entry into the storage array market. Despite decade-long rumors, NetApp isn’t a great fit. Cisco needs next-generation technology not existing market share.

Still, “VCE sans EMC” is not a strategy for real growth and transformation. Cisco must bring in really transformative technology with Nutanix-like integration and Meraki-like management. Innovation was the real secret to UCS’ success; Cisco must offer a breakthrough storage or converged infrastructure product, not just one with all-Cisco ingredients.

Stephen’s Stance

Cisco is casting off the consumer push and refocusing on the data center and service provider markets. Cisco’s next move is to divorce EMC and enter the storage space with a round of  acquisitions. But Cisco won’t be “just another array vendor” – their strategy will be to focus on converged “one-stop” offerings for service providers and large enterprises. That’s a sensible move, but what about meaningful growth?

Even is all this works out, a sunny scenario only sees Cisco’s revenues doubling in size. Cisco must expand services revenue and get deeper into enterprise software if they are to grow out of the infrastructure niche. John Chambers can lead Cisco to better days in infrastructure, but the fumbled consumer push casts doubt on his ability to lead the company to new markets. Cisco has a solid path to the future, but a change in leadership would signal real positive change.

See also the response Where will Cisco go from here? by Nick Buraglio

  • http://blogstu.wordpress.com stu

    Stephen,

    On the consumer side, I would add that there wasn’t much synergy with Cisco’s sales force or channel and that margins are highly dilutive to what Cisco was used to on the enterprise side.

    As for UCS, it has been successful, but note that in the overall server market, is still $250M – the EMC (VCE and VSPEX) and NetApp (FlexPod) are highly profitable and strategic for getting UCS into service providers and large enterprise accounts. If Cisco wanted to get deeper into storage, I would see them expanding on the compute side (embedded with UCS) rather than trying to compete in the highly volatile and fragmented array side.

    Cisco has had many opportunities to go deeper into storage. Related moves (iSCSI, FC switching, converged offerings) have only reinforced that they are better suited to partner for storage. If they are going to make an expansion in the enterprise space in a big splash, I’d see them move deeper into software. Rather than break-up with EMC over a storage product, Cisco could buy Citrix and that would shake up quite a bit more…

    Cheers,
    Stu Miniman
    Wikibon.org

  • http://twitter.com/stevie_chambers Steve Chambers

    if you add (a) a timeline to this prediction, and (b) what you will do if it’s wrong, I’m happy to make that bet! :-D

  • Blake

    Did the consumer issue really hurt Cisco? I don’t think so. They really are two different areas. The flip – meh, no biggie. umi – did anyone even know about that?

    I wouldn’t call the Cius a consumer device either, it was an attempt at an enterprise tablet that failed because of price/features of consumer devices.

    Also the 792x wireless IP Phone was never really a competitor to the iPhone, two entirely different beasts. The iPhone can’t compete with the 792x in roaming and voice quality, while it does more it doesn’t do more where it matters. I actually really like the 792x phone and it’s XML applications for business use.

  • http://twitter.com/hansdeleenheer Hans De Leenheer

    I have to agree wth Stu on the consumer stuff. It’s just no fit for their channel/sales/margins. And to Blakes comment; enterprise consuming devices just won’t make it. Maybe in that 1% closed environments but not enough for a biggy like Cisco.

    On topic for storage: yes, VCE is a relationship, not a marriage (IMO). UCS has been a succes as such from a technical/management point. VCE is ‘just’ building blocks and sales. A next step towards storage could be a very good move as I agree here wth Stephen. But I’d suggest they’d strengthen that UCS concept with in-server storage. Cisco could pull off what HP and DELL probably won’t be able to and EMC can’t because they don’t own the server. Buying an array vendor would also just be building blocks and not enough to compete wth the vast amount of startups + EMC.

    So my point: flash components producer + distributed storage software. 2 acquisitions, 1 win.

  • Pingback: Where will Cisco go from here? | The Forwarding Plane

  • http://twitter.com/Arjantim Arjan Timmerman

    Great read!

    Don’t forget about Nexenta:

    http://www.cisco.com/en/US/solutions/collateral/ns340/ns517/ns224/ns836/ns978/white_paper_c11-700383.pdf

    I understand Stu’s point, but EMC (VMware) stabbed Cisco in the back with the Nicira acquisition and I can’t really see why Cisco wouldn’t do the same. Of course the VCE and FlexPod are very profitable, but (IMHO) an acquisition of NimbleStorage/Tintri (and maybe Whiptail, although I would say hybrid is a better way to go for Cisco) would be the right step for Cisco.

    Cisco needs to shake things up mainly because they need to differentiate like others do… IBM/DELL/HP are doing the same thing and are still working together with VMware/EMC. But in the meanwhile they are building their own ecosystem and like Stephen already said, buying Citrix/Nextenta/Storage would give Cisco a huge benefit/potential. With Multihypervisor management on the horizon, and Microsoft closing the gap with their HyperV 3.x product Cisco could even be looking into that path when it comes to a break (and Microsoft will be supporting that one happily)…

  • ssstofff

    Well, spoken from the consumer side … they could take a huge lead into wireless VOIP handheld phones like the 7921G … but the device is not open to register with other IPPBX. Missed change.

    The Cisco WAP4410N is another disaster … supposed to be a nice WAP, which you can combine with other devices. I all send them back where we replaced with Meraki … .

    Their portal website SSO is more or less a very good firewall where you spend half a day to know how to get in, why to get in, or why not …

    As the article state … with the several acquisitions … they’re more or less filling up their own supposed market gaps …. But this isn’t guaranteeing you’re an expert in it.

    When a company fades away from his core business …