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!
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.
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