Cisco has built a billion-dollar business with a controller-based, enterprise-grade wireless LAN offering, based on its 2005 acquisition of Airspace, for which it paid "just" $450 million. Cisco has consistently controlled about two-thirds of the traditional enterprise WLAN market ever since.
BIG SPENDERS: Top tech M&A deals of 2012
Meraki and other vendors, such as Aerohive, developed alternatives to the controller-based WLAN architecture, reducing capital and operational costs, and simplifying network management. Meraki in particular went to great lengths to move controller functions into a cloud service, accessed by a Web interface that was simplified and streamlined for its target market of smaller, mid-range businesses. In 2011, Meraki added the MX line of routers to its cloud-based networking portfolio.
According to the companies' joint statement, Meraki's share of the market is tiny by comparison to its vastly larger acquirer: Meraki had an annual revenue run rate of just over $100 million, and only recently became "cash flow positive." Meraki has posted an FAQ about the deal on its website.
Sujai Hajela, vice president and general manager of Cisco's Enterprise Wireless Networking Group, spoke with Network World about the reasons for the buy and Meraki's role in the network giant's future. He was actively involved in the negotiations.
Why buy Meraki?
When we looked at Meraki, we saw their software-based business model, and a [WLAN] platform built from the ground up to let customers easily service a network from the cloud.
What do you mean by "software-based business model"?
If you go to a Meraki [reseller] partner website, you'll see two SKUs [stock-keeping unit]. You'll see a hardware SKU, and you can order that equipment. Next is a SKU for a one-, three- or five-year license to manage and support that equipment. It's a subscription system, or recurring revenue model. This is the software-based business model.
They make that a very simple and attractive way to do business for midmarket customers. And because of Meraki's velocity of innovation [in its products], that's an incentive to midmarket customers to continue to update or renew their subscription, because of the value they get from it.
What's the Meraki platform and why was that such an attraction for Cisco?
It's about how they make it really simple for the midmarket businesses, which usually don't have IT staff, to be able to deploy a network. The guy who's deploying it doesn't need to be a network expert. You can deploy the Meraki hardware on premises, just plug it in, and then manage via the cloud, without needing network experts. And it comes with very strong network security and network and application management and control.
Customers can get a switch, router, a WLAN, a controller, and just plug it into the Internet. That device "phones home" to the Meraki cloud, and boom! It's there. It's very simple to deploy: We're talking minutes.
For us, we get a midmarket play for our Unified Network strategy, announced a few months ago. The focus is on the midmarket segment. We'll continue with our Cisco enterprise portfolio for more complex networks.
So where and how will Meraki fit into Cisco?
Today, we're focused on the cloud. We're going to preserve the Meraki product line and culture, and continue to grow all of this.
As we evolve, we want to add more products to that cloud platform. That's the first thing. Second is the whole Meraki development culture: They've been able to achieve a very high velocity of innovation. They can introduce in software new features in a matter of days. When you log in, the latest updates are downloaded, customers can try them out, and these spread to the rest of the customer base very quickly. This [kind of rapid innovation] is very attractive to this market.
They've made it very simple to go to market and for their products to be "consumed" in this midmarket. We want to build on that.
Meraki initially declined Cisco's buyout offer. How did you change their mind?
Well, I'm not commenting on the [negotiation] proceedings. But Sanjit [Biswas, Meraki CEO and co-founder] and I see the world very similarly. The key point was [the company's realization of], how does Meraki help Cisco evolve in this cloud platform? I think they realized that with Cisco they can make their platform a lot bigger, on a global basis [compared to going it alone with an initial public offering].
How will you preserve these Meraki virtues structurally in Cisco?
Meraki will become a new unit, the Cloud Networking Group, within Cisco. Sanjit is the GM of this new group. The two other co-founders will be vice presidents in that group. That group, and the [existing] Enterprise Wireless Networking Business, report to me. And I report to Rob Soderbery, senior vice president, Cisco Enterprise Networking Group.