All eyes were on Cisco last Friday, December 7th as the company held its annual Financial Analyst conference in New York. Cisco, the undisputed 800-pound gorilla in networking, has been rapidly transforming itself into a broader IT company. At the event, CEO John Chambers made the bold claim that the company’s goal is to not just be an IT company, but indeed the No. 1 IT Company. Chambers did clarify that this would be accomplished by improving overall value as an IT partner versus total revenue. Chambers also re-affirmed to investors that the long-term growth target remains 5%-7% and that gross margins would remain constant during that timeframe. So summarizing the “Cisco plan" – No. 1 IT company, long-term growth of 5%-7% off the already massive $46B or so in revenue, and steady margins – makes it a pretty bold statement to throw out there.
I do, however, think Cisco has a good shot at reaching these goals, for the following reasons:
- The market is moving towards Cisco. Computing is going through its most significant transition maybe since the birth of the mainframe, and this shift favors Cisco and the other network vendors. Cloud and mobile computing are network-centric compute models and this centricity is what should give Cisco a long-term edge over the other IT vendors. IT value follows compute. Consider the mainframe days when IBM had the top position among IT vendors because compute was mainframe-centric. When the world shifted to client-server, WinTel took over. While we’re at the very start of the transition to mobile and cloud computing, it should create a rising tide for Cisco and all of the other network vendors.
- Cisco expands its architecture. The company has always used "architectures" as its competitive advantage. When I was at a reseller we had great success selling the "AVVID" architecture to deliver a combined VoIP and network solution. Looking forward, Cisco will expand its architecture to including ASICS + Hardware + Software + Services to deliver on the intelligent IP network. The ASICS + Hardware + Software isn’t really that new for Cisco, but the vocalizing of this as a competitive differentiator is. However, based on comments by all of the Cisco executives, services are expected to be a bigger part of the company’s revenue pie moving forward. Services currently account for 21% of Cisco’s $46B in annual revenue and are expected to reach 25% in three-to-five years. Cisco will look to add high-end consulting services as a way to drive larger deals. IBM currently uses its consulting to help customers solve business problems through compute-related solutions. Cisco will do the same thing, except the solutions will be network-centric.
- Market transitions. The majority of Cisco’s growth throughout the years has been based on catching markets in transition. A recent example of this is its Unified Computing System (UCS). Many thought Cisco would have as much success in the server market as Mark Sanchez has had at being an NFL QB. The company did show, though, that there was room in the market for a server vendor that built the server specifically for the era of virtualization. Frankly, the other server vendors should be embarrassed at how fast Cisco has grown server share, but this is typical of Cisco, and I expect the company to continue to catch future transitions.
- ASICs versus merchant silicon. This has been a great debate in networking for years. The majority of vendors use merchant silicon to build networking products and then create differentiation through software. Why? Well, someone at one of these niche network vendors once said to me "Building your own chips is a fool’s game." He went on to explain that by the time you finish an ASIC, you need to start thinking about the next one. The cost and time involved is prohibitive for all but the biggest of companies. Well, Cisco is one of the biggest companies and has the resources to spin its own ASICs and gain differentiation in software and hardware.
- Cisco’s "standards plus" approach. One of the huge differentiators for Cisco over the years has been the use of proprietary features versus standards. The company typically supports standards when they’re available, but they often have a proprietary version of the standard that does more than the standard. The company calls this "standards plus" and some examples of this are EIGRP versus RIP and Skinny versus SIP. While much of the competition calls this "proprietary" (and it is), many of Cisco’s customers consider using the standard a downgrade from the Cisco version of it. This makes the all-Cisco network better and faster than a mixed environment.
I certainly think the company has set itself up well to become a better IT vendor. The company will almost certainly break away from Dell and HP, both of which have significant challenges to their businesses today.
Usurping the likes of Oracle and VMware for IT mindshare is a different matter. While I believe the transition to cloud and mobile will put Cisco in a position to achieve its goal of being a more significant IT solution provider, it does need to continue to bring in new leaders, hire salespeople who can "talk the talk" with line-of-business managers and market higher-level network-based solutions with more quantifiable benefits. Everything is set up for them to succeed, and now the company must execute, something Cisco has a track record of doing well over the past decade.