I’ve been covering Cisco as an analyst now for the better part of 15 years. Prior to that, I worked at a reseller, and before that was a networking engineer. It seems that for the past 20 years or so, I’ve heard the cries of commoditization of the network and how Cisco’s whole business model was about to fall apart.
Well, the network business is alive and kicking and based on Cisco’s last earnings call, product margins are still above 60%. Sure, that’s down a bit from 10 years ago, but I remember some pundits claiming that margins would fall into the 30% range or even the 20s. Why hasn’t this happened? Well, what Cisco has proven over the years is that if you continually offer differentiated features, the product can avoid being commoditized.
To me, there was never more evidence of this than the success Cisco had with its Unified Computing System (UCS). When Cisco launched UCS back in 2009, there may have been no market (other than PCs) that was more of a commodity than servers. UCS completely redefined the server industry. In just five years Cisco has reached No. 4 in server sales and, according to IDC, has gained No. 1 share for x86 blades in the Americas. The UCS business is now on a $3 billion run rate and the company touts more than 35,000 customers. UCS took the concept and tied it to the network through something called a “service profile,” enabling organizations to automate many of the processes that were done manually in the past. Pay a bit more on hardware, but save money on operational costs.
This week, Cisco announced another wave of UCS infrastructure that actually broadens the product line to meet the demands of the largest cloud environments, but then scales down to environments with just a handful of servers. Jim Duffy did a nice job outlining all the new products in his article, so I won’t rehash that information.
The new UCS line broadens Cisco’s portfolio greatly. In his blog, Duffy points out that the new M-Series is optimized for cloud environments. IT does this by distributing workloads differently than traditional servers. Given the strong push Cisco is making with Intercloud this year, it would seem the M-Series would be one of the key building blocks of those cloud services.
Cisco is also introducing the UCS Mini. The most obvious use case for the mini is for remote sites, branch offices, and small IT environments. The introduction of the mini also brings a new concept to computing that Cisco calls “edge-scale computing.” At its most basic level, edge scale computing would address the computing needs of “edge” locations, like branches. However, the Internet of Things (IoT) expands the edge to locations that collect data from sensors and mobile devices. At Cisco Live 2014, Cisco talked extensively about the concept of “fog” computing, where computing wasn’t quite in the cloud but closer to the data. Edge-scale computing is the right compute model for IoT, giving Cisco a potentially huge market opportunity with the UCS Mini.
Another element of the launch that I thought was meaningful was the Hadoop integration into UCS Director Express. While the UCS hardware is the shiny thing that people can “oooh” and “ahhh” over, the management software provides much of the value. The Hadoop integration provides a single pane of glass for the infrastructure and Hadoop software to enable rapid configuration of Hadoop clusters.
So is the era of hardware commoditization here? Hardly. I believe there’s room for innovation in both the server and network markets. The new line of UCS servers is a good example of this.