Analysis: WebEx key to Cisco's transition into applications

Could search technology also be in Cisco's sights?

Cisco’s acquisition of WebEx Communications is perhaps its most aggressive move yet – and not the last – to transform itself from network hardware vendor to provider of networked applications and software.

As the market for routers and switches continues to mature, Cisco’s growth prospects become slimmer and slimmer. If it wants to maintain its ambitious 10% to 15% annual growth targets, it behooves the company to move into markets that are expanding at a much faster clip than is network hardware.

“Cisco appears to be in the middle of ‘taking a right turn’ into the network applications and services space,” says Dave Passmore, research director at The Burton Group and a longtime Cisco watcher, noting another recent Cisco acquisition of Five Across, a company that builds social networking sites.

“Why would they do this? Cisco’s core market of enterprise networking, while very profitable, is also very mature. Many of our large enterprise customers have 10-year-old Catalyst Ethernet switches that they’re perfectly happy with and not likely to replace anytime soon,” Passmore says.

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Cisco’s acquisition of WebEx Communications is perhaps its most aggressive move yet – and not the last – to transform itself from network hardware vendor to provider of networked applications and software.

As the market for routers and switches continues to mature, Cisco’s growth prospects become slimmer and slimmer. If it wants to maintain its ambitious 10% to 15% annual growth targets, it behooves the company to move into markets that are expanding at a much faster clip than is network hardware.

“Cisco appears to be in the middle of ‘taking a right turn’ into the network applications and services space,” says Dave Passmore, research director at The Burton Group and a longtime Cisco watcher, noting another recent Cisco acquisition of Five Across, a company that builds social networking sites.

“Why would they do this? Cisco’s core market of enterprise networking, while very profitable, is also very mature. Many of our large enterprise customers have 10-year-old Catalyst Ethernet switches that they’re perfectly happy with and not likely to replace anytime soon,” Passmore says.

Another longtime Cisco watcher – Frank Dzubeck, president of consultancy Communications Network Architects – also notes the company’s transition.

“It’s the whole concept of 'get out of the hardware business',” Dzubeck says. “Basically, the only thing you can do [with hardware] is make it better or repackage it and make a platform out of it. So what do you do? You go into the software business.”

One analyst does not see the acquisition so much as a dramatic shift by Cisco to become a software vendor than as a way for the company to enhance the strategic value of the network overall – including its hardware, such as the new Telepresence videoconferencing system.

“Existing WebEx customers stand to gain as Cisco integrates the WebEx tool set into its other communication and collaboration offerings, such as Cisco Telepresence,” says Chris Silva, a Forrester Research analyst. “The union of the two firms will pave the way for customers to grow into more complex, infrastructure-centric collaboration solutions.”

Dzubeck says WebEx gives Cisco not only a seasoned, network-based collaboration product and customer base, but also a foundational piece of a larger network-application strategy. That strategy includes getting into the search engine business, he says.

“One of the areas they’re going to go into next is search,” Dzubeck says. “Search to them is a Web-based technology that competes with Google’s search. One of the theories that Cisco has is, the network has got all of these indices out there. If you just have access to these indices . . . you can take search up to the next level.”

That next level is Web 3.0, where network applications are more adaptive and associative in nature, Dzubeck says.

While more direct competition with Google could be in Cisco's future, WebEx also may assist Cisco indirectly in its competition with Microsoft for collaboration and unified communications dollars, Passmore says. Most large corporations prefer to control and operate their own unified communications and collaboration systems, Passmore notes; an external, network-based service like WebEx would appeal more to small and midsize businesses that don’t have the technical staff to own and operate their own collaboration systems, he says.