Cisco's cloud services reversal was inevitable

Market dynamics forced it to compete with customers 3 years after pledging not to

Cisco had no choice but to enter the cloud services market this week even after pledging not to do so three years ago, according to two analysts. IT vendors and service providers are continuously reviewing their go-to-market strategies and realigning them to address market shifts, even of it means competing with some customers.

Notes market tracker Technology Business Research:

The move is a significant departure from the company's previous strategy of being just a cloud "arms dealer."

" facing a different competitive landscape than they did just a few years ago and are adjusting their go-to-market because of it," says Tiffani Bova, vice president and distinguished analyst at Gartner, who noted that Microsoft, VMware and HP, and IBM, are doing the same. "With this new market demand and the fact customers have extremely different expectations from technology means all providers have to re-think and rationalize their business frequently. Business relationships are also being impacted, the fact that a service provider may find themselves working with and then competing with existing partners is going to become the new status quo."

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Bova says Cisco is also looking to drive the market at the speed they want, and if partners are not willing or able to invest or fully commit to the long term vision that Cisco has for their business, Cisco then has to respond accordingly.

"And the way to do that is to gain greater control of their destiny by fundamentally changing the market dynamics and creating a set of services on their own," Bova says.

Also, many customers are demanding that many IT companies like Cisco manage and operate their environments directly, with comprehensive SLAs and services. This will inevitably set up a competitive situation with partners and customers whose business was once sacrosanct.

"Cisco will, in fact, compete with a number of other cloud services in the market and the number of options customers have to choose from will only increase and accelerate," Bova says. "IT providers have to find their own differentiation and ways to resonate with clients in solving business problems they have today and in the future."

TBR agrees with Bova but sees some pressure on the horizon for Cisco's hardware sales:

TBR believes the new cloud strategy will negatively impact Cisco's hardware sales, particularly in the service provider segment, as customers will be able to leverage Cisco's application-centric, network-aware services without buying routing and switching infrastructure for their cloud environments. However, the move is necessary to help the company evolve into a services-focused IT solutions provider, as cloud continues to upend the traditional hardware model - even for a dominant market leader such as Cisco... the move will place Cisco into competition with other key partners, such as IBM, as well as customers like Verizon that sell public cloud services using their own infrastructure. However, Cisco anticipates the benefits of targeting this market outweigh the risks, just as it did entering the server market in 2009 and effectively ending its long-standing partnership with HP.

We reached out to four large Cisco cloud customers - Verizon, AT&T, Sprint and Amazon Web Services - to gauge their reaction to Cisco's move into cloud services. AT&T declined comment. Verizon said it had "no new information" to share, and AWS and Sprint didn't respond at all.

But in addition to competing with customers and partners, and impacting its hardware sales, TBR sees other challenges for Cisco in entering the cloud services market:

TBR believes Cisco will face challenges executing its new cloud strategy, as the focus on applications and services does not play to the company's core strengths in hardware. However, Cisco will invest in additional partnerships and tuck-in acquisitions to quickly establish itself as a key player in the next phase of the cloud services market.

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