Suing Arista was always the plan

Cisco didn't want a royalty arrangement; it wanted revenge

Suing Arista was always the plan. It appears there was no intention to attempt to negotiate a royalty arrangement with the company after Cisco discovered potential infringement of its patents and copyrighted material.

CEO John Chambers didn’t answer our question last week on whether Cisco did indeed attempt to hammer out a royalty deal with Arista. He said he couldn’t comment on litigation, but that the company was surprised by statements from Arista executives on how they didn’t have to re-invent existing technology in order to achieve its current success in data center switching, among other remarks.

His non-answer was enough to convince us no such alternative was even considered. The bad blood between Arista CEO Jayshree Ullal and Cisco/Insieme marketing VP Soni Jiandani is well known. There may be some resentment between Chambers and Arista Chairman and Chief Development Officer Andreas Bechtolsheim as well; Andy served as vice president and general manager of Cisco’s Gigabit Systems Business Unit, developers of the Catalyst 4500 line, from 1996 to 2003.

Indeed, our belief is that Cisco was ready to file suit against Arista back in June as the company was set to go public. But perhaps due to the bad PR implications of trying to derail the IPO, Cisco delayed its suits until this month, which was no accident.

Cisco's suits came two days after expiration of the 180-day lockup period on Arista, the time in which company insiders are prohibited from selling shares immediately following an IPO. If insiders flood the market with Arista stock it may cause a significant decrease in its value; being sued by Cisco would undoubtedly sink it even deeper.

And it did. Arista’s stock actually gained 3% between Monday, Dec. 1, and Thursday, Dec. 4, during expiration of the lockup period; but when Cisco’s suits hit the morning of Friday, Dec. 5, the stock dropped 12% by the close of trading on Monday, Dec. 8.

Despite the apparent momentum behind Cisco’s Nexus 9000 line – 1,000+ customers, 200+ of which use the APIC controller -- Cisco actually lost share in Ethernet switching in Q2, as Arista’s revenue grew to $121 million, according to Dell’Oro Group. For the third quarter, Arista's "strong share gains in the data center" caused revenue to climb to $155.5 million, an increase of 53% compared to the third quarter of 2013, and an increase of 12.7% from the second quarter of 2014.

But Cisco was no slouch in Q3 either. Dell'Oro reports that Cisco's share of 10G rose to 66.8% from 64.7% in Q2, and 40G rose to 59.3% share from 53.9% in Q2.

Arista lost 40G revenue share in Q3, dropping to 12.8% from 13.9%. In 10G, Arista had a 3.6% share in Q3, up slightly from 3.3% in Q2. For the fourth quarter, the company expects revenue between $160 million and $168 million.

Another interesting aspect of the Cisco litigation is that one of the suits against Arista involves copyright infringement of Cisco’s command line interface, right down to the typos in the manuals. But other Cisco competitors claim to have Cisco-compatible CLIs, too. Why aren’t they being sued?

Finally, Cisco went public with the suit before it was even filed, before Arista was even aware of it. This was designed to cause damage before damages might be awarded by the court.

So when you add everything up in Cisco’s complaints against Arista, some things just don’t add up. Rather than punctilious enforcement and protection of intellectual property, Cisco's suits smack more of planned, plotted and calculated revenge.

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