Reasons not to buy Cisco

Goldman Sachs a few weeks ago published survey results on IT spending patterns for 2009, going into 2010, from 100 IT executives at Fortune 1000 firms. The survey found that pricing pressure is increasing, which could lead to share losses for Cisco.

About half of the respondents said they were able to reduce their Ethernet switching costs beyond typical declines, which Goldman interpreted as increased competition in the industry from “up-and-coming” switching vendors such as Brocade, Juniper and HP. The heightened competition has so far resulted in share loss for Cisco rather than pricing or margin compression, though the firm notes that could change depending on Cisco’s priorities for share versus margins.

Cisco’s share of the Ethernet switching market dropped from 75% in the fourth quarter of 2008 to 69% in the third quarter of 2009, Goldman notes, citing data from Dell’Oro Group.

Eleven percent of respondents said they were able to lower their switching costs by shifting their business away from Cisco. Another 12% said they were able to get better discounts on Cisco products, and 10% received lower prices on support and maintenance from Cisco, the survey found.

Thirteen percent said they said they can get better than typical discounts from non-Cisco switching vendors as well.

Pricing was No. 2 on the list of factors weighing most heavily on the respondents’ switch purchase decision. Performance was No. 1 and that, combined with price, suggests “best-of-breed vendors with superior price/performance can gain market share despite Cisco’s significant incumbency advantages,” the Goldman survey found. 

Vendor reputation and pre-existing relationships rank fourth and last, respectively, on the list of important factors in making a switching purchase; and product roadmap for converged or virtualized solutions — where Cisco and Brocade currently have a time to market lead, Goldman notes — ranked near the bottom of the list, “indicating that most customers are making their purchase decisions based on near-term performance of their networks rather than future proofing their systems,” the survey report states.

Goldman expects global IT spending to grow 4% in 2010 after declining 8% in 2009.

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