Thoughts on Cisco’s Business Trajectory, and on Networking

Let’s face it, Cisco’s quarter was bad, and nothing management says can alter that. Supply chain issues may have been a factor, but it’s hard to justify the miss and the weak guidance Cisco supported with that excuse (one, by the way, that all the vendors who have weak quarters have been using). They did much better just a quarter ago, after all. Cisco, Cisco’s competitors, and everyone in the networking industry need to take stock here, and reflect on new details on some of the points I made in my blog on their prior quarter.

If we want to look beyond the now-classic supply chain excuses, there are two sources of revenue/profit issues that Cisco and others face. The first is differentiation, needed to sustain pricing power and margins. The second is return on investment, which is needed to get any additional budget for network gear, or to sustain current spending levels if they come under pressure. Both seem to be at work here.

The challenge for network vendors is that networking at the device level has been commoditizing for ages. A router is based on many broadly accepted standards, making it difficult to claim any great feature differentiation if you stick to the basic function of pushing packets around. The vendors responded to that by creating “ecosystems” of products that reflected the reality that networking today is a complex assemblage of stuff that buyers find hard to integrate. And, of course, with creative marketing and sales.

To me, the big question raised by Cisco’s quarter is whether even the network-ecosystem approach is running out of gas, and if so why. The answer to the latter may be easier to see than the answer to the former.

I’ve mentioned many times that Cisco really wants to be a “fast follower” in technology. They want to exploit proven opportunities more than evangelize new stuff in the hope it will catch on. That’s understandable in a sales-driven company; you don’t want your sales force pushing something that turns out to be a dud, both because it hurts their credibility and because it overhangs sales of current-generation stuff. To me, a problem with ecosystem credibility is most likely to lie with a shortage of exciting ecosystems. You can’t differentiate with old stuff in the world of ecosystems, any more than you can in the world of devices.

If you ask enterprises and service providers whether they believe that networking is changing, almost 100% say it is. If you ask of the changes are radical, just short of 90% say that’s also true. I don’t have up-to-the-minute data on the point, but last fall about two-thirds of enterprises and three-quarters of operators said their vendors weren’t offering “new” or “novel” solutions to their network problems and challenges. So let me get this straight; networking is changing radically and vendors aren’t changing their stuff to keep up, right? It sure seems so.

The popular ecosystem strategies for Cisco and other vendors have tended to center on things like network management and operations or network security. These things are important, of course, but they’re ecosystemic product sets long recognized and offered. The changing network issues that buyers are referencing can’t be the same stuff that’s been around for a decade or more. What then are they?

Networking has had its share of transformations, particularly for enterprises, and the enterprise transformations have been tied to shifts in the network services offered them. In the past, we saw a shift from networking built from user-provided nodes and leased lines to IP VPNs. In the present, we’re seeing a series of shifts created by the cloud.

Enterprises use networks to connect users (employees, customers/prospects, partners) with information and application resources. The cloud has transformed where the “front ends” of these information/application resources are hosted, and by doing so have changed both the network connection for the users and for the rest of the applications and databases involved. If we were to assume that the popular view that “everything will move to the cloud” were correct (note that I don’t subscribe to that view), then networking would be nothing more than the Internet for access to cloud apps. Even steps short of that extreme would surely give cloud providers a much greater role in enterprise networks.

Most vendors, including Cisco, have focused on “multi-cloud”, which isn’t the real problem, but which has the advantage of being easy to promote in the media and follow up with sales. There is certainly a shift in networking going on that’s driven by the cloud in general, but nobody is really pushing it.

Edge computing, which is a subset of cloud computing, would magnify the number of things that the cloud would do, and thus magnify the impact on network services. The impact on networking would be greatest if one of the drivers of edge computing were to be an increased use of “the edge” to host network functions, as 5G proposes to do. Since this kind of impact would be most likely confined to metro centers, I’ve tended to call this a “metro” shift. Cisco rival Juniper did an announcement on “Cloud Metro” a year ago.

I think what’s going on here is simple. Cisco, not surprisingly, isn’t anxious to tout a change in networking that would validate cloud providers rather than their traditional network operator customers. Not only that, cloud providers are more willing to embrace white-box technology or SDN for their networking, and neither favors vendors like Cisco.

We can now attack the question of whether ecosystem differentiation is running out of gas, because it’s also a good transition into the second potential challenge—difficulties with network ROI. The failure to develop new ecosystems can have the effect of removing justifications for projects, which removes spending authority, if the new ecosystem can potentially also represent business value-add. If Cisco and others were able to develop new benefits for networking, that would drive new spending. To the extent that new ecosystems were able to generate new benefits, they could help Cisco boost its numbers, but we’ve already seen that things like the cloud would more likely reduce spending than boost it.

This reflects the real challenge for Cisco and others in the space. What’s really needed is a new set of network benefits, and that’s a problem because every network vendor has focused on the notion that connectivity is the only real goal of the network. We’ve achieved connectivity. To find other network benefits, we’d have to find things to do with networks that step beyond basic connectivity. That almost surely involves going “up the stack” and more into applications.

This circles back to the cloud, too. The cloud is winning the battle of new benefits, which is advancing computing by distributing it, and making more of the network a between-cloud-stuff proposition than a separate entity. Cisco has offered servers and software for years, so it’s unlikely they could make a push for cloud hosting gear that would offset any network revenue challenges.

We can sum up the ROI issue with some data. Back up 20 years, and we find that network budgets were almost equally balanced between “sustaining spending” on current infrastructure and “project spending” designed to add business value. Since then, most of the projects have focused on cutting sustaining costs, not adding new business value. That means that networks have been under constant budget pressure for decades now, and we’re probably seeing this exacerbated today because of economic uncertainties.

You can’t expect users to spend more annually to sustain the same set of benefits, particularly if there’s hope of spending less. That hope materializes in things like white-box competition and discount pressure on vendors like Cisco. The only sure way to fix this is to make networks do more, not just cost less.