Gigaom

Cisco: What Went Wrong and What Needs to Be Fixed


Cisco Systems (CSCO) is in trouble. It screwed up and John Chambers acknowledged as much in his memo to employees Monday, Apr.4, which was later published on the company's blog. Chambers didn't go into the details of what has gone down, but after years of following the network giant, we can say straight up that Cisco let its eyes stray from the ball. By not staying true to its core networking focus, Cisco managed to let its market share come under pressure from incumbent players and upstarts. It also allowed rivals to set the agenda for the next big trend in networking: the idea of one unified network.

As traffic becomes increasingly dynamic and comes from myriad networks—be it wireless or from a Web server hosted at Amazon.com (AMZN)—the older ways of building out static networks no longer make sense. They add too much overhead. Think about the work Open Flow folks are doing to separate the data plane from the control plane of the network. This is in response to these shifts in traffic, a shift that Cisco rival Juniper Networks (JNPR) is also watching and plans to address, according to Pradeep Sindhu, director, vice-chairman of the board, and chief technology officer at Juniper. In an interview with Om Malik last month, Sindhu said:

"The nature of traffic today is increasingly dynamic. And so the old ways of addressing and building networks, with very statically provisioned technologies, like circuit switching, is essentially dead. So you have to rethink this architecturally. Point No. 2 is that I believe that the traffic is going to get a lot more stochastic in nature. In other words, unpredictable; both with respect to any given circuit and with respect to the sources and destination, the amount of usage will continue to explode and they will get more and more dynamic and unpredictable."

Lost Focus

So while Cisco bought up Pure Digital, the maker of the Flip camera, and focused on creating separate networks for video traffic to flow over, its competitors pulled the entire concept of networking out from under Cisco's feet. And Cisco does best when it focuses on the network. For example, its cloud computing business, where it reinvented the concept of a server to combine the computing and networking into one box, was a visionary idea that fit perfectly with the shift toward the cloud model that was occurring in the computing business. Yes, Cisco gear is expensive and proprietary, but the company built on its familiarity with enterprise customers and its existing foothold in their data centers to expand.

In the last few years, Cisco's forays in the consumer space, video, telepresence, and even collaboration have distracted it from what it is good at on the core networking side. A good example of this is its telepresence initiative. Instead of building a platform that customers could integrate into the far-flung offices of remote employees, Cisco went with a proprietary, high-cost system that people who might otherwise work remotely must travel to in order to take conference calls. Yes, TelePresence is beautiful, but for the wider audience, it's not worth the cost and hassle when Skype or even Logitech's (LOGI) LifeSize is out there offering a cheaper, easier alternative.

So proprietary may be acceptable in an area where Cisco has a huge market share, but in consumer and telepresence—where it is trying to build users and adoption—it forgot that a key tenet of creating a platform is either making it incredibly usable or incredibly open. Cisco tends to favor closed ecosystems but unlike Apple (AAPL), its consumer products don't have the same usability or cachet. So this refocusing of Cisco's on five priorities that include core routing and switching; collaboration; cloud computing; network architectures; and video is good news for the most part, although video is a huge category.

Analyst Report

In an analyst report issued Apr. 5, UBS's (UBS) Nikos Theodosopoulos noted that while the Chambers memo was a recognition of mistakes made, it could become a turning point for the company, perhaps leading Cisco to sell off low-margin or low-growth businesses to focus on a few lines of business. He wrote:

"On Monday, CEO John Chambers wrote on a Cisco Blog upcoming tough decisions the company will make given recent earnings disappointments. Cisco will remain focused on five priorities: leadership in core routing, switching and services; collaboration; data center virtualization and cloud; architectures; and video. These priorities are not surprising in our view. … Some actions investors may favorably perceive is a reduction in target markets to a more manageable number (e.g., from 40+ to less than 10), and organization structure adjustments to reduce bureaucracy (e.g., elimination of councils/boards). We also would view divestment of low growth, low margin businesses as positive (e.g., consumer, set-top box, home networking)."

Cisco has been able to stay ahead of the curve in the service provider market by making gigantic routers for dealing with unimaginable traffic at the edge of the network, a problem that it predicted would occur as broadband networks proliferated and services delivered over the network required more bandwidth. It managed to disrupt the giant computing vendors by consolidating servers and networking in one box, and still has plenty of innovation and knowledge locked inside the 70,700-person company. Cisco may have screwed up, but if it refocuses, we shouldn't count it out.

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