Here's the plain truth: That familiar ringing won't go away, and Cisco isn't really reinventing itself. While much has changed in the past few years--heavily virtualized data centers, mobile clients on the network, video to the handset, software-defined networks, grittier competition in its core markets from the likes of Hewlett-Packard and Dell--Cisco continues to do what it has always done, even if it's moving into new markets. And somehow it works, whether buyers admit it or not.
In a lengthy session with reporters last week, Chambers touted Cisco's track record for making the right bets (on switching, telepresence, and converged infrastructure); owned up to recent miscalculations (like getting into the Flip camera business), miscalculations he repeatedly characterized as minor; and projected a bright future for the company. He did so clearly, and predictably. It’s hard to argue with Cisco's success, including its most recent financial results (second-quarter non-GAAP earnings were up 23% from a year ago, on 11% higher revenue). InformationWeek's own research shows that Cisco’s data center technology is still, far and away, the No. 1 choice of enterprise buyers.
CIOs we talk with, all of them customers, warn that Cisco is on precarious ground--its products are too expensive, its relevance is fading, and so on. But their spending seems to say otherwise, Chambers rebuts. And besides, haven't we always heard such complaints?
It's no secret that Cisco charges a premium for its products, and that its profit margins in almost every sector are among the highest. Chambers says Cisco can extract those premiums because its technology "lowers customers' risk" and "helps them achieve their business goals" and "protects their investments." If Cisco is indeed reinventing itself, it's still preaching the same value proposition.
But make no mistake: The price pressure is on, and Cisco feels it. "I'm probably even more worried about merchant silicon now than I was five or six years ago," Chambers allowed, "because if someone can set a fast pace in merchant silicon and other people are just focused on software, it's a different game." But Chambers said Cisco's focus on custom ASICS, underpinning a world-class combination of hardware, software, and services, has always served the company and its customers well. Cisco's "gross margins are back to where they were two years ago," he said--specifically, at 62.4% across its product lines. And he noted that HP, whose networking unit has become a major challenger, is "clearly back to where they were two or three years ago" (and he didn't mean in a good way).
Chambers made the point repeatedly, as he always does, about not being "religious" about technology. He also said that while Cisco will make its technology choices, "we'll cover our bets and let the market decide." And while I don't doubt that Chambers is a pragmatic CEO, he has no intention of letting merchant silicon dictate Cisco’s future, despite his admission that he has "no problem using merchant silicon ourselves" for some products.
On the other hand, Cisco's Unified Computing System (UCS) strategy could be viewed as a hedge. Chambers admitted that Cisco created UCS to guard against the threat that IBM and HP would spurn Cisco as a networking partner on integrated infrastructure opportunities. Cisco won't be the server leader, but it has an integrated offering (a data center stack) for those organizations that want one--and plenty do.
Cisco may not be reinventing itself, but it has been busy (and successful) evolving in a rapidly changing data center industry. Cisco has "taken on giants, and dominated," Chambers crowed. In response to competition in its core switching market, like the much-lauded Q-Fabric from Juniper, Cisco is "winning the architectural strategy," Chambers said, pointing to the scoreboard. "We're winning," he said, but not in the Charlie Sheen kind of way. "I don't want to be overconfident, but I feel pretty comfortable with where we are...."
Again, this isn't reinvention; it's just execution. During the company's Feb. 8 earnings call, Chambers relayed that UCS now has more than 10,000 customers, more than half of them large enterprises and service providers. During the call, Cisco pegged UCS revenue at $1 billion, and it grew 91% in the second quarter.
Cisco has taken heat for not supporting OpenFlow, the much-anticipated standard for software-defined networks. But since when has Cisco jumped into a standards fray with open arms (OK, besides TCP/IP)? While Chambers talks openly about the need for interoperability (more on that in a moment), Cisco derives no real advantage from that until it can lock its customers into some of its proprietary approaches. Chambers did hint that Cisco is discussing its options in software-defined networks. And given Cisco's track record and Chambers' recent statements about feeding its acquisitive appetite, it seems possible that Cisco will look to buy a company--again, to hedge its bets.
Chambers is a pragmatist: If Cisco were to eschew OpenFlow to do its own thing, and the market were to decide it wants OpenFlow, Cisco would be up the proverbial creek. So it does both. You can also bet Cisco has an excellent OpenFlow implementation working in its labs.
One acquisition (albeit in another sector) that Cisco passed on, Chambers said, was Skype. He said he still thinks that was the right decision, as Cisco doesn’t want to compete with its service provider customers. Meantime, Cisco is doing its fair share of saber rattling against Microsoft-Skype. For instance, it has petitioned the European Union to revisit the Microsoft-Skype deal, with an eye toward setting some rules, primarily around embracing open standards for video calling. Cisco's head of emerging business, Marthin De Beer, has said the company is afraid that Microsoft will integrate Skype with Lync exclusively.
Cisco had been hopeful that it could work out a deal with Microsoft, presumably to use video calling standards, but it turns out, Chambers said, that "Microsoft doesn't see [interoperability] as important as I do." He added that when Cisco acquired videoconferencing vendor Tandberg in 2010, Microsoft was one of the loud voices insisting on the same type of video calling interoperability, which Chambers said he agreed to.
Beyond a carefully crafted public statement saying that Cisco had its say during the European Commission's investigation of the Skype acquisition, Microsoft declined to comment on Chambers' assertions.
Microsoft's video calling and collaboration products, and Skype in particular, are focused on one-to-one communication: individual end users or consumers making voice or video calls, chatting, and sharing screens with one another. Sure, Microsoft’s products allow for group-oriented videoconferencing, and its Office Communications Server (OCS) can be a client into room-based systems, but most people use OCS and Lync for one-on-one meetings. Skype even more so, and while Skype has worked hard to gain enterprise acceptance with full-fledged business offerings, it has been a consumer play.
More important--and perhaps the threat to Cisco’s unified communications ambitions--Skype has become the de facto standard for presence, chat, and video, especially across platforms (not just PC and Mac, but mobile devices as well). Chambers admitted, when discussing the Cisco-Skype issue, that "over time . . . a lot of the trends will come from the consumer route."
Cisco sees a major threat not just from Microsoft-Skype, but also from a host of smaller players such as Vidyo, OoVoo, and Fuze. Those vendors’ video-based products provide a user experience similar to Cisco's telepresence, with some of the infrastructure intelligence (bit-rate detection and picture-quality adjustments) and additional features (shared screens, white boards, presentations) in a more personalized manner, at a fraction of the cost. Videoconferencing is nice, but the bigger opportunity is one-to-one unified communications, on mobile platforms, and those small players are poised to eat Cisco's lunch.
Not Reinvented Here
So if this is Cisco up to its old tricks, why does Chambers insist on championing the reinvented Cisco? Well, for one thing, Cisco lost its way, hurting its financial performance over the past couple of years. Incredibly, Chambers blamed some of that poor performance on the company's might, saying Cisco "had never brought out five switching platforms at the same time that had major price/performance improvements." In other words, we were so good, we hurt ourselves.
Of course, another way to look at it is that some customers stayed with Cisco only because it made substantial price/performance improvements.
Chambers talked passionately about video, and to some extent this is as close as he came to really framing a different Cisco. It's no longer a router company or a switching company, he said (except on the income statement, where that’s exactly what it is). Chambers was all over the map on video, saying it’s a primary form of IT, though he talked about it mostly from a service provider standpoint--as a service, as "the next voice," as something that can be delivered and searched, as something that goes beyond communication.
In other words, Cisco sees itself as a distribution hub for all things video, most notably in the cloud via the company's Cisco Videoscape initiative, which is mostly a service provider strategy. It's also plausible that some of the functionality of set-top boxes will be driven to the cloud.
Chambers adamantly denied recent speculation that Cisco is trying to sell its set-top box business. If anything, the rumor mill has afforded him the opportunity to highlight that cloud-based future, and Cisco's role in it. A reinvention? No. An intelligent evolution? Sure.
And that's what all of this reinvention business really is. It includes a push into services. It means that Cisco's sales approach revolves around architectures and "solutions" rather than products. It means an eye toward acquisitions when Cisco fails to sees one of those major market transitions Chambers is always waxing on about. Isn't that just what a strong company is supposed to do?
Sure, as many CIOs have told me, Cisco's sales team can be arrogant. Some of Cisco's five foundational principles (core networking, data center cloud, video, collaboration, and business architectures) are lost on most people--CIOs say they aren't sure what business Cisco is in. Cisco charges high prices (Chambers’ response: "I'm getting very little pushback today on prices"), but that has always been the case. And in the types of "solutions" Cisco sells, price isn't the top customer issue (it's No. 5 of 11 criteria on our readers' list of priorities, following reliability, performance, post-sales support and operational cost). Still, Chambers would be making a critical mistake to ignore any of those concerns.
Cisco CEO John Chambers is fond of pointing out that his company has always been good at anticipating and catching the big market transitions. Or more precisely, driving them. Get a couple of them right, and suddenly everyone starts to believe you. Bettors love a winner, and Cisco has won big, from routing to switching to security to voice. It won't win big in collaboration, but it will do fine. Perhaps its future is in video, as Chambers predicts.
As always, Chambers effuses hope. He’s the eternal optimist and salesman hellbent on willing Cisco to victory. He’s at his best when predicting Cisco's future by recounting Cisco's past, its strokes of genius. Judge me on how we do, he dares.
I wouldn't bet against him.