Cisco's standing as a critical infrastructure supplier has slipped, as companies turn to vendors providing cloud-based...
computing and network services.
Cisco has fallen behind Amazon Web Services (AWS) as a key infrastructure supplier to enterprises, according to a recent CIO survey by JPMorgan Chase & Co. Microsoft led the poll with three times the votes of second-place AWS.
"We were shocked to see [it]," JPMorgan analyst Rod Hall said of Cisco's position as a critical supplier. "I thought that you'd see Amazon coming from behind, but they've actually surpassed Cisco now."
Hall joined three venture capitalists and a technology analyst in a debate on how software-defined infrastructure is changing the technology industry. The panel discussion was held this week at the Open Networking User Group conference in Silicon Valley, Calif.
Cisco is under pressure from more companies than just AWS and Microsoft. Cloud-based startups,such as security vendors Zscaler and Okta, and analytics platform supplier Databricks, are also taking their toll, said Peter Levine, a partner at venture capital firm Andreessen Horowitz, based in Menlo Park, Calif. Those companies are using open source software to compete with Cisco in selling network services that sit above foundational gear, like switches and routers -- a market Cisco dominates.
"I am a believer that we can disrupt the networking industry through open source," Levine said. Andreesen Horowitz is an investor in Databricks and Okta.
Cisco's size slows the company down in responding to market trends started by nimble startups trying to become a critical supplier, Hall said. Cisco, which had $50 billion in revenue last year, is unlikely to enter a market with less than a $1 billion in potential sales. Startups, on the other hand, will tackle markets of $100 million or less.
Rod Hallanalyst, JPMorgan Chase & Co.
Rather than dedicate resources to small markets, Cisco and other tech giants will continue focusing on traditional product lines that bring in billions of dollars in revenue, even if sales are slowing. "That precludes doing a lot of interesting things in favor of continuing the cash cow," Levine said.
While size can be a deterrent, it can also work to a company's advantage. Cisco has the money to acquire a hot startup and become a player in a new market overnight. Cisco has used that strategy to build enterprise-class portfolios in security, unified communications and software-defined networking.
Cisco has also built over the years a level of trust with enterprises that startups don't have to become a critical supplier. As a result, companies will try startups' cloud services or software at the edge of the network, not at its core.
If vital networking technology fails, the people responsible could lose their jobs, said Barry Eggers, a founding partner of Lightspeed Venture Partners, based in Menlo Park. Therefore, very few network operators put their fate in the hands of startups.
Nevertheless, Cisco can't ignore market trends nibbling at its standing as a critical supplier. AWS, for example, is the leading cloud-based infrastructure provider for computing and storage. It also sells network services like load balancing, application delivery controllers and domain name system services.
As more of these less expensive network services become available through the cloud, Cisco will have to lower its prices, which will have an impact on revenue and profit margins. "If you're an enterprise, you'd be happy to go with Cisco, but you're not going to be happy to do it at the cost you do today," Hall said.
Pricing could also become a problem for Cisco in switching. In 2015, Cisco accounted for 56% of the market, which was flat from the previous year, according to Synergy Research Group. Maintaining that dominance is likely to become harder as companies like Dell and Hewlett Packard Enterprise partner with software vendors in building less expensive products.
Carrier Verizon, for example, launched five data centers last month that it had re-architected using Dell switches controlled and managed by Big Switch Networks Inc.'s software.
"Cisco is in denial a little bit," Hall said. "They are drunk on high margins, so the switching part of the business is highly at risk."
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