Cisco's determination to grow its software business to counter slowing hardware sales is likely to intensify in...
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2017. But the company's need to diversify has caused uneasiness among data center operators dependent on Cisco hardware.
Industry analysts expect Cisco to release lots of new software for security and the internet of things [IoT]. Both areas -- major pieces of the Cisco software strategy -- are of high interest to enterprises and hold the promise of offsetting falling sales in switches and routers, which account for 47% of Cisco's revenue.
"Those two [security and IoT] are going to drive a lot of what you see Cisco do from a product introduction in 2017," said John Fruehe, an analyst at Moor Insights & Strategy, based in Austin, Texas.
Security is particularly promising. Sales at Cisco have risen 12% over the last nine quarters to create a $2 billion business, according to financial news magazine Barron's. Sales of switches and routers, on the other hand, are below 2014 levels.
Cisco is hoping software will also reenergize hardware sales. The company is pushing customers to embrace its Application Policy Infrastructure Controller (APIC) as the centralized brain of a Cisco switching fabric.
Customers wary of Cisco software strategy
Cisco's concentration on software-defined networking (SDN) through APIC is making enterprises heavily invested in Cisco networking gear anxious, said Brian Dooley, data center specialist at IT consulting firm OneNeck. Dooley's customers are concerned that technology like APIC will eventually lead to Cisco selling commodity switches, instead of the high-performing hardware it sells today.
"Cisco has made they're bread and butter on selling hardware and just to drop that is hard for a lot of customers to accept," he said. "[Enterprises] still want the reliability and the support mechanisms that come from the enterprise-class switching and routing architecture."
While companies could move to software-centric networking in the future, "a lot of customers aren't necessarily moving in that direction very quickly," Dooley said.
Nevertheless, experts believe SDN is the future of networking, and any Cisco software strategy has to embrace it. "They know long term that [hardware] is not a good business for them to be in," Fruehe said.
Cisco software strategy emphasizes strength in security, IoT
Cisco is in a good position to increase revenue in security and IoT, analysts said. That's because the company can leverage its networking expertise to provide features competitors might not match.
In security, Cisco can use its hardware to collect network data useful in spotting malware. Cisco already analyzes network-extracted data in firewall appliances and the cloud to provide virus protection.
In IoT, 2017 will likely see Cisco position itself as a partner that can help companies and government formulate an IoT strategy. Many organizations are interested in IoT to track everything from truck fleets and public transportation to manufacturing equipment and environmental control systems in office buildings.
The importance of networking in IoT gives Cisco an advantage over some competitors. "Everything about IoT is data in motion," Fruehe said. "Cisco is in a great position to say nobody understands data in motion better than us."
Cisco's weakness in service provider market
Despite the promise of IoT and security, Cisco will have to show investors progress in slowing, if not reversing, weakening hardware sales. In 2017, Cisco will try hard to bolster sales to communication and cloud service providers -- two markets where Cisco has lost share to rival Arista, analysts said. Sales to service providers, which account for roughly a quarter of Cisco's business, fell 12% in the fiscal quarter ending Oct. 29.
"That's one segment [service providers] where Cisco will need to up the ante to make sure it plays a more active role in meeting the needs of the public cloud provider and the hyper-scale [data center] players," said Rohit Mehra, an analyst at IDC. The hyper-scale data center is the term used to describe the large facilities operated by the biggest service providers and financial institutions.
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