Cisco won't discuss a recent report that it's preparing to release a stand-alone version of its network operating system. But staying mum doesn't change the market dynamics that make it likely a hardware-independent NOS is coming.
This month, The Information reported that Cisco was nearing completion of an open NOS called Lindt that could run on a white box powered by merchant silicon. Such a move would be a dramatic departure from Cisco's decadeslong business of selling high-margin hardware inseparable from its software.
Cisco doesn't say the article is wrong. Instead, the company falls back on a corporate cliché for refusing to discuss a media report. "We don't comment on rumor or speculation," a company spokesman said.
Cisco's evasive response does not alter market trends likely to push the company toward an open NOS. First is the company's eroding dominance of the Ethernet switch market. Since 2011, the company's share has dropped from about 75% to less than 60% last year, according to the financial research site Trefis.
The decline is important because switches accounted for 40% of Cisco's product sales in 2016, 30% of net revenues and 20% of the company's $162 billion valuation, Trefis reported.
Why Cisco is losing sales
Cisco's weakening performance in switching is tied, in part, to customers turning to public cloud providers, such as Amazon Web Services, Microsoft and IBM, for their IT infrastructure. The more enterprises subscribe to infrastructure as a service, the less networking gear they need in their data centers.
The shift to cloud providers is found in the latest numbers from Synergy Research Group. Revenue from public cloud infrastructure services is growing at almost 50% a year. In the fourth quarter of last year, revenues topped $7 billion.
At the same time, enterprises that were Cisco's largest customers are joining cloud providers in building open networking hardware and software to replace inflexible proprietary systems that lock them to a vendor. Those companies include large financial institutions, like Bank of America, Goldman Sachs and Fidelity Investments, and communication service providers, such as AT&T, Deutsche Telekom and Verizon.
The technology shift is driving an enormous amount of spending on IT infrastructure. Worldwide spending on public and private cloud environments will increase 15% this year from 2016 to $42 billion, according to IDC. Meanwhile, spending in Cisco's core market of traditional infrastructure for noncloud data centers will fall by 5%.
Cisco sticking with integrated hardware over open NOS
Publicly, Cisco insists its customers are not interested in buying networking software that's separate from the underlying switch. "The vast majority of our customers see tremendous value in the power and efficiency of Cisco's integrated network platforms, and the tight integration of hardware and software will continue to be the basis of the networking solutions we offer our customers," the spokesman said.
While Cisco is ignoring the trend away from proprietary hardware, its rivals are embracing it. Juniper Networks and Arista Networks have released a version of their NOS for white boxes favored by cloud providers and large enterprises. Both companies reported year-to-year revenue growth in switching last year.
Cisco's resistance to change is likely due to fear that giving customers other hardware options would accelerate declining sales in switching. "There would be potentially some risk of cannibalization in the enterprise space," said Rohit Mehra, an analyst at IDC.
Rather than change its model for selling networking gear, Cisco has spent billions of dollars on acquisitions over the last few years to create software businesses in security and analytics. But Cisco's software push has yet to pay off.
In February, the company reported its fifth consecutive quarterly revenue drop. For the period ended Jan. 28, overall revenue fell 3% year over year due to weak sales in switches and routers.
The networking market is evolving away from the hardware that Cisco depends on for much of its valuation. Cisco will resist changing its market approach for as long as possible. But in the end, the company will have to become a part of the trend with an open NOS capable of running on whatever hardware the customer chooses.
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