Cisco Adjusts to a New Reality

Agile Federal Data Centers: The Drive to Thrive

The top-line item from news stories on Cisco’s fourth quarter results was that the company will cut 6,000 jobs during the next year. Cisco employs 74,000 people, so this represents about 8 percent of its workforce.

The reality for the firm isn’t quite as dire, though it isn’t all peaches and cream. Network World says that Cisco is spinning the move as a redistribution, as the skills that are necessary shift:

The move will be a reorganization rather than a net reduction, the company said. It needs to cut jobs because the product categories where it sees the strongest growth, such as security, require special skills, so it needs to make room for workers in those areas, it said.

Other results from the company were more upbeat. Software sales rose 29 percent, Unified Computer System gear sales were up 30 percent, and the customer base for the Nexus 9000, which the story defines as “the heart of Cisco’s SDN (software-defined networking) strategy,” increased from 180 to 580 customers.

The big picture has two pieces. One is that the world is moving from hardware to software. That business has less margin and, unlike the legacy world in which Cisco reigns, no hugely dominant force. Cisco is strong, but the field is far more open. A temporary but no less important near-term issue is the poor results from developing markets, due to the particularly unstable state of affairs in many regions during the past few months.

The impact of SDN is the more systemic change. Its impact on Cisco’s finances is discussed by Benchmark Monitor. The takeaway is that the industry has seen the future, and it is one that is less friendly than the present landscape to Cisco and other hardware-centric vendors. Indeed, the vendors may be a farm team for startups:

Venture capitalists are increasingly moving into the SDN market. According to Kumar Srikantan, former VP and General Manager of Cisco’s Enterprise Networking Group and current CEO of Pluribus Networks, ‘there was so much action going on in terms of software-defined architecture and the market. I was being approached by VCs for months.’ Even Cisco has jumped on the bandwagon by starting their own ‘spin-in’ called Insieme and then purchasing the company for $ 863 million.

The challenges that led to the adjustment in the work force and the cautious words of CEO John Chambers at the related analyst call have had their impact. Last month, for instance, Pacific Crest Securities’ analyst Brent Bracelin downgraded Cisco to “sector perform” from “outperform.” Investors.com discusses the impact of the cloud, which is roughly the same as an SDN infrastructure, on Cisco’s fundamentals. Bracelin sums up:

“Bottom line, the handwriting is on the wall and the next major battle to control the cloud computing stack is on, coming to a theater near you this fall,” he wrote. “We assign a high probability that Cisco and EMC will be competing against each other more in 2015 than in any other year in the past two decades. Increasing competitive overlap could, at a minimum, limit margin expansion in the coming year, in our view.”

During the next few years, SDN and its cousin, network functions virtualization, will increasingly dominate networking. It will be interesting to see what strategy and tactics Cisco uses to stay on top. It is clear, however, that no matter how successfully it handles the transition, Cisco won’t be as dominant as it has been in the past.

Carl Weinschenk covers telecom for IT Business Edge. He writes about wireless technology, disaster recovery/business continuity, cellular services, the Intenet of Things, machine-to-machine communications and other emerging technologies and platforms. He also covers net neutrality and related regulatory issues. Weinschenk has written about the phone companies, cable operators and related companies for decades and is senior editor of Broadband Technology Report. He can be reached at cweinsch@optonline.net and via twitter at @DailyMusicBrk.