Data centers

10:06 AM
Greg Ferro
Greg Ferro
Connect Directly

Cisco Faces Make-Or-Break Week For SDN

Cisco is counting on ACI, its software-defined networking strategy, to keep its hold on the enterprise infrastructure market. We'll see how that plays out this week at Cisco Live.

Following a year of shrinking revenue and profits, Cisco told investors on its quarterly financial earnings call last week that the company's recovery depends on its Application Centric Infrastructure strategy. This week, the Cisco Live US customer event takes place in San Francisco, and the signs are that Cisco will be announcing much more around ACI and SDN. It's now been six months since ACI was announced, and the public release of the first-generation product was promised by next month.

ACI is a big vision
Cisco ACI is not a single technology or product. The basic strategy is to use software applications to manage and operate networks in completely new ways. Cisco ACI product announcements started in November around using custom silicon in Nexus 9000 hardware. Since then, a string of announcements has shown that Cisco intends to extend ACI into many areas of the product portfolio. Announcements on UCS Director, security, and the WAN have already come out, and it seems reasonable to expect that the service provider business unit will make announcements in the near future.

SDN products have already disrupted networking, and Cisco came late to the realization. In many ways, ACI is catching up to competing strategies from VMware NSX and HP VAN. A thriving and expanding startup scene has also emerged to offer competing visions. Cisco is feeling competitive pressure.

Acceptance remains uncertain
The big question around ACI is that of customer acceptance. Customers that are holding back on Cisco are reluctant to speak publicly, but internal sources talk about significant pushback against ACI on the basis of proprietary technology, complexity, and high pricing.

Many organizations perceive that deploying ACI will create a dependency on Cisco technology, not just for routing and switching, but also for UCS servers, firewalls and IDS, and Invicta storage. Logically, this could also extend to other Cisco products such as unified communications -- although Microsoft Lync remains the dominant IP telephony platform in the enterprise.

The recent standards and open-source initiatives around OpFlex, OpenStack, and LISP can be seen as reaction to this criticism (although it also encourages third parties to write for the ACI platform). Many companies -- such as AT&T -- have been highly vocal in advocating that SDN must be open and interoperable to avoid vendor dependency.

In a recent blog post, Cisco claims it has:

  • 70+ active ACI trials with customers and channel partners
  • An ACI ecosystem with 33 ecosystem partners leveraging the open approach and the policy model
  • 1000+ customers in pipeline
  • 175+ customers in its service provider, enterprise, and commercial divisions, with several in production deployments

Some critics make the point that Cisco has been promoting ACI to customers since mid–2013. Cisco has 75% market share, which makes these numbers seem low compared to the total number of addressable customers. And 33 ecosystem partners seems limited, when the opportunities for orchestration are so large. For example, consider Vnomic, a Cisco ACI partner that is providing application modeling to automate the deployment of SAP and HANA landscapes. This type of specific orchestration provides enormous opportunity.

On the other hand, slow uptake is to be expected because ACI is an early-stage technology, highly disruptive to IT operations, and the product is not yet shipping. The early-adopter model is well entrenched at Cisco to seed deployments for companies willing to take risks so that deployments are ready at launch. Cisco executives will, of course, assure you that they are pleased with the uptake and customer interest to date. The early marketing program has been as vigorous and comprehensive as Cisco can make it, and many customers are looking forward to ACI.

One final concern is purchase price. VMware NSX pricing has been widely criticized in recent months. This is in part because of its emphasis on rental licensing, but mostly because it is simply expensive and perceived as overpriced. Cisco is already known for high product pricing, but until actual ACI/APIC pricing is available, a proper evaluation cannot be made. Customers are looking to reduce their overall IT spend, and any attempt to increase top-line spending is likely to meet significant resistance.

Cisco financial struggles
Cisco has had a few quarters of poor business with mixed outcomes in different business units. In the last two quarters alone, profits and revenue have dropped by 5% or more, with the gross profit margin now reduced to slightly more than 60%. Most financial news suggests that Cisco's share price has remained flat due to huge buybacks of shares. Cisco has announced a $10 billion share buyback, funded by debt raising in the US and backed by $30 billion net cash in offshore funds. (Head to page 2.)

Greg has nearly 30 years of experience as an IT infrastructure engineer and has been focused on data networking for about 20, including 12 years as Cisco CCIE. He has worked in Asia and Europe as a network engineer and architect for a wide range of large and small firms in ... View Full Bio
1 of 2
Comment  | 
Print  | 
More Insights
Newest First  |  Oldest First  |  Threaded View
<<   <   Page 2 / 2
User Rank: Guru
5/22/2014 | 4:14:00 PM
Another negative slant on a post by who, Greg - Surprise

For the amount of time Cisco has invested in you to help you understand what ACI is and isn't, you forever get it wrong.  Cisco is not catching up to anyone with ACI, nor SDN for that matter.  You financial information is wrong, your technical information is wrong, and your marketing info is what, wrong.

I genuinely enjoy talking to you and like our exchanges, but I know the outcome is always a negative slant to get headlines.  

My recommendation is to go get a balanced view, by someone who also has a reputation of being tough on Cisco, Jim Duffy at Network World, who posted a very balanced view in the article below.

If you want more BS info such as this, try the following link:

User Rank: Strategist
5/20/2014 | 11:11:35 PM
Re: Sanguine
Interesting moment during media Q&A today with Chambers, when a reporter asked him about his successor. He didn't offer up any clues -- there are a number of good candidates, including Cisco President of Development & Sales Rob Lloyd, he said. Lloyd, for his part, refused to say anything. Oh, and Chambers looks to be in superb health. But he did allude to some transition news coming "next time you hear from me." He likened it to a parent wanting his kids to succeed.
Susan Fogarty
Susan Fogarty,
User Rank: Strategist
5/20/2014 | 11:26:37 AM
Re: Sanguine
It will be quite interestng to watch it play out. I was actually surprised at how forgiving Wall St has been to the latest financial reports, given that the numbers were adjusted down a lot so that the earnings would look ok to begin with.

I agree -- and am hearing in talking to people here at Cisco Live -- that there is a large contingent of customers who will go with ACI becasue they already have so mch invested in Cisco and are comfortable working with the company and its technology. BUT, I do think they are losing a big chunk, and it's the higher, more lucrative end, where architects want to have more control. That's why the whole open networking movement is so big, right?
Drew Conry-Murray
Drew Conry-Murray,
User Rank: Strategist
5/20/2014 | 10:47:40 AM
Re: Sanguine
Very interesting times! I wouldn't be surprised to see Cisco have to take a cut on its gross margins, and then get spanked hard by Wall Street. But that won't drive the company out of business (thought it might drive Chambers out of the CEO seat).
User Rank: Ninja
5/19/2014 | 4:26:45 PM
Re: Sanguine
I agree with your sentiment that Cisco has loyal customers and been able to retain revenue/profit for longer than expected. 

What might be different this time is that Cisco is facing competitive pressure in all market segments - routing and switching is challenged by commoditisation, video conferencing is being undermined by google hangouts and skype video, service providers have new options for supplier and need new technologies, etc etc. 

And financially, Cisco needs to maintain 60% gross margin to maintain its share price. New markets like Cisco UCS are at much lower profit margin. ACI might see lower hardware margins but higher margins on software. 

Interesting times!

Drew Conry-Murray
Drew Conry-Murray,
User Rank: Strategist
5/19/2014 | 3:58:25 PM
I think Cisco's mission for Cisco Live is to psyche up the customers and tech bloggers who will be at the show. It has to generate some buzz among potential buyers and start greasing the runway to land sales of the Nexus 9K and (eventually) APIC.

That said, I'm sanguine that Cisco is going to survive this SDN shakeup in the enterprise market. It's got a deep customer base, and lots of network professionals who've invested a lot of time and money in getting Cisco certifications, and will likely be advocates within their own organizations for sticking with the one that brung them.

Cisco has been thwarting lower-priced competitors for ages. It's been accused of locking in customers for ages--and yet it still wins customers. Yes, SDN opens up a new front for competitors to come at Cisco, and competitors will likely peel away a percentage of Cisco's market share.

But there's also a huge cloud of uncertainty hovering over SDN. And that works to Cisco's advantage because it can play the role of Moses to its customer base, ready to lead them to the land of streamlined, automated, scalable, policy-driven operations.

And I don't mean to imply that Cisco's customers are blind followers. They aren't. But they have to evaluate the risk of SDN not delivering as promised. Do you jump into a boat you've never sailed before? Or stick with the one that's carried you this far already? I'm guessing the majority of enterprise customers will sail with Captain Chambers. (Apologies for the mixed metaphors)
<<   <   Page 2 / 2
White Papers
Register for Network Computing Newsletters
Current Issue
Research: 2014 State of the Data Center
Research: 2014 State of the Data Center
Our latest survey shows growing demand, fixed budgets, and good reason why resellers and vendors must fight to remain relevant. One thing's for sure: The data center is poised for a wild ride, and no one wants to be left behind.
Twitter Feed