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Art Wittmann
Art Wittmann
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Reimagining Cisco: You Aren't a Box Seller

For the duration of its existence, Cisco has been all about selling hardware and adding software that can run on only its hardware. It's time for a change of attitude.

There's a good debate going on between my colleagues at Network Computing.com--it's one that's also been raging on other parts of the net, and centers on the future of networking giant Cisco. Cisco's John Chambers is leading the company through what's now a regular once-per-decade public navel-gazing exercise, or self-reassessment--depending on how kind you'd like to be.

Some of the questions are around internal processes and the needlessly public discussion of them: "Have line-of-business managers lost their accountability, and has that led to poor and slow decision processes?" I suppose some investors want to know how all that is to be worked out, but, really, the only people who actually know enough to assess the utility of Cisco's internal business-decision processes and proposed modifications are the people at Cisco. So why make it all public? You aren't the Kardashians; no one cares about your internal strife, just figure it out and keep the details to yourself. And also, unlike the Kardashians, your net worth is highly unlikely to go up for the public airing of your dirty laundry.

But then there are questions that customers and shareholders alike should care about: Will Cisco eliminate more product lines, and, if so, which ones? Has it allowed competitors to catch up or pass it in terms of the desirability of core products? Is it missing out on key trends or failing to make important alliances that will keep the company strong and continue to make its products appealing to its customers? Is the company acting in ways that are contrary to its customers' best interests, and, if so, have the customers figured it out yet? Although it's been said in some quarters, no one doubts Cisco's staying power--it's more about maintaining those sparkling profit margins and market shares.

On Network Computing, the debate has been about whether Cisco is making the right moves to capitalize on the impending network virtualization wave. Contributor Kevin Fogarty sees Cisco's position as confused and vulnerable, while Editor Mike Fratto thinks Cisco has nothing to worry about. Not too many Cisco watchers have taken Mike's point of view, so much so that Cisco's Gary Kinghorn, who's the marketing manager for Cisco's network virtualization and SDN products, called out Mike's blog in one of his own.

There's a lot of good detail and thought in Kevin's and Mike's pieces, but for my part I a see major flaw in John Chambers' notion that Cisco's great proprietary hardware in combination with its great proprietary software will be what users want and need for their networking needs--whether virtual or not. The bottom line is that proprietary hardware and software combinations will always give way to cheaper, more open systems with time. Servers are a prime example--from mainframe to minis to proprietary Unix systems to x86 dominance, once performance of less proprietary and cheaper systems become adequate, the more tightly coupled predecessor gives way.

Beware the Box Mind-Set

You can see the path pretty clearly in switches--Broadcom and Marvel are the providers of chips, networking vendors put together largely compatible systems based on them, and, sooner or later, some software-defined networking systems will come along to provide the external smarts, leaving switch vendors to largely compete on price, service and product reliability.

But that's not the only place where Cisco has placed the wrong bets. Its reliance on hardware in its VoIP offerings from phones to Cius (now discontinued) has been wrong-headed. Chambers acknowledges that the Cius was a bad idea and that Cisco execs should have realized it at the time. The lesson is simply this: Don't take an Android tablet and strip away everything that made it appealing apart from one function, like wireless communications. Instead, add that function to already existing multifunction Android tablets and make them better. Cisco has made the same mistakes with phones, which were the center of UC and desktop video-conferencing capabilities. Why not use that highly capable Wintel system sitting next to the phone? Why not, indeed--Microsoft is making huge strides in unified communications all with never selling a single box.

The same logic applies to desktop conferencing and even its larger, room-based systems. The company would be far better off getting out of the box -pushing mentality and into truly delighting customers with great network-based services.

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EmmaL608
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EmmaL608,
User Rank: Apprentice
10/22/2013 | 9:22:02 AM
re: Reimagining Cisco: You Aren't a Box Seller
Yet, the Cisco is developing faster now, cisco is the king od networking
Brad Reese Speaks Out
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Brad Reese Speaks Out,
User Rank: Apprentice
8/21/2012 | 5:06:06 AM
re: Reimagining Cisco: You Aren't a Box Seller
Hi Art,

Cisco has missed the "market transition" in videoconferencing:

http://www.bradreese.com/blog/...

Cisco's Q4'FY12 gross margin, switching, routing, collaboration, SP video and other revenue all sequentially declined.

Quarterly revenue in 5 of Cisco's 9 sales reporting categories sequentially declined:

http://www.bradreese.com/blog/...

For the 1st time in 10-years, Cisco's FY12 research and development expense sequentially declined.

Meanwhile, Cisco's FY12 general and administrative expense sequentially soared by +21.69%

Also for the 1st time in 10-years, Cisco's FY12 sales and marketing expense sequentially declined.

Cisco's operating income has grown by just a meager +6.5% over 4-years (i.e. since 2008), $10.065 billion vs. $9.442 billion.

Since FY07, Cisco's "interest and other income, net" has fallen by a staggering -88.8%, from $840 million to $94 million.

During FY12, Cisco earned less net income, $8.041 billion, than it did 4-years earlier in FY08, when net income was $8.052 billion.

Even though Cisco had $8.041 billion in FY12 net income, its FY12 adjusted stock price close was -15.78% less than 11-years earlier when Cisco reported a -$1.014 billion FY01 net loss!

Over the past 11-fiscal years, Cisco has repurchased $76.132 billion (an average of $6.921 billion per year) of Cisco stock for a combined total of 3.740 billion Cisco shares (an average of 340 million Cisco shares per year).

However since FY01, Cisco's basic shares used in its per-share calculation has decreased by only -1.826 billion shares.

That means 1.914 billion shares (i.e. 51.17%) of the total Cisco shares repurchased for a cash cost of $38.956 billion (i.e averaging $3.541 billion per year) went to support the dilutive management compensation practices of Cisco CEO John Chambers.

13-year history of Cisco's fiscal year consolidated statements of operations:

http://www.bradreese.com/blog/...

Sincerely,

Brad Reese
MAEWORK
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MAEWORK,
User Rank: Apprentice
8/20/2012 | 8:18:39 PM
re: Reimagining Cisco: You Aren't a Box Seller
I've been pushing a similar line to Cisco for a while now, dump Cius, dump Scientific Atlanta, Kill off Quad, or whatever it is you are calling it now. Focus on what matters, for some it's speeds and feeds and yes that's a combination of commodity components from Broadcom and others, price things appropriately, innovate and drive in new directions, datacenters are going to be wired, everything else is going to be wireless move on. I think the fundamental challenge for Cisco is that innovation that's happened there has mostly been through acquisitions, I don't believe they can effectively innovate because their culture of positioning business units to compete against each other makes it so that teams effectively hold back and don't work together.
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