Cisco Faces Make-Or-Break Week For SDN

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:

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.)

Cisco's ability to grow the business seems limited. Companies in Asia are turning to local companies like Huawei, Futurewei, and ZTE for network equipment -- both for political reasons and cheaper pricing. There is some growth in Europe, but many companies are turning to other suppliers. Ericsson and Alcatel have done well in the carrier space, while second tier network vendors have taken market share. South America is in a financial downturn, and sales are shrinking overall.

Cisco has done better in the US, with some 10% year-over-year growth in the enterprise market. Sales of UCS servers continue also to grow strongly, and the recent acquisition of Sourcefire has increased revenue in security.

Chambers And The Future
There are many investors indicating that it is time for John Chambers to step down from the CEO role. Equally, it's hard to imagine that Chambers wants to leave when Cisco is struggling; he appears to be a person who wants to leave on a high note. Even if Chambers appoints a successor to be CEO, he is likely to remain Chairman of the Board and maintain control of the company.

If ACI fails to ignite customer interest to the point where it sustains Cisco profit and revenue, calls for change at the top job will escalate. Analysts say that Chambers has credibly made the case for Cisco's current challenge and is providing a compelling vision for recovery.

Big Week To Come
There is no question that Cisco is struggling to maintain its market position in face of product commoditization driving lower product prices, the rise of Chinese competitors in major markets, as well as public cloud services from Amazon, Google, and Microsoft stealing customers away.

And Cisco ACI looks like a good strategy. It solves real business problems, offer portal and automation to network. Cisco has demonstrated the ability to integrate with many of its own products after making the commitment in November to converge the previously independent business units into a coherent vision.

Cisco has enormous customer loyalty through it's incumbency, large salesforce, and certification programs. At the same time, it has the credibility with other technology companies to build a platform those companies can join. Cisco Live brings many of Cisco's most loyal customers together to share new visions, dive into products, and keep them close to Cisco staff.

This week will provide more details on Application Centric Infrastructure and allow closer examination of its capabilities. The question of customer acceptance and adoption against a perception of technology lock-in and pricing fears is one that will be repeated.