The focus of Cisco’s Investor Day was its expanding presence in the software market. The rise of software from 20% of revenues in 2017 to 30% in 2021 validates their assertion of software growth. Less obvious is whether Cisco’s declared transition to software is offensive or defensive and if it can sustain Cisco’s long-term bottom-line revenue growth. Know more information, please contact SPOTO.
Cisco’s product revenues, which include software, were $36.014 billion for the fiscal year ending July 31, 2018, and $39.005 billion for the fiscal year ending July 31, 2019, a decrease of little under three billion. If software revenues increase, hardware sales will fall significantly from 2019 to 2021. Cisco expects its hardware to “persist” longer in customer accounts and will rely on software subscriptions for the devices to generate yearly income.
This idea appeals to Wall Street, who feel that hardware is under pressure from both budgets and competition and who seemingly believe that software has no limits. Cisco would be running down the Yellow Brick Road if this were true, but is it? There are three difficulties.
Challenge One is feature fatigue. The majority of Cisco’s “software” consists of what I and others have sarcastically termed “underwear” — software designed to build functionality for a hardware platform, such as a switch or router, or to administer networks of such media. In respect, it is similar to an operating system. Even before Cisco split its hardware and software, many IOS network operating system customers did not update. New capabilities are what keep people upgrading and paying for subscriptions. It is difficult to offer new features every year and retain a feeling of user value.
Novell emerged in the 1980s as the darling of workgroup networking, although many of my readers may not remember it. NetWare was the enterprise network operating system of choice, the originator of print and file sharing and resource catalogs, among other things. The issue was that Novell generated money by selling and updating software, and as time progressed, they took up more and more of the things that consumers valued. There was eventually little left to contribute.
This brings us to the second difficulty, bursting competitiveness. Microsoft’s addition of essential resource sharing to Windows, an example of booming competition, proved devastating to Novell. Cisco anticipates that other network equipment makers will challenge its “disaggregation” of software and hardware, but there is a more significant competitive threat. Cisco must extend beyond basic routing/switching to provide value-added services to sustain continuous subscription revenue. This leads to hosting, which they have naturally provided through UCS servers.
Well, maybe. Many were startled at Cisco’s recent investor presentation that the company barely mentioned UCS servers. It is difficult to believe that Cisco aspires to be a significant software company if the only “software” they offer is this “underwear.” Competition and the need to generate update pressure for consumers would propel Cisco into sectors where software is more broadly associated with computer functions. How might that be accomplished without servers? Why, if you already have servers in stock, wouldn’t you position yourself in the general or at least edge-focused hosting market by promoting that you are a service provider?
The edge-focused element is of particular relevance since Cisco, like other network manufacturers, would likely find the most straightforward road out of pure packet-pushing to be edge computing, which is emerging from 5G hosting missions that are (as previously said) already budgeted. In addition, server and software companies such as Dell, HPE, IBM/Red Hat, and VMware are all vying for 5G hosting and telecom prospects, putting network equipment at risk.
This vulnerability is exacerbated by the likelihood of identical software being housed on servers and white boxes. If prominent software vendors provide this type of dualistic software, a Cisco withdrawal from hosting might result in a rise in consumer demand for white-box switches and routers. This might reduce Cisco’s equipment sales and increase their reliance on their developing software approach.
The final obstacle is internal resistance. Cisco has tried software for decades, but it has never met its expectations. A portion of this is attributable to the conventional hardware types that have dominated Cisco engineering for decades. Today, as I’ve already mentioned, Cisco is not a software firm but a hardware corporation that has isolated its formerly included software. This approach did not generate the same backlash as previous, bigger software projects, but Cisco cannot continue on this constrained software path and maintain its income stream.
The farther Cisco’s software ambitions deviate from “underwear,” the more difficult it will be for Cisco to rely on existing personnel and the greater the demand for fresh hires. As this influx upsets the balance of power, it further intensifies the opposition of Cisco’s longest-tenured employees, who have undoubtedly risen to top positions. Will these individuals accept the new software predominance? Doubtful.
As a result, establishing software claims is easier for Cisco than making software the focus of a future income universe. The most problematic aspect of their investor-meeting narrative is the absence of emphasis on UCS. This is Cisco’s greatest and most distinctive advantage among network-equipment-non-mobile suppliers; obviously, it should have been the center of the conversations, but it was not. There are three potential explanations for why it was not.
First, Cisco may have no plans to expand its software position beyond “underwear.” Consequently, the only explanation for their tale to investors would be to purchase time while they choose their next course of action. This is a bad thing.
Second, Cisco may assume that “underwear” is all they need to thrive in software. If this is true, I believe that rather than a rebirth, as Cisco and Wall Street have claimed, we may be witnessing the beginning of a significant decline in Cisco’s market domination. Consider Novell, which is a terrible idea.
Third, Cisco may be developing a genuine software blitz incorporating UCS, but they are unwilling to reveal their plans. This would prevent competitors in the server/software arena from erecting hurdles against Cisco before Cisco has truly developed a competitive solution. That is partially acceptable as an explanation for their seeming disregard for UCS, provided they have the “real software blitz” in the works and soon.
A software strategy for Cisco must fulfill Cisco’s revenue/profit objectives, but it must also meet the objectives of the purchasers and produce the ROI they’ll want. Currently, Cisco has a software transitioning strategy that is not transitioning to a state that will deliver on this, and they must fix this immediately, or they will not only fail to deliver on their promises in 2022 but also risk putting their entire software-centric vision at risk for the long term.