As enterprise IT continues its current transformation to rely on the Internet to handle computing tasks, not only software providers must adapt to more cloud uses of their applications, networking equipment makers such as Cisco Systems (NASDAQ:CSCO) also have to address the resulting need for comparable networking hardware. To accommodate the increasingly flexible software deployment and access by enterprises and other communications service providers, networking equipment must now function with scalability in directing and transporting data flows to allow customers making changes to their networking software applications whenever needed. However, this is not how networking equipment is traditionally made and used and has presented a disruptive challenge to the old networking hardware business.
For Cisco, its traditional proprietary networking gears of switches, routers, etc. are designed to handle pre-defined network computing tasks with pre-installed, in-house networking software. But one suite of applications doesn't fit all, and customers likely also experience changes with their network computing needs over time. Thus, traditional, function-specific networking gears may become out of date later on and can be costly and time consuming to replace. As a result, the old networking systems have given rise to the so-called software defined networks, or SDN, which employ bare-bones networking equipment, as opposed to, say, a full-fledged Cisco proprietary system, so that customers can add to and subtract from a basic networking hardware platform different software applications at their own requirements and in a more timely manner.
However, the use of SDN for networking equipment may have not been a welcoming business development for Cisco and other brand-name makers of networking hardware. SDN could essentially upend Cisco's established proprietary networking equipment business over time. With SDN, networking gears are offered without much built-in software, leaving networking hardware making a low-value business with many unknown vendors ready to come in with inexpensive, stripped-down networking equipment. This has already caused Cisco's sales to become stagnant for the past three years. To address the disruption to its traditional networking equipment business, Cisco has to make structural adjustments to its existing product lineups by reducing the production capacity of its proprietary networking equipment. There'll be less profits in making and selling basic networking gears without pre-loading certain high-margin networking software.
Recent workforce reductions in large numbers may have indicated that Cisco is making some strategic moves to reallocate resources away from its primary hardware offerings of the past, and not simply implementing a cost-cutting measure amid its lack of revenue growth. Cisco's net total headcount has actually increased likely because of hiring in other potential growth areas. Most visibly, data center and virtualization has become Cisco's additional IT architecture beyond its traditional product platforms of enterprise networks and communications collaboration. In fact, a lot of Cisco's solutions, services and software now go hand-in-hand with its own and other vendors' networking gears to help enhance the hardware's capability and flexibility, allowing customers to increase their IT operation efficiency and achieve higher value from IT investments.
Therefore, the future Cisco Systems will be very different from the maker of conventional networking equipment, known for supplying boxes of switches and routers that help create and connect corporate and other networks, both wide and local area. Over time, Cisco Systems will look more like a company offering networking solutions, software and services or what the company itself likes to call these days, an IT leader that provides networking hardware and software, enterprise services and security solutions. But the transition time may be slow, similar to what software providers are going through in their shift from on-premise software installations to over-the-cloud software services. While many customers are aware of the potential benefits of adopting SDN, some have yet to be fully capable of defining and managing their needs of networking software themselves.
It can be an ongoing challenge for Cisco to try to balance between its old networking equipment business and nascent software-oriented networking IT solutions, given that some customers seem to still lack immediate commitments to overhauling their traditional IT networks. This could negatively affect Cisco's sales on both fronts until most customers are onboard with the SDN idea. To help reroute current proprietary IT networks to future open infrastructures that support third-party networking software configurations, Cisco need to focus more on consulting for its enterprise customers with solutions and services targeted at scaling up any baseline networks they may choose to deploy.
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