By Morgan Smith
The year began like any other for Cisco Systems, Inc. (CSCO), but once it missed its earnings estimates, the outlook did not look so rosy. The threat of disruption and software-defined networking has always been in the minds of those who follow the industry, but it seemed to be a larger threat after the earnings call. It has been slowly building its price back up, but as it is prone to enormous losses in just one day, it will have to show the market it is still an industry leader. So far, it has done a commendable job.
Needless to say, Cisco understands the threat of software-defined networking and is fighting it head on. The company's vision of networking's future is slightly different than the typical proposals of OpenFlow and Software-Defined Networking (SDN). What Cisco sees as the future is a programmable network with heavy use of APIs to accomplish this. It is no surprise to see the company adopt this approach because the very nature of SDN would commoditize the switches and routers, leaving all of the value in the software portion. This would cut into its bottom line very sharply.
One author believes that with this development, Cisco might set the move to SDN back a long way, and he makes a strong case for this. With Cisco's next generation networking equipment's ability to be programmed, companies will have to justify whether spending even more money on SDN equipment and expertise is worth it. It is not very often that an incumbent company successfully fends off disruption. Cisco appears to have set it back at the very least. This will maintain its revenue stream and give it time to adapt.
I think that Cisco was embarrassed by missing its previous earnings call and now has something to prove. For the near future, I expect Cisco to be energized and I think these ambitious plans prove this. You should not forget about Insieme. There is bound to be some big news regarding this spin-in.
The main development with Cisco's new networking gear is the use of a controller. This controller will operate with the switches and routers to better allocate network traffic flow. For Cisco, filling this controller, and by the extension of the rest of the networking gear, with high value software will be a value proposition that will extend into the future. It is assumed that SDN will require the use of a sophisticated controller. This will allow Cisco to merely tweak the already existing controller it has. All in all, this seems to be a very smart business move.
But we need to be careful. With all the talk of SDN, it is easy to count Cisco out or marginalize it in some way. To drive home how important the company is, we need look no further than mobile web networks. GigaOm summed it up when it wrote, "Cisco […] is by far the market leader when it comes to the mobile core." With the addition of its new AR550 mobile core, Cisco has the ability to scale up massively to accommodate the overwhelming amounts of data on mobile servers. The AR550 core will be very elastic, able to bend in different ways to meet all the demands placed on mobile servers.
But that is not to say that there are no threats. Cisco, being a hugely profitable incumbent firm, faces many threats that will persist indefinitely.
Typically seen as its largest competitor, Juniper Networks (JNPR) has actually looked pretty weak for quite some time. Much like Cisco, its core business is threatened by SDN, but it had yet to announce any meaningful solutions. That is, until late last week when it spoke of SDN, outlaying that it intends to service the needs of high-end customers.As it understands that it will lose business, it intends to shift its business focus on what particular customers need and providing company-specific solutions. If you think it sounds like Juniper intends to be a consultant of sorts, you are not alone. This might actually be a great way to bypass the threat, provided it can do this well.
Juniper has recently jumped into the growing Korean market and is offering its cloud-based security suite to competitor SK Telecom Co., Ltd. (SKM). The partnership brings together two powerhouses, and Cisco should hope that such alliances don't last over the future. Korea is a growing and important market in the technology market, and its move to more cloud-based operations shows just how newer markets are embracing the new trend.
One rising threat to Cisco is Huawei Technologies. Cisco initially underestimated the privately held company, but has since changed its mind. It now plans to compete with Huawei head on in solutions and innovation. It will be interesting to watch, as in the enterprise market, Cisco has been short on innovation, while Huawei has been short on solutions. That was true until the announcement of Cisco's programmable network. Now, Cisco is in a great position for innovation, and a programmable network leaves a lot more room for innovation. In this respect, Cisco did a great job of stepping up its game. Now, Huawei will absolutely need to do the same.
As mentioned earlier, there are many companies that are looking to undercut Cisco through the use of SDN. The first among them being Google Inc. (GOOG). Google has been developing its own data centers since 2011 and is pushing hard for SDNs. It is not that Google wishes to push Cisco out of the market, but in an effort to cut costs, commoditization of routers and switches is big.
On the other end of SDN is Citrix Systems, Inc. (CTXS). Last week, it acquired Bytemobile, a privately held company that specializes in optimizing network traffic flow. This is evidence enough that Citrix is putting its money into SDN, and for this reason, it will attempt to usher it in.
This all leaves Cisco in a precarious position. Regarding SDN, it appeared to be in "a damned if you do, damned if you don't" situation. However, with the announcement of its programmable networks, Cisco might have done what many believed it wouldn't: get back on top of the industry. I am going to keep watching this development. Cisco appears to be back on track and it is no wonder many analysts are recommending this stock as a buy. If its programmable networks catch on, it could be in for another huge growth spurt. If there is one thing it has proven, it is that it can handle it.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.