Cisco announced the company's latest quarterly results earlier this week and while the tone of the call was somewhat upbeat the results were yet another mediocre quarter. Much of the malaise Cisco is in right now is based on the fact the overall economy is still sluggish. We may be seeing some signs of recovery but I still sense more caution than I do optimism. But is it just an economic recovery that Cisco needs or are there other issues? Even with a recovery the below will still challenge Cisco's growth:* Law of large numbers. When you're a $40 billion company, growing at even 10% a year is an enormous challenge
* Market dominance. In the markets that really matter to Cisco, routing and switching which make up over half of Cisco's revenue, Cisco owns somewhere between 70% and 95% of the revenue depending on product, market segment etc. Growth needs to come from market growth since there's no share to take
* Pricing pressure in core markets. The router and switch markets are now mature markets. The fact that Cisco has managed to maintain a price premium for such a long period of time has been remarkable. However, over the past year or so Cisco has started to feel some price pressure, particularly in the area of switching from the likes of HP and 3Com.
Clearly Cisco is now at a crossroads in its history. It is a huge company that owns #1 share in almost every market related to networking, and many of those markets' growth is slowing or even in decline. This has prompted Cisco to move into a number of tangentially related markets in a variety of different market segments, some close to networking and some not. On paper, moving into these adjacent markets makes sense but one has to wonder if all of Cisco's moves have put the company in a position where it has to defend too many fronts.
Several years ago, when Cisco was just a network vendor, its competitive landscape was fairly simple and not all that threatening. Large competitors like Cabletron, 3Com and Nortel imploded and small upstarts like Extreme and Foundry were just getting off the ground--hardly any competition for a company with the resources and muscle of Cisco.
The company then added VoIP to its portfolio and started competing with a number of much larger vendors such as Avaya, Nortel, Siemens and the like but caught most of them sleeping and grabbed a bit of early mover advantage as it was the only vendor to aggressively try and move the market towards VoIP. Along the way Cisco picked up some other businesses in the areas of security, wireless LAN, etc., but most of these were related to the network and were core to what Cisco did, so voice was the first true adjacent market Cisco moved into and had a great deal of success.
Now over the past two to three years Cisco has moved into a number of other adjacent markets that are similar to its move into voice where the technology area has its ecosystem and unique set of competitor. Below is a list of some of the more significant acquisitions or in house developed technologies and who the main competitors are:
In addition to the above list, IBM (through OEMs), Brocade (through Foundry acquisition), Juniper and HP (through ProCurve realignment) have all moved to threaten Cisco's cash cow, Ethernet switching.
The above list shows just how diverse Cisco's competitive front has become and it's not just "the seven dwarves" any more. It is many large companies whose degree of "Cisco friendliness" varies from very good to downright nasty. Cisco has done a good job of continually reminding the market of how good the relationships are with the vendors listed above, but it's clear that there is more competition with the likes of IBM, Microsoft and HP today than there was five years ago.
So while Cisco has made these adjacent moves because it finds its business at a crossroads, the company is now squarely in the crosshairs of many more formidable foes. This may eventually pay off long term, but
