There has been a bunch of industry chatter lately regarding a pending Cisco-EMC joint venture, what it might look like and what the purpose of it is. I recently checked with official sources at Cisco and was given the party line that they do not comment on rumor or speculation, which is about what I expected. Since then I've reached out to other contacts I have and have managed to piece some things together and would like to provide a summary of the possibilities and the market impact it could have.First, a bit of background on Cisco and services to set some context. Although Cisco maintains the position that it isn't a services company, services did generate about $7 billion in revenue last year, which is about 19% of Cisco's total revenue. However, most of Cisco service revenue is generated from support agreements such as Cisco SMARTNet, which is used to provide technical support and maintenance for Cisco products. Much of the up front consulting, integration and management work is fulfilled by Cisco partners such as Accenture, Dimension Data, IBM and HP. Cisco's move into the server space has more than irked some of Cisco partners with their own server business, most notably HP who has pretty much declared all-out war on Cisco.
So why is this context important? It appears that the JV between Cisco and EMC is focused on building a services company with each company rumored to be contributing anywhere from $200 million to $600 million. If this is true, it raises a couple of questions.
The most obvious question is why Cisco and EMC feel like they need to build their own services company. I must admit this left me scratching my head a bit. As I stated above, the typical model for Cisco is to have its partners do most of the services work. However, they do offer a few services for leading edge type of technologies where they learn best practices and then, when the market matures a little, the company turns the services business to its partners. Now, all of the data center redesign currently going on would qualify for the type of leading edge technology that Cisco would look to do with its own services but that flies in the face of the need to create a separate organization.
One scenario that has been speculated is that the team that came in from Cisco's Nuova acquisition has pushed hard to have a dedicated sales team to move the data center products. The structure of the acquisition pays Nuova anywhere from $10 million to almost $700 million (I may be wrong on the exact range but it's a wide range) depending on the products hitting certain revenue goals at three specific moments in time, once of which is coming up. So, in order to maximize payout, revenue must be maximized as well. With the breadth of Cisco's portfolio, combined with the competitive landscape in the data center, it's likely difficult to get the dedicated sales efforts needed to maximize revenue and, in turn, maximize payout to the Nuova executives.
The second question is if Cisco and EMC go off and build a joint services company, what does this mean to Cisco's current partners? A JV will almost certainly be focused on services that are wrapped around the products that have been developed since the Nuova acquisition, such as the Unified Computing System and Nexus product line. These types of services are the types that Cisco's services partners would fulfill on. In fact, since alienating HP and to a lesser extent, IBM, Cisco has gone out of its way to promote the relationships with Accenture, WiPro and other partners. I'm guessing when the JV is announced Cisco will address the role that it will play and the role that its partners will play, but this will almost certainly have a negative impact on the relationship with some of its current partner community. Maybe it's only a small number of them but I don't really see a way for a Cisco-EMC services company to improve the relationship with the partner community.
Lastly, if this is successful, what does it mean long term? If it is a success, I could see Cisco acquiring the JV and using this to jump-start an end to end services organization. This type of services group has been speculated for quite some time but Cisco has steadfastly stated it wasn't interested in this type of business. However, with the market for many of Cisco's current products being in slow growth or even decline, corporate growth has to come from somewhere and services could finally fit the bill. Also, if successful, this could be a new model for Cisco and you might see other JVs to test markets and if successful it stays, if not it gets shut down and the only downside is a small investment.
Whatever the case, we're continuing to see the transformation of Cisco right before our very eyes. Its historical partners are becoming less important or even enemies and new alliances are being drawn. I, like many other people have stated that the Cisco of two year from now will look significantly different than the one today; the JV may be the thing that accelerates this change.
