Courting the Cisco crown

In terms of legacy market leadership, few companies dominate like Cisco. The vendor is the yardstick for competitors and the most recognised brand in the enterprise networking space. It boasts huge revenues and an extensive channel base around the world. However, it is not an unrivalled player and more than ever before the market pawns are making moves to trouble the once safely protected king. But are rivals gaining ground or are their efforts just a spit in the Cisco-controlled ocean?

Just how dominant?
Founded in 1984 by a small group of computer scientists from Stanford University, Cisco is the undisputed leader in the development of IP-based networking technologies. Today, the vendor has more than 65,000 employees and global revenues just short of US$35 billion.

The problem of defining Cisco’s dominance comes with the fragmented nature of the networking market. The rise of convergence and with networks being used for more offerings than ever before, Cisco has diversified in recent years.

“If we are talking about the switching and routing market, there is no doubt that Cisco remains in the leading position, especially in the enterprise market,” said Jamie Jin, market analyst for network technologies at IDC Australia. “Cisco’s rivals have recently delivered a stronger product set than what they had before and hence the decision-making process for CIOs has become more difficult.”

John Lively, vice president of forecasting and analysis at Ovum, echoed Jin’s views: “Cisco leads the switching and routing category with its dominant position in core and edge routers. Cisco also ranks first in cable TV equipment, which today is dominated by sales of digital set-top boxes and digital video recorders, and less so by cable TV transmission equipment.

“Alcatel-Lucent holds the number one rank in both optical networking and broadband access equipment (DSL). Huawei makes the overall top five by virtue of holding second place in both optical networking and broadband access. Huawei is Alcatel-Lucent’s main rival in the optical networking market and competes with both Alcatel-Lucent and Cisco in broadband.”

Further research from Ovum for the first quarter of this year found that Cisco leads the IP/MPLS (multi protocol label switching) space, with a 51 percent share compared with Juniper Networks’ 20 percent slice.

“One year ago John Chambers set a target to be a US$50 billion revenue company in 2010,” said David Molony of Ovum. “His last full year’s results showed revenues about half that, so it looked demanding. But the company ended the year on US$35 billion and is now at a run rate of US$40 billion or more for financial 2008.”

Molony said Cisco still has to pedal hard to get to that US$50 billion target, but its latest quarterly figures show it is keeping up.

“Cisco’s business model is fundamentally simpler than the expanding range and increasing sophistication of products would suggest. The company sells network equipment, and while it also does the services that most vendors insist is where the future lies, Cisco never loses sight of the box sale. For every dollar equivalent a customer spends on consulting with Cisco, it will spend US$4 on services such as integration, maintenance, upgrades – all the things the supplier should be doing anyway, but US$7 on equipment, and that’s the bottom line for Cisco,” said Lively.

So how has Cisco managed to build its lofty stature?

“I’ve never seen a company that is so customer-centric,” said Jeff Sheard, director of A/NZ channels at Cisco. “There is a focus on listening to customers and we are driven by what customers want.”

Sheard said another driver behind Cisco’s success is its cultural alignment on market transitions, enabling the firm to shift resources to optimise its presence.

Acquisitions
Another cornerstone of Cisco’s approach is acquisitions. In September 1993, Cisco acquired Crescendo Communications, a networking company which provided workgroup solutions to the desktop. It was the start of a highly prolific acquisition strategy, which has seen Cisco acquire 128 companies in the past 15 years.

“We don’t make acquisitions for market share,” said Sheard. “We do acquisitions for strategic advantage and innovation. The acquisition needs to be within a market opportunity which is capable of being a billion dollar plus market for Cisco in three to five years.”

Jin at IDC said the acquisition approach works very well for Cisco. “The acquisitions make it easier for Cisco to branch out into new profitable areas and to be a leading vendor in those areas. This is not an easy thing to do. Cisco is one of only a handful of companies that can acquire and capitalise on that acquisition in a short time frame.”

Molony at Ovum said: “Cisco has the ability to absorb new companies quickly and turn them into another profitable part of the Cisco money-making machine. This does not seem to be diminished as it has gone from small buys to the bigger deals.

“Cisco is still making small deals along the way just as it used to – that program hasn’t altered. Typically they buy one company a month. Cisco also doesn’t buy outside the US historically – will that change? It has ambitious plans for emerging markets so may need more,” added Molony.

Rival pitch
As the networking space has diversified, it has seen Cisco find new opportunities alongside fresh rivals. If Cisco is the leader in the enterprise networking space, then according to research house Dell’Oro Group, HP’s ProCurve networking division is second globally.

According to Dell’Oro, HP ProCurve experienced year-over-year port growth for the first calendar quarter of 2008 at nearly four times the growth rate
of the networking industry.

“ProCurve has experienced strong growth in both Australia and New Zealand over the last three years,” said Gurkirat Singh, country manager South Pacific at HP ProCurve. “Our networking solutions are based on open standards, and offer businesses real flexibility and choice. In the current economic climate, many businesses in Australia and New Zealand are looking for ways to reduce costs. ProCurve’s product reliability and warranty have helped reduce network running costs for many of our clients.”

Mark Thompson, global director of sales and marketing at HP ProCurve, said: “This growth reflects a dramatic increase in the number of customers who are reconsidering their alternatives and looking to ProCurve for flexibility to quickly meet the changing needs of users, applications and organisations.”

Grant Howe, country manager for A/NZ at 3Com, said: “3Com and Cisco compete across a number of networking solutions. There is no one particular area that stands out. Whilst we can’t comment on Cisco’s market share we do know that 3Com is performing well in the Unified Communications segment. We are sure that we will continue to gain ground in this growing market – covering requirements of organisations of different sizes and needs.”

Dominic Torre, managing director of D-Link A/NZ, said: “Specifically in the ANZ region, D-Link competes with Cisco in the lower end enterprise and higher end of SMB networking markets.

“From a product perspective, the competition from Cisco has traditionally been switching, however more recently commercial-grade wireless, and to a lesser
degree security/firewalls and various other network security solutions.”
Torre said rivals have gained ground on Cisco at the enterprise end in terms of revenue, but the market has not witnessed a dramatic increase in ground from a single vendor.

Gary Jackson, vice-president for APAC at Force10 Networks, said the firm competes with Cisco in the core and edge switching environments.
“Yes we are gaining ground [on Cisco]. There is a growing recognition that there are highly reliable alternatives with very compelling total cost of ownership solutions that should at the very least be considered. And now that we have very substantial household name customers worldwide, and strong cluster computer, storage and software virtualisation partners and professional integrators, there is a growing acceptance of low-risk alternatives in the market that inevitably have some effect on market shares,” he said.

Jackson also questioned Cisco’s acquisitive approach and stated that Cisco has acquired numerous technologies, with many of them “dying on the vine”.

“Acquisitions have the advantage of obtaining ownership of new technologies faster than internal development, but brings with it the significant challenge of integration into the new owner both technical integration, and often far more significantly, “cultural” integration,” said Jackson. “It is a fact that many companies that are acquired wind up with a lot of very unhappy people, who are used to being part of a smaller, independent, fast-moving company, and overnight they become part of a large, less nimble company that has many more procedures and check points. As a result it is a regular pattern that 12 months later, much of the technical expertise of the acquired team leaves, and technical integration gets hard to impossible.”

Jackson said the Cisco of 10 years ago was more focused on its core business than the Cisco of today, and the amount and strategy of acquisitions is not always clear to its traditional customers.

Cisco’s channel ethos
Many analyst stats support Cisco’s position as the leading networking vendor, but how does the firm achieves the results? What really ignites the rivalry debate is discussions on Cisco’s approach to the channel.

When asked about Cisco channel reputation, Jackson branded it “not great”, in particularly for non-top tier Gold resellers.

“The big Gold [partners] do a large volume of business, so are accepting of the low margin business on the product side. However, it is a frustrating relationship for many, many others,” said Jackson. “We see this as part of our opportunity to grow our business, by showing value to the end-users, but equally important, by showing our predictability to the
reseller community, thus enabling them to grow a profitable Force10 business with us.

“We do not take business direct and undermine our reseller partners. We always work with end-users on the benefits and focus of our products, but we also work with partners. Cisco partners are often not sure whether it will be direct or indirect,” he said. “We also do not have hundreds of partners, we have a much smaller number with whom we work. This makes the relationship strong, and also helps preserve partner margins. Partner margins with Cisco are very, very thin.”

Steve Dixon, managing director for A/NZ at Riverbed, who competes with Cisco in the WAN optimisation space, said: “Cisco has its WAAS product [for WAN optimisation], which is not reliable, does not scale and does not perform.
“We come up against Cisco all the time, but we win nine times out of 10. This annoys Cisco no end and John Chambers himself is trying to terminate us
with extreme prejudice. It is a classic David and Goliath battle.”
Dixon added there are so many partners selling Cisco that it has become a commodity offering.

Nick Verykios, marketing director of Distribution Central, which stocks networking products from rivals such as Riverbed and Aruba, said rivals have only managed to ‘chip away’ at Cisco’s position in the traditional switch and router space.

“The exception is Juniper in the router space, who has indeed taken a good chunk of router share from Cisco. The exception in the switching space is HP, who seems to be doing well at the edge with ProCurve. However, this only holds true in enterprise and government verticals as the service provider space is dominated by many other players such as Alcatel-Lucent,” he said. “The emerging and advanced technology spaces such as security, collaborative communications, extreme network replacement, NAC, WAN optimisation, storage ‘version three’, wireless/mobility, see no Cisco dominance.”

Verykios said in many highly lucrative advanced networking opportunities, the trend “is clearly against Cisco”.

“Cisco rarely wins pure play technology bake-offs yet still manages to sell truckloads of whatever it wants to influence. It has kept competitors out of its premiere account base short term, selling to the customer that does not need to diversify and increase support burdens. But that’s naive and is starting to show,” said Verykios.

“Much of Cisco’s acquired technology isn’t incorporated into IOS as the systems are incompatible, and yet to be ‘assimilated’. There are also issues relating to compatibility and where they use the ‘all one company’ line to make it look like support could be reduced, there are in fact still products from many different companies, thereby increasing support burdens. The clever marketing and brute force approach is being offset by competitors who are actually building a more integrated and enhanced technology set under a single OS. That’s a big reason why Cisco is not dominating in the emerging and advanced technology space. As an example, its wireless and WAN optimisation acquisitions have been a bit of a joke.”

Verykios said Cisco presented mature, clean and successful channel programs in the past, some of which many vendors would be well served to imitate in concept.

“In just four years we have built a $60 plus million business at Distribution Central and we sell anything but Cisco and only in the advanced and emerging technology markets. It will double next year at worst,” he said.

“Cisco openly recognises the channel as its only way to leverage the larger end-user space available through mid to low-end opportunities as well as emerging and advanced technology markets. But someone needs to tell its distributors who are polarised in their focus on the larger enterprise opportunities and cleaner worldwide logistics. This is frustrating Cisco,”
said Verykios.

“Cisco’s resellers get both sides of the sword. Resellers have been burnt by Cisco meddling in deals, playing “God” and the reseller ends up on the losing side. At the same time it’s an easy sell in traditional networking. The deal may not come at the best margin, but the cost of sale is pretty low. As a Cisco channel partner you learn quickly that you can’t have your cake and eat it too.”

Asked if he would ever work with Cisco, Verykios said he has spent considerable time as a Cisco partner and a Cisco competitor and believes it’s a very positive trip either way, for very different reasons. “From this stance, if I said anything other than yes [to working with Cisco], I’d be a bloody idiot.”

Jin at IDC, said: “For a company the size of Cisco, channel relationship management is difficult and political. You don’t stay number one across that many solution sets for such a long time without looking after your channels and making sure your channels are looking after you. That’s the business they are in and the numbers speak for themselves.”

It is easy for rivals and their partners to take potshots at Cisco. Being top of the pile, Cisco would expect nothing else.

However, David Peach, vendor channel manager at Cisco distributor Express Data, said: “We do not distribute any other networking vendors and we are experiencing continued year-on-year growth with Cisco. They seem to be performing.

“Nortel, Juniper and HP are some of the firms that our partners might come up against. Cisco’s growth is being driven by convergence as customers now need more bandwidth on their networks.”

Peach said Cisco is a channel-friendly organisation with a very mature indirect approach and a stable channel base.

“Cisco is not always chopping and changing its partners. Cisco partners can also specialise in certain areas and this enables them to play to their strengths. This specialisation process has enabled partners to move into areas where they can make more money,” said Peach.

Sheard at Cisco insisted that the main pillar of the vendor’s channel approach is having a mutually profitable relationship with partners.

“We look to get market coverage from the channel for the wide breadth of technology we have. We ensure that we drive margin growth, not just revenue growth, for our partners,” said Sheard. “At each stage of our development there have been competitors who have been strong, but they have fallen by the way.”

Ensuring that these competitors continue to “fall by the way” will be key to the future success of Cisco. The vendor has not reached its current stature without adopting an aggressive and innovative approach to the industry. Every established IT organisation in the world has its rivals, but few manage to keep them at the distance Cisco maintains.

Are Cisco’s rivals catching up? In the diverse networking space, they are certainly finding traction in certain areas. However they all have a long way to go before dents, rather than mere chips, are being made on the Cisco behemoth.