Light Reading

Cisco's Secret Software Strategy

Light Reading
News Analysis
Light Reading
1/13/2005
50%
50%

Sources say Cisco Systems Inc. (Nasdaq: CSCO) has launched a long-term software initiative that could bring the company closer to IBM Corp.'s (NYSE: IBM) model of offering full consulting services.

Cisco has already set up a special software group (yet unnamed) to develop middleware, Web applications, and services products, says one reliable source who is close to the company but asked to remained unnamed. Other sources say Cisco has indeed set up a new software group but that it may have less dramatic goals.

Adding to the fun, Cisco may be planning to rehire Selby Wellman, a former senior vice president whose responsibilities included Cisco's alliance with IBM, according to several sources. That deal, signed in 1999, paired IBM's Global Services division with Cisco's hardware -- and also marked IBM's exit from the router business. Wellman, whose pre-Cisco career had included a stint at IBM, retired from Cisco in 2000 to pursue other business interests.

One unnamed source within Cisco says Wellman has already been hired and is heading the new software group along with Cliff Meltzer, senior vice president for Cisco's Network Management Technology Group.

This source says Cisco's goal with the new software group is to create "application-aware" networks, a move that could tread on the turf of partners IBM and Microsoft Corp. "This has been kept totally quiet by Cisco because they do not want Microsoft to get mad enough to hurt other lines of business," the source says.

Cisco officials declined comment, noting they do not discuss "rumors and speculation." But given the political implications, some analysts find the plan hard to believe.

So why would Cisco do this? Experts point out that with networking technology becoming increasingly commoditized -- and with a looming fret from low-cost hardware competitors in China -- Cisco could help insulate itself from these trends by moving up the software stack and marketing consulting services and developing more sophisticated software.

"They're going to need something like [a software group] to bulk up those consulting services. It's part of their move to quietly become more like IBM," says Deb Mielke, managing director of Treillage Network Strategies Inc.

Other sources believe the group's task is less grand, possibly related to future developments with XML and Layer 7 traffic engineering.

Depending on where the project is going, it's clear that Cisco will have to be careful in developing the project around its relationship with IBM and Microsoft, major partners.

"Cisco has an enormous dependency on their relationship with IBM," says Tom Nolle, president of consultancy CIMI Corp. "The only thing I had heard was that they were expanding their professional services stuff, but I don't think they're doing applications development."

Nolle says he'd heard of Wellman contacting Cisco about re-employment. But, he adds, "I had not heard there was any convergence on his actually returning." Wellman's name does not appear in Cisco's voicemail directory.

Cisco CEO John Chambers has already dropped some hints about a startegy toward moving to consulting, software, and services. At Cisco's analyst meeting in December, he outlined a strategy to make Cisco more of a consultant, showing customers how to change their business processes to take advantage of new capabilities in the network. Cisco's new Integrated Service Router (ISR) product line reflects that thinking by making routers to become the roosting place for network applications such as voice over IP (VOIP) (see Cisco Rolls Out Roadmaps and Cisco Takes Apps on Board).

Tough Crowd
If Cisco is considering a middleware play, it's got a tough fight ahead. "I fear they would know not where they tread. The software ballgame is not for the faint-hearted," says Frank Dzubeck, president of Communications Network Architects. In addition to IBM and Microsoft, Cisco could be up against BEA Systems Inc. (Nasdaq: BEAS), Computer Associates International Inc. (CA) (NYSE: CA), Hewlett-Packard Co. (NYSE: HPQ), and Veritas Software Corp. (Nasdaq: VRTS).

Then there's the question of whether it makes sense for Cisco to develop this software on its own. "I would be very surprised if Cisco would embark on third-party custom software development as a service or develop a software applications package," Nolle says. "With all the cash Cisco has, they'd be better off buying somebody."

Adding to the difficulty level, Cisco's superpowers in routing could prove useless in the software dimension. "It's a different set of rules and a different set of customers. The buyer [of applications software] is not the one that buys the routers," Dzubeck says. "No one would believe you're talking about putting your crown jewels in the hands of a communications company."

Dzubeck thinks it's more likely the new software group targets "higher-order Layer 7 things like XML." Such a program would tie nicely with recent acquisitions such as P-Cube Inc. and with Cisco's recent interest in traffic engineering technologies (see Cisco Reroutes Traffic Management, Cisco's Parc Purchase: An MPLS Play, and Corvil: Another Cisco Secret?).

Software plans aside, Mielke, who was once a consultant with MCI, sees plenty of pitfalls ahead for Cisco the Consultant. One crucial adjustment is that services -- network designing help, for example -- aren't supposed to be free any more. "That can be a tough transition" for a sales force that's given away services "all their lives," she says. "I'd call my MCI guy and he'd be giving away services to get a $2 million voice contract. It's a tough change."

So, why would Cisco even pursue things like consulting and middleware? The answer might have to do with Cisco's flagging stock price. Institutional investors reportedly are losing patience with the company, as its stock lost more than 20 percent of its value in 2004, even though Cisco had a decent year. Even the closely watched launch of the CRS-1 core router couldn't break the stock's doldrums (see 2004 Top Ten: Stock Gains & Pains and Cisco Sees Big, Bold Growth).

Given the company's dominance in routers, something like consulting might be Cisco's best way to create new revenue streams. "There's nowhere else to go," Dzubeck says.

— Craig Matsumoto, Senior Editor, Light Reading

(3)  | 
Comment  | 
Print  | 
Newest First  |  Oldest First  |  Threaded View
materialgirl
50%
50%
materialgirl,
User Rank: Light Beer
12/5/2012 | 3:29:46 AM
re: Cisco's Secret Software Strategy
They do not call it convergence for nothing. As SUNW said years ago "The Network is the Computer".
As I mentioned last time this story was leaked, CSCO has to sell something other than their existing networking gear to be credible with this new strategy.

Clearly, L1-3 is getting commoditized and CSCO must move up stack to hold their value. At the same time, issues like security (L7 worms, XML flows and load balancing require an up-stack awareness in the network. Networks and computer applications are indeed converging. CSCO is just moving up stack with customer needs.

However, do not think they can just buy their way into software. Ever heard of "open source?" And they think Chinese hardware is a problem! The new paradigm will be very different in terms of earning money.
krbabu
50%
50%
krbabu,
User Rank: Light Beer
12/5/2012 | 3:29:43 AM
re: Cisco's Secret Software Strategy
If the story is true, it is tacit admission on Cisco's part that the Chinese have already come, not that they are coming! Networking equipment intelligence has to move up from IP routing & transport to encompass the higher layers of the so-called 7-layer OSI stack and the pure software players such as Microsoft will want to integrate parts of their software solutions into the network elements.
I guess no one has the correct crystal ball.
-
Ramesh
DoTheMath
50%
50%
DoTheMath,
User Rank: Light Beer
12/5/2012 | 3:29:41 AM
re: Cisco's Secret Software Strategy
The issue is not just the Chinese. Cisco simply has an "excess margin problem", and has had it for a long time. Even assuming a very optimistic 20% revenue growth (tough in an environment of inevitable price erosion), I see only potential for margin compression for them, and that is going to keep the bottom line growth feeble. They have also squeezed the heck out of their suppliers and have wrung out the most from their employees, so there isn't a lot of room there either. The stock market seems to have figured it out, and that would explain the lack of momentum in the stock.

What has kept the game up for so long is their outstanding sales execution (I tip my hat to Chambers), coupled with some outstandingly lousy execution of their competition. Companies like 3Com and Nortel simply self-destructed. The staying power of companies like Juniper or Foundry or Adtran (in a variety of markets) shows how to survive and thrive against Cisco. This ain't no Microsoft.

But the flip side of a sales-driven culture is that there simply isn't much of a long range technology strategy there, HFR notwithstanding. Witness the recent Wi-Fi acquisition (congrats, Airespace!): it is beyond pathetic for Cisco to have to pay this kind of price in today's market, when the whole of silicon valley knew what kind of Wi-fi companies were coming, circa mid-to-late 2002. In late 2002, if Cisco had gotten its act together product management and engineering-wise, they wouldn't have had to shell out the $450 million they are shelling out now. I can understand investors getting tired of this endless dilution paying god-knows-how-many-times sales for products they should have built in house.

So this is one story that is weaker than it looks, however good the short term numbers may be.
Flash Poll
From The Founder
The New IP is actually bigger even than business. Like another hugely important tech that Light Reading is digging into right now, the New IP has the potential to change the world by fundamentally advancing what it is possible for people to achieve with communications.
Between the CEOs
EXCLUSIVE: Cisco's Chambers on Reinvention

3|3|15   |   8:24   |   (0) comments


Light Reading CEO Steve Saunders talks transformation and virtualization – including Light Reading's independent testing of the vendor's virtualization solutions – with Cisco CEO John Chambers at Mobile World Congress in Barcelona.
LRTV Documentaries
The Three Cs of MWC15

3|2|15   |   2:33   |   (1) comment


My visit to this year's Mobile World Congress is going to dominated by three Cs – cloud, cells and coffee.
LRTV Huawei Video Resource Center
Huawei Shares Its Vision of the Future of Mobile Networks Innovations

2|26|15   |   2:30   |   (0) comments


Mobile broadband is changing our lives. It's reshaping the Internet, industry, and society. It allows us to freely connect with one another anytime, anywhere. At this year's Mobile World Congress, Huawei will share its latest insights and newest ideas and technologies that will shape the future of MBB. They will showcase their end-to-end MBB solutions that will ...
LRTV Huawei Video Resource Center
Accelerate Digitizing, Boost Digital Business

2|26|15   |   6:14   |   (0) comments


A new digital revolution is leading us to a better connected world. Together with millions of digital partners, Huawei will help CSPs to build their digital service ecosystem and aggregate a wide variety of digital services. In this video, we find out how Huawei is going to help CSPs implement digital operations.
LRTV Huawei Video Resource Center
The Secret Recipe to Enabling Hyper-Growth Industries

2|26|15   |   3:38   |   (0) comments


With a number of successful cases on network capability exposure, Huawei is going to share the secret recipe to enabling hyper-growth markets with a step-by-step approach.
LRTV Documentaries
BTE 2015 Is Bigger & Even Better

2|25|15   |   03:13   |   (4) comments


This year's Big Telecom Event (BTE) in Chicago is going to provide more opportunities than ever for networking, getting to grips with key industry challenges and opportunities and, equally as important, having some fun.
LRTV Interviews
Light Reading ICT Leaders Roundtable at MWC 2015

2|12|15   |   1:07   |   (2) comments


On Sunday March 1, 2015, Light Reading will host an ICT Leaders Roundtable in partnership with Huawei. At this half-day event, CIOs, analysts and researchers will discuss key industry trends like virtualization in the cloud with a specific focus on new business models. Located at the luxurious Renaissance Hotel near the Fira Barcelona, space is limited so please ...
LRTV Documentaries
Going Green in 2015

2|12|15   |   02:04   |   (0) comments


Energy efficiency is set to be an incredibly hot topic in the telecom industry this year.
LRTV Custom TV
SDN & NFV: Where Are We Going From Here?

2|11|15   |   11:27   |   (0) comments


Vitesse Semiconductor CTO Martin Nuss gives his perspective on why SDN and NFV should be tightly interconnected and how he sees the industry moving forward.
LRTV Documentaries
Time for Gigabit Europe?

2|9|15   |   01:27   |   (4) comments


Gigabit broadband networks are springing up all around the US and they'll soon become more commonplace in Europe.
LRTV Interviews
Brocade Brings New IP Vision to 2020 Vision Executive Summit

2|3|15   |   4:23   |   (0) comments


In December 2014, Light Reading gathered telecom executives in Reykjavik, Iceland to discuss their vision for high-capacity networks through the end of the decade. The intimate, interactive meeting was set against the backdrop of Iceland's spectacular natural beauty. As one of the event's founding sponsors, Brocade's Kelly Herrell shared his company's strategy at ...
LRTV Interviews
Brocade's Kelly Herrell on the New IP

2|2|15   |   12:36   |   (0) comments


In December 2014, Steve Saunders sat down with Brocade VP of Software Networking Kelly Herrell at Light Reading's 2020 Vision executive summit in Reykjavik, Iceland. They spoke about Brocade's approach to the New IP, the future of the telecom industry, and more.
Upcoming Live Events
March 17, 2015, The Cable Center, Denver, CO
April 14, 2015, The Westin Times Square, New York City, NY
May 12, 2015, Grand Hyatt, Denver, CO
May 13-14, 2015, The Westin Peachtree, Atlanta, GA
June 8, 2015, Chicago, IL
June 9-10, 2015, Chicago, IL
June 9, 2015, Chicago, IL
June 10, 2015, Chicago, IL
All Upcoming Live Events
Infographics
Net neutrality, broadband services and the current outlook on data consumption, as presented by the New Jersey Institute of Technology.
Hot Topics
Internet Pioneers Decry Title II Rules
Carol Wilson, Editor-at-large, 3/2/2015
Small Cells Enabling Location Services
Sarah Thomas, Editorial Operations Director, 2/25/2015
Verizon Takes Radio Dot to Detroit, VoLTE Overseas
Sarah Thomas, Editorial Operations Director, 2/27/2015
FCC Adopts Title II Rules
Alan Breznick, Cable/Video Practice Leader, 2/26/2015
Like Us on Facebook
Twitter Feed
Webinar Archive
BETWEEN THE CEOs - Executive Interviews
Check out Light Reading's interview with Jay Samit, the newly appointed CEO of publicly traded SeaChange International Inc. With a resume that includes Sony, EMI, and Universal, Samit brings a reputation as an entrepreneur and a disruptor to his new role at the video solutions company. Hear what he had to say about the opportunities in video, as well as the outlook for cable, telco, OTT and mobile service providers.