Cisco is laying off 4000 workers after only slightly beating expectations (and earning a profit to add to the huge pile of cash they have). Now I am no lefty, but this seems a little harsh. What is the nature of these cuts? Are these 4000 jobs considered obsolete? Why does a company that is doing really well need to do this to deal with a blip? Do they think they see a long term trend and they are trying to get ahead of it?
Thanks,
Rob
Cisco’s problems are much larger than the latest quarterly results:
[ul]
[li]July 2012 - http://www.forbes.com/sites/panosmourdoukoutas/2012/07/24/ciscos-problem/[/li][li]June 2012 - 4 Reasons Why Cisco Stock Fell (NASDAQ:CSCO) | Seeking Alpha 2012 - http://www.businessinsider.com/dear-john-chambers-ciscos-real-problem-is-way-bigger-than-europe-2012-5[/li][li]June 2011 - http://www.networkworld.com/community/blog/ciscos-credibility-problems[/li][/ul]
It boils down to a CEO and/or a board that thinks/acts old school and cannot adjust to the new paradigms.
Cisco has bought all kinds of companies in an attempt to extend its reach past the network closet. They bought Flip video cameras and later closed the company. They bought Linksys but I think they sold or spun it off. They bought Scientific Atlanta in an attempt to extend their reach to the living room. They bought Tandberg, which makes video conferencing equipment. None of these have been significant. Meanwhile, companies like Juniper Networks and Huawei are taking parts of their core market.
Apparently Sysco is going through some tough times. Maybe Cisco’s executives are confused about who they work for.
To be fair to Cisco they purchased the technology and had to buy the company as well. Once they incorporate the tech into theirs they just shut the brand down.
They did realize pretty quickly that the consumer market wasn’t for them.
But the reason I have been told is that Cisco believe the world market for tech is about to go through a major slump due to issues coming out of China including Huawei but more importantly the threat of more constrained spending by Chinese firms leading to worldwide downturns.
They are also at heart a hardware company and as more stuff moves to the cloud they tend to lose out. Yes they are part of the cloud but it’s smaller pie.
I’m skeptical. First, the cloud is made out of hardware, not vaporware. Second, the hardware in a cloud needs a lot of special software features for it to work. Cisco will be making a lot of money selling new networking gear that supports the flexibility required by cloud computing. Yes, you can do a lot of cloud computing without special features on the routers. But yes, you need special features on the routers to take it to the next level. I’m confident that the big push in cloud computing is a great thing for Cisco, not a bad thing.
Also, a cloud solution requires significantly more network bandwidth than its hardware equivalent. (This is a no-brainer, since (a) the cloud is a distributed implementation and (b) the distribution mechanisms require data to be more deeply encapsulated. So, more packets transmitted, and packets are bigger.
But isn’t there always a but! Cloud purchases are driven by LARGE companies such as telcos, Amazons etc and they are less profitable than sales to enterprises. Yes bandwidth is required, a lot of bandwidth.
Cloud allows large companies to centralise things and therefore gain economies of scale. This drives down the amount of hardware and bandwidth overall required.
Cisco are building a lot of clouds but once it becomes commoditised all the carriers etc will look to drive costs out and that is not good for Cisco.
Market growth is a good thing for vendors.
Once a market is saturated, regardless of what the market is, sure, the competition heats up, and market forces push for cost reduction without a compensating increase in sales. We’re a long way from that, in cloud computing, or “virtualization”, which is the more general term (as it includes cloud networking in addition to cloud computing).
Cisco is very keen on “virtualization”.
Regarding big customers vs. small ones, I believe that the vast majority of Cisco revenues comes from very large companies, mostly service providers plus juggernauts like Amazon and Google, and that’s been true for a decade or so.
The trouble is, Cisco is to network tech since the 90’s, what IBM was to large computers in the 1960’s through the 1980’s. They even follow the same model - charge 2 or 3 times what the others charge for the same equipment, fancier brand, more in depth operating system. (Apple still does this - their computers cost much more than equivalent PC’s, but they are resigned to being the Mercedes of computers, they won’t have a large market share and they aren’t cutting prices to get it).
IBM folded big time when people realized that PC server farms and Windows Server (or LINUX) could do what IBM mainframes could do at a fraction of the cost. A lot of their cushy profit evaporated when people realized there was not a lot of difference between IBM and HP versus Wang Foo, Acer, or other non-name beige boxes. Suddenly they could not compete charging 3 times as much for the same PC.
Cisco is going through this now. Fewer and fewer people need to cross-connect Novell and DECnet, or also tunnel IBM mainframe traffic - it’s mostly all plain TCP-IP. More and more of the WAN interfaces are simply connected to Ethernet modems or T1, no need for frame relay ISDN interfaces. The glitches that require clever configuration to bypass, are being replaced by very standard offerings, so nobody needs excessively complex, hard to configure boxes just to connect their networks. The type of chips that are used to create high-end routers are becoming more mainstream and easy to program.
Companies like Juniper are eating their top end, the Linksys competitors and no-names are taking the consumer market, and SonicWall and Watchguard are pulling the mid-level rug out from under them. Their only reliable source of sales now are the very large corporations that can afford their equipment and a full-time staff to keep it running.
My guess is their complex OS is the product of a very large research staff. Similarly, they have a high level of hand-holding for 24-7 support of their expensive products, meaning a lot of staff. They are probably cutting back on both these levels as the need for their services shrinks.
Unfortunately, it’s a downward spiral. Either they bite the bullet and cut their prices in half, or they slowly strangle as one big customer after another bites the bullet and buys their competitors’ products for half the price.
The big shift in networking right now is “Software Defined Networking”, shifting the intelligence of the network from specialized hardware to open software. This opens up the opportunity for startups to offer solutions at a fraction of the price while incumbents need to protect their high margin products from commoditization.
Cisco has had it’s head in the sand about SDN and is trying to claim that it’s business as usual but the market is skeptical that it can weather the transition successfully.
Exactly - Watchguard, for example, has a software-only virtual machine version of their appliance (after all, what is a firewall nowadays - it is a unit with multiple ethernet interfaces that controls the traffic between them). Computer fanatics have been using LINUX boxes with a firewall app for years. Even Microsoft made ISA, a programmable Windows server app that controlled network access. Virtualize these, and you don’t even need extra hardware. Use VLAN technology and you don’t even need extra network ports.
Part of this too, is that the service providers more and more provide an ethernet interface, that accepts plain IP packets, rather than odd plug interfaces for complex WAN technologies. The interconnet standards, such as VPN tunnels, are mature enough that it is not difficult to interface one manufaturer’s device with another, so you don’t need identical technology across the network.
As a result, there is less demand for complex, proprietary hardware to control networks.
It’s not a storm they have to weather, it’s a climate change they have to adapt to.