Disaggregation, security, software licensing all part of challenges Cisco faces

As it sets its sights on becoming the No. 1 IT company in the industry, Cisco will continue to face challenges and opportunities in virtually every IT market. Here’s an arbitrary list of 10 areas that will impact Cisco in 2016 as the company evolves to address emerging trends that are shaping the industry in the coming year and beyond.
The antithesis of Cisco is disaggregation, taking off the shelf switching hardware and mixing and matching multivendor and open source operating systems to run it. It decouples the dependencies and integration of the hardware and software, which Cisco argues is an integration and total cost of ownership nightmare. But the big cloud companies are using it and eventually the enterprise, so Cisco will need to continue to address it by offering compelling consumption options in addition to competitive product. Perhaps uncoupling its own? (Read all Network World’s predictions for next year.)
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One of those consumption options – and perhaps the most lucrative – is the subscription and licensing model Cisco is adopting. CEO Chuck Robbins recently told us that any product customers want to purchase as-a-service is on the table. ACI’ s policy engine could soon be a cloud service. Perhaps Cisco could offer an interesting as-a-service option for uncoupled hardware and software, whether its own or partners.
These consumption options will hinge on the uptake in cloud, which is not negatively affecting Cisco sales, as many had anticipated. Cisco and HP are regularly recognized as the top two cloud infrastructure players; and Cisco was cited along with Amazon and Microsoft as a beneficiary of cloud. Cisco’s Nexus 9000 switches have been popular, more in standalone NX-OS mode than in ACI mode; but Cisco’s been setting the pace in SDN, and a cloud-based group policy network service might build on that. Nonetheless, Cisco’s challenge will be to continue this momentum in 2016.
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That depends for the most part on customer spending. IT spending is expected to rise over 6.7% between 2015 and 2017, more so on software (+17% from 2014-17) than on hardware (-13.6%), according to Barclays. Gartner is a bit more conservative, forecasting 1.5% growth in 2016 from 2015, to $3.6 trillion.
Security spending is expected to dominate IT spending, making up as much as 75% by some estimates. Cisco has its sights set on returning to double digit growth in security this fiscal quarter, which ends in January. Cisco registered 7% annual growth in its fiscal first quarter and only 4% in fiscal 2015’s fourth quarter. Recent acquisitions like Open DNSand Lancope will be key to accelerating that.
Spending in security or any other IT area will of course be gated by the macro economy – global currency valuations, geopolitical issues, etc. Even though it was “executing well in a challenging environment” in the first quarter, Cisco’s forecasts for second quarter revenue and earnings are below Wall Street expectations. Results in Canada in Q1 were weak because of the declining value of the Canadian dollar; and even though China was a strong theater for Cisco in the first quarter, CEO Robbins says continued uncertainty around the Chinese economy and currency situation was “tough from an orders perspective.” There are still cyber espionage tensions, however, between the US and China but Cisco Executive Chairman John Chambers believes the governments can achieve a network control ‘win-win’ with Cisco’s help.
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Cisco also expects – and needs – wins from recent partnerships and acquisitions. Robbins said he expected deals to pay dividends in the second half of 2016. One such partnership is the $100 million relationship with China’s Inspur to jointly develop IT products for the Chinese market combining Cisco networking with Inspur’ s cloud and data center products. Six months ago, Cisco pledged to invest $10 billion in China.
Another partnership is the one with Ericsson, a clear response to the industry consolidation gripping the IT industry. Perhaps more a direct response to the Nokia/Alcatel-Lucent tie-up, the Ericsson deal may also signal how Cisco plans to respond to mega deals between rivals and partners, like Dell/EMC. Perhaps too big to merge, partnerships might enable Cisco and another titan to respond more quickly to market demands while the merging competitors are bogged down with operational integration. No matter what course Cisco chooses to pursue, consolidation among its rivals, and its partners, will be an issue the company will have to continue to respond to in 2016 and beyond.
Partnerships and acquisitions may help Cisco in 2016 recover growth in its core businesses of routing and switching. Another aid might be the “alpha project” internal start-up strategy CEO Robbins favors over spin-ins.
Cisco’s router business declined 8% in the first quarter due to timing issues with some big transactions. Robbins expects growth to return this current fiscal quarter, and referred to new routing products developed by Cisco’s alpha internal start-up program fueling that growth. Cisco is also looking for an inflection point in data center switching in the second half of 2016 in which newer products like the Nexus 9000s and 3000s will offset some of the decline in the company’s historical architectures. While switching growth was 3% in the first quarter, analysts only expect about 1% revenue growth in Q2 and perhaps less than 2% for the entire fiscal 2016 year. As it did with routing, Cisco might lean on the alpha start-up teams to accelerate switching growth in 2016.
Acceleration is the operative word with Cisco’s Internet of Everything (IoE) ambitions in 2016. Cisco is one of the main drivers behind IoE and Internet of Things (IoT), and Gartner expects the phenomenon to explode next year and beyond. That pace at which cities and countries digitize, sensor networks expand and machine-to-machine communications spread will be a key determinant in Cisco’s growth in 2016 and thereafter. Cisco could get a near-term boost from a new alliance with Philips for connected office lighting.