Cisco is at an interesting crossroads. It’s approaching a $40B run rate, which it has achieved mostly through hardware sales. In fact, we recently did a full analysis of Cisco’s business and its current position looks rock solid (see our Q3 analysis here). But how many $40B+ vendors out there sell mostly hardware? None. Cisco has shed its primary network-only bias and is on the way to becoming more of an overall IT vendor, but the competition is stiff. Companies like HP, IBM, and Microsoft have strong software and services revenue streams — as well as a significantly more mindshare with the CIO. As Cisco moves “up the stack” to compete with these IT juggernauts it will inevitably change its business model. I anticipate 2008 will be a turning point for Cisco as it:

  1. Infuses software development talent. Software engineers abound at Cisco, but they’re not exactly working on enterprise applications; they’re mostly IOS engineers. Cisco’s move up the stack requires a strong portfolio of collaboration, unified communication, and platform applications well beyond what they have today. Cisco will have to acquire this talent and absorb a platform or application company of considerable size. BEA would be a logical, but lofty choice to truly build out “the network as a platform.”
  1. Embraces virtualization. This one impacts many aspects of Cisco. First, it needs to continuously nurture the VMWare relationship, which was cemented with a $150 million investment. More importantly, though, Cisco needs to embed its own software intellectual property throughout virtualization infrastructure. Virtualization is blurring boundaries and virtual servers, storage, mainframes, and desktops all need built-in Ethernet switching — and today that’s not Catalyst code. I would even go so far as to predict VM SKUs for some of its datacenter technology.
  1. Redefine carrier partnerships to become consumer friendly. Cisco has a healthy relationship selling big iron to worldwide service providers, but it’s also using them as a channel to bolster its consumer-facing strategy. To do so, I think Cisco will need to enhance two areas: voice and the digital home. I think Cisco will build out its FMC software strategy with an acquisition of a vendor like Kineto, which would make them attractive player for North American UMA telcos — and an attractive supplement to the carrier-class WiMax IP it picked up from Navini. For the digital home, Cisco wants to "be the platform for work and play" and part of the "human network." I don’t buy it with its current strategy and I don’t think this comes from selling Linksys at Best Buy because: 1) the experience is NO where near that of a consumer device like TiVo; 2) it’s still too complicated to setup; and 3) it’s valueless without an Internet connection. Cisco needs to take an increased role in shaping the services that are user experience-oriented. It can’t keep treating retailers and service providers alike as a distribution channel. At the very least, they need a closer connection between content and their networking technology and pick a service provider or two that gets them deeper into the home

By Robert Whiteley

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