Why I am Shorting Cisco’s Stockby Sorell Slaymaker in Telecom
Cisco is a dominate player in the networking, security, and communications markets, but they are facing ever stronger head winds. Their current business model cannot sustain these headwinds and their ability to quickly innovate and adapt is getting weaker.
One of my first moves after leaving Gartner was to own technology stocks again. I bet on teams of people who work well together more than I bet on raw technology. Speed of innovation and adaptation is what wins in the technology market versus relying on the patent process to guard intellectual property. Cisco is being challenged by:
Software – Software defined networks and running all networking and security functions on Common Off The Shelf (COTS) hardware is where the market is heading. The number of start-ups in this space now numbers over 60, and companies are reporting throughputs of 100Gbps on a $3,500 COTS server. Cisco’s knows hardware well, but software is not in their DNA. Pure software companies can innovate and adapt faster than hardware based companies.
New Business Models – Freemium, consumption, and value based pricing is displacing the traditional model of paying upfront for products and services. As the decision makers for networking and security products evolves to DevOps and business leaders, there is less of an appetite for paying up-front and big contracts. The last thing enterprise IT controls is the network, and as new solutions in the market come to play, this too will be lost. While Cisco is a marketing machine, the cost of all this marketing in the new economy with social media is not sustainable.
Cloud – Most of the innovation in IT is occurring in the cloud. Most of the large cloud providers are not building their networks based on Cisco products because of the complexity and costs. Unlike conservative enterprise environments, cloud providers are more aggressive on new technology adoption. I predict in the future, the cloud providers will deliver networking into the enterprise as part of their service so that their SLA’s cover the Quality of Experience (QoE) of their applications, not just service levels.
Teamwork – Cisco has a product centric culture. While this culture does promote accountability, getting different product teams to work together continues to be a challenge. Cisco’s SD-WAN is a good example with their I-WAN and Meraki product teams offering overlapping solutions. A good number of the SD-WAN startups are ex-Cisco people who got tired of the Cisco organizational dysfunction. Another example is Cisco spinning off a startup, then buying it back, resulting in some of their staff getting wealthy, while others are left out of opportunities.
The most successful money making schemes in the world are pyramid schemes. Keep building the base, and the pyramid gets taller, and everyone wins. When the talent and motivated move onto other opportunities, the pyramid starts falling. Based on all the LinkedIn updates that I am getting, the Cisco talent and motivated are moving on. While Cisco can buy these startups, these people have learned, and will not stay around like they have in the past. So a shout-out to all those ex-Cisco people running start-ups at – Zoom.us, Viptela, CloudGenix, and many others. Congratulations to the Tandberg folks, who then left Cisco to start Acano, which Cisco bought earlier this year for 700M, and who will soon leave Cisco to create another start-up.
While Cisco can buy innovation, they cannot buy teamwork. The acquisition of innovation business model may have worked well in the past, but in an all software world and moving everything to the cloud, the speed of new innovation is just too quick.