Cisco finally focuses on the cloud, data centres, software solutions and the Internet of Things
EDITORIAL: On August 17 Cisco wrapped up a “great year” in the words of its CEO by preparing to lay off one in every 14 of its workforce (or 5,500 people worldwide). The IT giant is at last turning its guns on the Internet of Things.
At least it’s not the 14,000 job losses initially reported in some quarters, but that’s a poor silver lining for the cloud now hanging over its San Jose, CA, headquarters. To give it some context, US$49.2 billion revenues in Financial Year 2016, were unchanged on FY2015.
All of which leaves the rest of us to wonder, says Jeremy Cowan, why the tech behemoth (NASDAQ: CSCO) has taken so long to target software solutions? By its own admission it will now be more focused on the rich new lands of solutions for the cloud, data centres, security, and the IoT.
Except they’re not really new, are they? At VanillaPlus we have never claimed to have a crystal ball, and yet the launch of this title with its pure focus on ICT software was in 1999, and that of IoT Now (or it’s immediate predecessor, M2M Now) was planned in 2009. Even then many technology-led businesses, ranging from service providers like Vodafone and Telenor Connexion to solution vendors like KORE, Digi, Aeris and Telit had been growing in the M2M/IoT sector for years.
More blood on the carpets?
So you have to ask, what were the Boards of Cisco, HP and Ericsson — to name but three — doing over this period? (See also: Cisco to cut 5,500 jobs as it refocuses on the Internet of Things and security solutions and Hans Vestberg steps down as Ericsson CEO, and Ericsson replaces CEO Vestberg as it begins more cost cutting and focuses on IoT.) Indeed, the fall-out at Ericsson may not be over yet, despite the ousting of CEO Hans Vestberg, ahead of schedule. Some large shareholders are said to be lobbying to replace Ericsson (NASDAQ: ERIC) chairman Leif Johansson. This is according to Reuters quoting Sweden’s daily newspaper, Svenska Dagbladet.
It’s not as though the teams on the ground were unaware of the opportunity — for years there have been stimulating blogs on IoT, for example, on Cisco’s own website. Both Ericsson.com and Cisco.com have been filled with smart teams and ideas, identifying opportunities in the Internet of Things. (Let’s not get into the intellectual navel-gazing over calling this the Internet of Everything, or IoE, as Cisco has long suggested).
Which suggests to me that it must have been an issue of remote leadership, not listening to those on the ground who ‘got’ IoT and software solutions, and it was a failure by the top floor to capitalise on their ideas. For years.
If I was a Cisco shareholder or one of the 5,500 about to lose my job at Cisco I might feel aggrieved by that continued focus on the important but less profitable commodity business of network hardware. (Revenue at the company’s routers business fell 6% in the fourth-quarter ended July 30.) Why were previous Boards of Directors still ploughing this furrow when the business margins in software development were measurably greater, and there were opportunities for companies like Cisco with the expertise and the client base to succeed? I guess that’s a question for economics students to ponder in years to come, as part of the wider picture: Who will succeed in IoT, who will fail, and why?
The rise and rise of the ecosystem
In a market that still lacks global standards, the role of the ecosystem will surely grow in importance. And with the kind of relationships that Cisco can call on, this tech giant may yet become a dominant IoT player. It certainly isn’t yet. Of course, the current Board of Directors can point to the acquisition of Jasper for $1.4 billion in February 2016, although the price had some analysts scratching their heads in bemusement. (See IoT Now‘s report: Cisco’s US$1.4bn acquisition of Jasper shows determination to gain a stronghold in IoT.)
For another perspective I asked Godfrey Chua, principal analyst at Machina Research in the US, and a long-time Cisco watcher for his views. Chua commented, “It makes sense that it’s a re-alignment of resources towards growth areas. I like to think of it as almost akin to that economic process of ‘creative destruction’ (Schumpeter).
“You can’t look at it in terms of absolute job losses. If you consider in 2010 they had just over 70,000 staff ($40 billion revenues) and today it is around 72,000 ($49 billion revenues) – despite the near annual announcement of lay-offs since 2010 – it clearly has been about realigning to where the company feels the business is shifting to. To be sure, what will be interesting is how the lay-offs net out with actual hires (and acquisitions) into growth areas in the near term.”
“I think it’s a bit of a played out theme that ‘routers (hardware) are so yesterday’. We don’t track the router market so I can’t give you a percentage growth for the segment in 2015, but what is clear is that it is a mature and rather hyper-competitive market. It makes sense that areas like security and IoT would be more robust and thus commit additional resources to them. It goes without saying that competition is intense. On the traditional business there is the Huawei juggernaut and then obviously the disruptions taking place in software (SDN/NFV).
“So yes, I think what Cisco is doing is necessary and smart,” said Machina’s Chua. Lay-offs are obviously very tough, critical for Cisco will be managing the process. Employee morale inevitably suffers during these cycles, so effective communication is a must. You don’t want to frustrate your best people during these times. Equally important is assuring customers that they will continue to receive excellent customer care and support.”
IoT story still unfolding
Credit for making the change where it’s due, then. Cisco disclosed this far-reaching change of strategy on August 17 during an earnings call that showed a 4th Quarter 2% increase in revenues. As CEO, Chuck Robbins said, “We had another strong quarter, wrapping up a great year. I am particularly pleased with our performance in priority areas including security, data centre switching, collaboration, services as well as our overall performance, with revenues up 2% in Q4 excluding the (divesting) SP Video CPE business.”
All the same, if I was making this announcement I might soft-pedal the corporate hashtag found all over the Cisco website. You know, the one that says #NeverBetter.
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