What Should a Revamped Cisco Look Like?
Cisco's been really successful in Layer 2-3 switching. But the company slipped on what's arguably the most significant product transition in that market in Cisco's history.
Switching revenue was down 7% in Cisco's second quarter and profit margins missed the mark as a new generation of Nexus and Catalyst switches with better price/performance cannibalized sales of others. Analysts say Cisco needs to better align Nexus and Catalyst operations to avoid a similar fate down the road.
"The switching infrastructure built on Catalyst is a different group that the stuff built by ... the group that does Nexus," Kerravala says. "There's probably some inefficiency there."
"Part of the problem with Ethernet switching is the multiple groups involved: Catalyst, Nexus, Nuova, MDS, etc.," add Oltsik. "It leads to product issues like the Nexus 5000 not supporting FabricPath."
Cisco plans to add FabricPath to the Nexus 5500 switches in the second half of the year.
Cisco also recently introduced a Nexus switch - the 3000 - based on merchant silicon instead of internally-developed custom ASICs. The Nexus 3000 is based on Broadcom's Trident chipset. Meanwhile, Broadcom is adding Cisco's AdapterFEX data center fabric switching technology to its silicon in what some observers believe is a quid pro quo arrangement between the two - Cisco uses Broadcom silicon if Broadcom adds Cisco technology as an alternative to Cisco developing its own custom ASICs.
Both Oltsik and Kerravala believe Cisco will continue this practice in its effort to cut expenses.
"The Nexus 3000/Broadcom decision may be a sign of things to come: Do a deal with Broadcom, make a revenue commitment, get Broadcom to add some specific Cisco code into the ASIC, then greatly reduce your ASIC development group, fabrication facilities, etc.," Oltsik says.
"They're looking at Trident for the next fabric product," code-named "Jawbreaker," Kerravala says. "One of the ways a lot of companies keep the cost down is to use merchant silicon where available. The ability to differentiate doesn't come in the (custom) ASICs anymore because the merchant silicon is so feature-rich."
While focusing more intently on core markets like Layer 2-3 switching, Cisco might want to also subtract Layer 4-7 switching from its portfolio. It's been losing market and mindshare to companies like F5 and Riverbed, and analysts say Cisco should either cut those losses by exiting that market or reinvest in it through acquisition.
"They need to either buy their way back into that market or get out of it because they're losing share pretty rapidly, and whatever money they put into R&D is not really paying its dividends," Kerravala says.
So while Chambers waits for Cisco employees to answer his question on what they want their company to be, the CEO has his own response. And it's not any different from what he's proclaimed before:
"I want it to be a company that keeps changing the way the world lives, works, plays and learns," Chambers stated in his memo. "A company that knows how to win and intends to continue that track record. A company that's taking the network where it needs to be, with focus. And at a place that puts people, customers and communities at the core of its values. That's Cisco, no excuses."
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