Cisco stock has plummeted nearly 20 percent since announcing fiscal 1Q2011 results. While Cisco’s revenue and growth was solid, their forecast left investors and analysts stunned. One open source vendor thinks that open source is encouraging competition in Cisco’s arena. If so, what should Cisco do, and how should IT decision makers prepare.
Cisco’s revenue slows down
Cisco projected revenue growth of 3 to 5 percent for fiscal 2q11 and 9 to 12 percent for fiscal 2011 in total. Both rangers were below the 13 percent Wall St. expected for fiscal 2q11 and fiscal 2011.
On the earnings call, Cisco CEO John Chambers explained that a slow down of sales in the government sector was to blame:
However, we did see challenges, for example, in the U.S., say, government business, down in Q1 approximately 25% year-over-year from an orders perspective.
To give you an idea of how rapid a change this was, the state government business was down 48% from Q4 to Q1 from an orders perspective.
Vyatta CEO Kelly Herrell thinks there’s more to Cisco’s slowing revenue growth than its prospects in the government sector alone. Herrell writes in response to Cisco’s results:
Routing was a central focus of discussion by analysts, because it’s always been assumed that it was a guaranteed cash cow for Cisco. That’s no longer the case; the routing market is changing fast…
Routers are the bulk of the Layer 3 networking market. Layer 3 plays the most crucial role for Internet plumbing. This complex set of protocols enables the connectivity between devices over a distance, and between virtual machines in an integrated or cloud solution. That explains why the market for Layer 3 products is more than 2X the size of the entire market for Layer 4-7.
But the Layer 3 Overhaul is upon us now… But the new wave of L3 Infrastructure clearly isn’t coming from Cisco.
Open source enabling Cisco alternatives
In case you hadn’t guessed, Herrell’s company competes with Cisco’s router business. Herrell believes that open source software routers, such as Vyatta’s offerings, are threatening Cisco’s cash cow router business. Herrell claims: “Vendors and partners adjacent to Cisco’s router business used to recommend or resell Cisco. They no longer have to. Vyatta has removed that barrier and enabled them to add complete L3 functionality as software.”
Vyatta’s products, which range from an open source and unsupported Vyatta Core, to commercial Vyatta Subscription Edition and Vyatta PLUS, have been adopted by companies such as CBS Corp., Toyota and Rackspace. Vyatta serves up nearly 25,000 downloads of their software-based routing technology per month and is closing in on 750,000 downloads in total.
Vyatta customers typically opt to use software-based routing technology on commodity x86 hardware. Herrell claims that the resulting price-performance is far and above the price-performance of Cisco’s hardware routers in the vast majority of cases.
Give customers open source and commercial choice
Given’s Cisco’s internal experience with open source, and the lessons learned by traditional software vendors faced with open source entrants, the most effective response from Cisco would be to promote a Cisco open source offering.
Cisco’s contributions to Linux and other open source projects are well documented and marketed. As such, it’s not as if Cisco doesn’t have the internal skills or executive support to promote an open source offering to customers.
Cisco can learn from IBM and Oracle, amongst other large IT vendors, that have been able to balance a portfolio of open source and commercial products.
Cisco’s first inclination may be to lower price points or introduce a lower featured version of its router product line to compete with open source offerings.
This initial response to open source alternatives is natural. Vendors don’t typically want to open source an existing closed-source product without significant competitive pressure to do so. And sometimes even not them. Instead, vendors will introduce a new open source offering, either through a third party acquisition or in the form of a new internally developed projects meant to be open sourced from the beginning.
Consider how Oracle and Microsoft initially responded to the threat of MySQL – by offering closed source “Express” or “community” versions of their commercial products for low or no charge. Next, consider the unique and complete story that Oracle now has with both MySQL and Oracle DB in its product portfolio. Few could argue that Oracle’s database revenue has fallen off a cliff since acquiring MySQL. Next, consider the application server market, where the two revenue share leaders, IBM and Oracle, both offer open source and commercial products.
Cisco needs to offer customers the choice of open source or commercial router offerings, likely differentiated based on stand alone software versus an integrated hardware and software stack. Being able to address the needs of customers, big and small, with varying degrees of affiliation to open source or commercial products, demonstrates an understanding that customers differ and want choice.
IT decision makers – plan for an acquisition
IT decision makers searching for options to reduce networking infrastructure costs should consider open source products such as those from Vyatta.
Buyers choosing an open source network routing provider should plan for a scenario in which the vendor is acquired by the likes of Cisco. Considering Cisco’s history of acquisitions, it’s prudent to expect Cisco to address open source competition in a core product area like their router business. Don’t be surprised if Cisco does so in a similar fashion as other large IT vendors have successfully done – through an acquisition.