Cisco Will Rise Sharply On Transition In 2013

Cisco often feels like a one trick pony. It trumpets networking and has done it so then for many years now. Nevertheless, being so invested in one market is problematic when you fail to see a major change or possibility coming. This is specifically what happened to Cisco. It did not adapt to the rapid growth of data centers and is now playing catch up. This will bring mixed results.

Cisco, with its heavy reliance on mergers and acquisitions, is looking to acquire its way back to prominence in the market. It recently invested $100 million in a networking start-up called Insieme. Cisco is using a spin-in to acquire Insieme, meaning Cisco invests $100 million today, with the option of purchasing the company at a later date for up to $750 million. By doing this, Cisco eliminates the chance that Insieme with directly compete against it in a market it is already struggling in.

To be more specific, Insieme is a startup in software-defined networking (SDN), "which is expected to be a cheap and efficient way to deploy large cloud computing systems." Additionally, software-defined networking allows those operating data centers to separate the physical infrastructure from the management of it. This means that networking equipment will become less expensive as companies will not need to rely on networking experts to operate and deploy them.

Some believe that software-defined networking will cause routers to become commodities. If this does occur, Cisco will take a huge hit, as its value will erode. It's a scary prospect for Cisco, to cut a long story short it must make sure to prepare consequently.

Make no mistake, Cisco is scrambling to ensure it does not miss the mark this time. Its CTO, David Ward, signaled it is developing different interfaces and functionality for its networking equipment. I do not expect this to change very much or slow down the adaptation of software-defined networking. In the software industry, disruption is rarely stifled. Typically, if a new breakthrough is going to occur, adding functionality or other features merely buys a company time.

The bright side

On the bright side, Cisco may not need these interfaces and functionality anyways. It turns out that some of the companies that foresaw the rapid growth of data centers might look back to Cisco. Notably, Google, one of the first companies to build its own data center, wants Cisco to be a major part of the software-defined networking market. For Google, and many other companies, leaving its networking to a start-up that it has not developed trust in, is not desirable. Hopefully for Cisco, more tech companies will agree. Maybe Cisco's greatest strength moving forward, at the time, will be its name and past reputation.

Another major source of concern regarding software-defined networking is Cisco's certification programs. During they are not its main source of income, Cisco's networking certification programs provide a steady source of revenue. To tell the truth, it recently launched a new program in configuring and troubleshooting its networks. If software-defined networking separates the infrastructure and the management of it, I anticipate the revenue from these certification programs will dry up.

The light of these new developments

In the light of these new developments, Cisco has done a good job of seeming cool-headed. There is no doubt that software-defined networking frightens Cisco very much. As late as this, if Cisco were to fall behind, it would need to undertake extreme measures to catch up. Luckily, it has deep pockets. I expect it is watching developments surrounding software-defined networking in the extreme closely.

Cisco's typical competition is much furthermore behind in these developments, as the recession eliminated a majority of demand for networking equipment. Take Juniper Networks for instance. Its long-term prospects are so stagnant that its stock has become popular among speculators. Juniper missed out on the rapid growth of data centers the same way Cisco did, nevertheless it has not been quick to react to other prospects. Combined with a macroeconomic environment not favorable to networking companies, Juniper's net income fell by 88% in the past year.

There are two other companies that should be watched closely nevertheless. Both F5 Networks, and Hewlett-Packard are making big gains on the cloud-computing side of networking. Unlike Alcatel-Lucent and Juniper Networks, F5 Networks was recently upgraded by analysts, and is seeing substantial growth. Hewlett-Packard has as well been experiencing modest growth due to cloud computing.

Both F5 Networks and Hewlett-Packard are players in the networking game. The addition of cloud computing has the potential to make a switch to software-defined networking very easy for these two companies. Unlike Cisco, which isn't a player in cloud computing, Hewlett-Packard and F5 Networks can absorb a loss in revenue from networking equipment due to the cloud computing revenue each will receive from the switch.

Bad stock to own

Cisco is undoubtedly not a bad stock to own. Anemic growth of competitors Alcatel-Lucent and Juniper Networks puts Cisco in a great position competitively. The major question is whether Cisco will allow itself to fall behind on the then and there big transition in networking. Right now, I believe the jury is out. Cisco is trying very hard to ensure it does not miss out on the then transition, however it has very little research to suggest it will be a major player. My advice would be to watch Cisco very carefully. It is a networking juggernaut, and if it times the transition to software-defined networking so then, it is in a good position to reap the rewards.