Just a Flesh Wound?
Is it safe for Cisco and HP partners to go in the water again?
It may seem like the pressure is off, since Cisco and HP's channel partner conferences don't fall during the same week this year. But, really, is the pressure off? Or is the competition just as acute as last year.
Lee Doyle, group vice president of network infrastructure and security products and services at IDC notes that Cisco does appear to be losing market share and a bit of margin to tech giant HP, although he's still working on his analysis of the last quarter of 2010.
"Are they staying focused enough on their core markets is a rational response," he told Channel Insider. "Juniper’s still tiny in terms of market share. HP is doing well, but Cisco’s still the dominant player. Their market share ebbs and flows," Doyle said.
Since the last Partner Summit (the one that competed directly with HP Partner Conference last spring), Cisco has continued its expansion into non-networking markets, but that’s nothing new, he said.
"It’s a continuation. Data center, video, UC, telepresence, you start looking at things like smart grid and smart cities, so they do continue to broaden their offering to the channel," Doyle said.
"That’s both a benefit and a challenge, because the channel’s got more things to learn and more products and more qualifications to get to the highest level. It’s an evolution, not a revolution."
Although there seems to be less focus on core networking products and more effort put into advanced technologies and consumer products, Doyle said that’s necessary for Cisco to grow. The company has been expanding its product categories to several different non-networking technology areas over the last few years, and that doesn’t seem to be slowing down.
After all, Cisco is building a growing consumer practice with the likes of Linksys, Valet, Cisco Explorer and The Flip video camera. That kind of expansion isn’t a concern, and is expected, Doyle said.
Whether any market share loss is a near-term reset or a longer-term challenge for Cisco is still unknown, he said.
Over the past year, Cisco’s traditional market has gone through what California would call a "seismic event," said Charles King, president and principal analyst of Pund-IT. Traditionally, Cisco has been the networking partner of choice for most enterprise data systems vendors, but there has been significant realignment of traditional systems vendors in the last 1.5 years, he said.
Systems vendors like HP and Oracle are actively competing against Cisco with increasingly vertically-integrated solutions, King said. This has caused some of Cisco’s alliances – mostly notably the partnership with HP – to topple.
"I don’t think that Cisco has been caught flat-footed here. It’s pursuing its own kind of partnership acceleration efforts on its own," King said. "For example, the company started developing and selling its own unified computing system, which is basically x86 blade servers that Cisco is selling on its own and in concert with partners like the VCE Coalition."
At the end of the day, vendors that dance in the overall networking space are stepping on others’ toes a lot more than they were before. That old Silicon Valley notion of co-opetition? It’s still exists, but it’s a much more delicate dance, King said.
"I think Cisco’s earnings are probably reflecting some of that pain and some of those new realities," King said. He added that he hasn’t seen any solid evidence that Cisco has actually lost market share to HP since HP’s acquisition of 3Com. Rather, HP is still playing strongly in the markets it was at the time of the 3Com acquisition – most notably in Asia.
Cisco is feeling the pinch in its financials, though. Cisco CEO John Chambers announced earlier this month that for the third quarter in a row, Cisco was feeling pressure from shrinking public spending and weaker margins because of tougher competition. In response to that announcement in early February, Cisco’s shares dropped 10 percent. However, competitors Juniper, F5 and Riverbed also experienced reduced share prices.
Financial expectations for Cisco have certainly been reduced significantly over past years. Although the company’s revenue continues to grow on a year-over-year basis, the growth rates aren’t what they used to be.
Cisco’s competitors are each biting off small pieces of the leader’s market share, but it’s an injury of a thousand cuts rather than the toppling of the giant, King said. He noted that there are only three or four major players trying to invade Cisco’s space, and although they may cause Cisco to bleed, it doesn’t mean Cisco is heading to the grave any time soon.
"They’re one of those companies where the products have been around for so long that it would surprise me to hear of any enterprise company that didn’t have some Cisco hardware in the data center," King said.
Increased competition in core markets is one of the reasons for Cisco’s hard push into what it sees as future and emerging technology markets.
"There’s been a lot of criticism or talk about Cisco. The Wall Street Journal commented on Cisco losing ground to Juniper. I found that interesting because Cisco over the past year to a year-and-a-half has made a shift in their strategy, more so a strengthening shift toward UC and telepresence and videoconferencing and social media and social networking tools," said Michelle Warren, president of MW Research & Consulting. There’s also a greater emphasis on serving the SMB market – something Cisco has been talking about for years.
With the core router and switching market facing challenges and reduced revenue and margins, Cisco is pushing partners to focus more on solutions and services, which is a more lucrative sell than hardware, Warren said. This change in channel strategy is being felt in all of Cisco’s North American regions. Of course, such a change in focus is not limited to Cisco; it’s also something that HP and other competitors have also been doing.
One thing does remain clear about Cisco’s place in the industry. Often considered to be on the forefront of channel strategies and programs in the past, Cisco is still considered to have the premier partner program in the networking space.
Although Doyle said Cisco’s earnings were not as positive as they would have liked, that’s more of a stock price issue than something for the channel to truly be concerned about.
"It’s not like their revenues are down. They’re not growing as fast the street wants," Doyle said.
According to King, Cisco’s channel program has been very aggressive in ensuring that partners have a stake in future markets like collaboration, cloud computing, data center virtualization and video.
Long-time Cisco channel partner Netarx has seen nothing but good things come out of Cisco channel programs. According to Michael Souders, president and COO of Auburn Hills, Mich.-based Netarx, Cisco has one of the best partner organizations he has ever seen. He must be happy, as he’s been a Cisco partner since 1994.
"Personally, I think over the last three or four years, our relationship with Cisco has gotten better every year, and this year I’ve seen specific examples of how it’s improved even more," Souders said. When there have been causes for concern, he said Cisco has always quickly stepped up to fix the problem.
Additionally, the partner organization has been quite stable. Souders said he has dealt with the same channel account manager for five years, whereas he’s used to seeing channel account managers come and go every year with other vendors. The stability of his Cisco channel account manager has saved him a lot of time because the account manager is fully aware of Netarx’s business and needs.
"I think Cisco’s just got it down. They’ve been doing it so long. They don’t have high turnover in their channel organizations," Souders said.
Dealing with Cisco does mean having a high level of complexity, though, but even that isn’t a bad thing for partners because it means having a wide selection of programs from which to benefit, Souders said.
"I think what it means is I need an accountant to help me with the programs. I do rely on a CPA. I have involved our business operations group much more in Cisco’s channel programs over the last six to 12 months because they have become very complicated," Souders said.
One of the bigger issues for the channel is margin pressure, said Doyle. It’s not a common complaint, but it is a fact their margins are under pressure, he said. If that trend continues, it could prove to be a long-term challenge for the company and its partners.
"The channel always complains about not having enough margin. That’s a given. If they don’t complain, then they’re doing something wrong," Doyle said. After all, who wouldn’t want to make more margin on any given sale?