Cisco held its annual financial conference on December 7th and as expected, the company outlined its new plan to become more of a software and services company. I wrote about this twist on Cisco’s strategy on my blog “Cisco Pulling an IBM?” on November 19th. While Cisco spent a good part of its analyst day talking about how it is best positioned to implement this new strategy, CEO John Chambers also put out the goal for Cisco to be the number one IT company in the world in the future. What I found interesting about this statement is that Cisco first put this target out in the 2006-2007 timeframe in a prior financial analyst meeting. At that time, Cisco had its “secret” spin-in Nuova developing the UCS blade server allowing Cisco to expand its addressable market within the IT industry from networking to also servers. Cisco was also at that time initiating its entry into the consumer IT segment, which it later shutdown in 2011 post the failed 2009 acquisition of Flip maker Pure Digital.
Cisco backed off its aim to the be the number one IT company when the 2008/2009 recession led to a decline in Cisco revenues and earnings, and concern that HP was going to commoditize its traditional networking business hit the stock in 2010/2011. Well now that the great recession is over and HP is viewed less likely to be a challenger to Cisco given the numerous problem the company is experiencing, John Chambers has re-launched the bold target to be number one. In 2006/2007, Cisco had the expansion into servers and the data center market as its launch pad for being more than just a networking company. Today, Cisco is using a more aggressive entry into software and services as the next frontiers for being number one. Storage seems to remain an area of partnerships rather an acquisition for now, but that could change depending on what EMC decides to do in the future with regard to any broader efforts in the networking market.
In my view, Cisco is better positioned in the networking industry than it was a couple of years ago as primary large competitors HP, Huawei and Juniper are less of a threat. HP has had many corporate issues and a failed overall strategy to date, Huawei’s success in entering the Enterprise market has shown little progress outside of China and Juniper is spread thin and faces niche competitors in addition to Cisco in areas such as security and switching. The improved competitive standpoint in networking and a much stronger commitment to capital returns to shareholders via a higher dividend yield than the past has make Cisco stock a safer place to be these days than the past three years.
While Cisco stock may be safer today than in the past three years, I think its still a long shot for Cisco to fulfill the number one IT company goal given IBM is basically already the de-facto number one IT company today with a strong suite of software and services, trust by corporate CIOs and a very focused and consistent strategy. I don’t see IBM bowing to Cisco’s new goal to be number one. In addition, other large traditional IT companies like Oracle and EMC and new challengers to the traditional IT model like Amazon, Apple and Google are all aiming to capture a larger share of corporate IT spending. So until proven otherwise, Cisco’s claim that it wants to be number one in IT sounds like déjà vu all over again to me. Given John Chambers is likely to retire within the next 3-4 years, the ultimate outcome of this goal is not even likely to be known when he departs after a long and successful role as CEO since 1995.