Will Cisco be like Apple and go on to continued greatness? Or will it be more like Sun Microsystems? The answer isn’t clear yet, but the negatives are looking a lot clearer than the positives.
Cisco grew like the internet – because it supplied a lot of the internet’s infrastructure. Most of those wi-fi connections, wired and wireless, were supplied by the highly talented team at Cisco. And yet today, revenues for internet routers, switches and company services for networks account for 90% of Cisco’s sales — and its non-cash value (see chart at Trefis.com.) The problem is that those markets aren’t growing like they used to, and some are shrinking, as companies are increasingly switching to common carrier services to access cloud-based services supporting corporate needs. Just like cloud-based IT architectures put risk on Microsoft PC usage, they create similar risks for private network suppliers. Even corporations, the (in)famous “enterprise” customers for Cisco, are finding they can create security and reliability by giving up proprietary networks.
The market capitalization for Cisco has plunged some 40% the last year, and over 55% since peaking in late 2007. Those who support investing in Cisco think like the SeekingAlpha.com headline “3 Reasons Why Cisco is Oversold.” They cite a huge cash hoard (some 25% of market cap) and Cisco’s dominance in its historical “core” product markets. They hope that a revived economy will create an uptick in infrastructure spending by corporations and public entities. Or big buying in emerging countries.
Detractors become vitriolic about the company’s lost valuation, blaming Chairman/CEO John Chambers in articles like the SeekingAlpha.com “Cisco, Either Chambers Goes or I Go.” Their arguments are less about product miscues, and more intensely claiming the CEO misdirected funds into bad consumer market opportunities (Flip phone,) undeveloped new projects like virtual conferencing and an overly complicated organization structure.
What Cisco really needs is more new products in growth markets. Places where demand is growing, and the company can flourish like it did in the hey-day halcyon growth days of the internet. That was why CEO Chambers implemented a market-focused organization structure – complete with multi-layered committees – in an effort to seek out growth opportunities and fund them. Only, the organization lacked the permission and resource commitment to really allow developing most new markets and was overly complex in the resource allocation process. Instead of moving rapidly to identify and develop growth, the organization stalled in endless discussions. A couple of months ago the new org was gutted in a “refocusing” effort (typical reaction: BusinessInsider.com “Cisco’s Crazy Management Structure Wasn’t Working, So Chambers is Changing It“.)
But, if the previously more open organization couldn’t find permission to identify, fund and develop new markets, how will a “more focused” organization do so? Focus isn’t going to make companies (or households) buy more switches and routers. Or buy more network consulting services. The market has shifted, so as people move to smartphones and tablets, and cloud-based apps they access over common networks, how will an organization focused on old customers and products prove more successful? While the old organization may have been problematic, is abandoning a market-focused organization going to be an improvement? Sounds like a set-up for future layoffs.
In the drive for new products Cisco bought a very successful business in the Flip camera two years ago, which according to MediaPost.com had 26% market share. But, “Flip Camera: Dream Becomes a Nightmare” details the story of how Cisco was too late. The market quickly was shifting from digital cameras to smart phones – and sales stagnated. Cisco didn’t learn much about consumer products, or smart phones or how to launch new products outside its “core” from the experience, choosing to shut the business down and withdraw the product this spring (“Cisco Kills the Flip Camera“.) Ouch!
Clearly, Flip was a financially unsuccessful venture. But that could be forgiven if Cisco learned from the experience so it could move, like Apple, toward launching something really good (like Apple did with iPods.) But we don’t hear of any organizational learning from Flip, just failure.
And that’s too bad, because Cisco’s virtual conferencing could have great promise. Most of us now hate to travel (thanks TSA and all that great airline service!) And most corporate controllers hate to pay for business travel. The trends all point toward more and more virtual conferencing. For everything from one-on-one meetings to multi-site meetings to industry conferences for learning. This is a BIG trend, that will go well beyond a simple WebEx. Someone is going to make money with this – taking Skype to an entirely new level of performance. But given how badly Cisco managed Flip, and the new “refocusing” effort, it’s hard to see how that winner will be Cisco.
Cisco’s not yet a Sun Microsystems, so locked-in to old products it cannot do anything else and unable to grow at all. It’s not yet a Dell or Microsoft that’s missed the market shifts and is trying to spend too much money, too late on weak products against well funded, fast growing and profitable competitors.
But, the signs don’t look good. There’s no discussion about what Cisco sees itself doing new and differently in 5 years. We don’t see Cisco offering leading edge products like it did 15 years ago in its old “core” market. It’s historical market is not growing like it once did, and new competitors are changing the market entirely. The layered organization was an effort to attack old sacred cows, and limit the power of old status quo police, but now the new “focused” re-organization is reversing those efforts to find new markets for growth. “Focus” rarely goes hand-in-hand with successful innovation. We cannot find an obvious group of people focusing on new markets, with permission and resources to bring out the “next big thing” that could drive a doubling of revenues by 2017.
Unlike RIMM, the game isn’t over for CSCO. It’s markets still have some longevity. But the organization has been failing at doing the kind of new things, bringing out the new innovations, that would make it a good investment. Until management shows it knows how to find new markets and launch disruptive innovations, CSCO is not a place to invest. Don’t expect a fat dividend, and don’t expect revisiting old growth rates any time soon.
There are likely to be some good, and bad quarters. Cost management, and occasional big orders, combined with manipulating the timing of revenues and costs will allow for management to say “things are all better.” But there will be miscues and problems, and blaming of competitors and weak economic conditions in the bad quarters. Defend and extend management does not work when markets shift. Sideways is not moving forward. It’s more like treading water in the ocean – not a good strategy for rescue. Overall, I wouldn’t be optimistic.