It's the End of Cisco As We Know It

Is this the beginning of the end of Cisco Systems (Nasdaq: CSCO  ) as we know it?

Cisco won't renew its longstanding alliance with tech giant Hewlett-Packard (NYSE: HPQ  ) after its current term ends this spring. As fellow Fool Tim Beyers so lucidly explains, it no longer makes sense for Cisco to share its roadmaps and other sensitive information with a rival like HP. I'm sure HP feels the same way, now that Cisco sells server systems, but the latter company was first to cut the ties.

And now, the end is near.

Say what?
If HP is a direct competitor now, then so is IBM (NYSE: IBM  ) these days. Oracle (Nasdaq: ORCL  ) also fits the bill, with Sun Microsystems under its wing. That's two more current Cisco partners looking likely to lose that status whenever their existing contracts run out.

I have long admired Cisco for its unmatched level of connectedness within the IT industry. Making more friends than enemies provides management with a priceless amount of insight into industry trends and future directions -- not to mention a powerful distribution network, where 80% of Cisco's sales now flow through partner agreements.

Maybe that unique insight has told CEO John Chambers to pursue this strategy, for reasons beyond my understanding. But based on publicly available information from the lowly perspective of a mere mortal, none of this makes any sense to me. Why rip the beating heart out of Cisco just to enter a new market that may or may not work out to Cisco's advantage? Some would liken it to Google going up against Apple in several markets, even as Google CEO Eric Schmidt still held a seat on Apple's board.

Google and Apple cut those ties pretty quickly, but I don't know how Cisco could ever repair the damage it's causing to its own heart and soul these days. That might sound like a heap of touchy-feely hippie talk to ardent Cisco investors, but I truly believe that Cisco is heading down a wrong track that will inflict serious damage on its lofty stock price. Furthermore, it's way too late to do anything about it.

What does the future hold?
Here's how I see Cisco's future playing out, in the light of the last year's business decisions:

  1. Cisco cuts its ties or seriously strains partnerships with longtime partners, including HP, IBM, Sun/Oracle, and possibly Dell (Nasdaq: DELL  ) , because they are all becoming direct competitors to the New Cisco. Dell has already had some scraps with Cisco over switching equipment; IBM has moved closer to Brocade (Nasdaq: BRCD  ) ; and Juniper (Nasdaq: JNPR  ) also stands ready to fill any voids left by broken Cisco partnerships.  Those big-name defectors could trigger an avalanche of smaller but equally important departures, as Cisco partners everywhere follow the lead of those big boys. This process takes a couple of years to play out, but it's coming as sure as death or the tax man.
  2. The business culture changes inside Cisco, as the old advantage of knowing more than pretty much everybody else about the technology sector's future direction evaporates. Visionary leadership turns into nickel-and-dime management, and the $140 billion ship finds itself rudderless.
  3. A price-to-earnings multiple in the low 20s doesn't sound preposterous for a driven growth business with a significant information advantage, but it's way too high for just another tech colossus in the mold of IBM or HP -- which is what Cisco becomes. Shareholders had better brace themselves for a huge impact to their holdings.

It could take several years, but Cisco's decision to enter the server hardware market will end up hurting shareholders, even if those server sales eventually become significant. The losses elsewhere are too deep to overcome.

This could indeed be the end of Cisco as we know it. Do you feel fine, shareholders? Discuss in the comments below.

Fool contributor Anders Bylund owns shares in Google, but he holds no other position in any of the companies discussed here. Google is a Motley Fool Rule Breakers recommendation. Apple is a Motley Fool Stock Advisor selection. The Fool owns shares of Oracle. Try any of our Foolish newsletters today, free for 30 days. You can check out Anders' holdings and a concise bio if you like. The Motley Fool is investors writing for investors.


Read/Post Comments (11) | Recommend This Article (15)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 22, 2010, at 4:24 PM, jenniferfroa wrote:

    All in all, it is too late for Cisco to hire you?

    You think that all executives couldn't foresee your 3 future decisions?

    I understand similar opinions, however, why don't you ask them the questions, at least we could hear their defense against similar things claimed by others like yours.

  • Report this Comment On February 22, 2010, at 4:50 PM, Swoop1918 wrote:

    This seems to me to be a series of assumptive leaps without a whole lot to support them, and it raises a whole bunch of corresponding questions you don't answer. How do we know the HP divorce signals a whole string of them to come? Isn't it more than possible that this change is HP-specific, rather than a sign of revolution? And even if your diagnosis is correct, isn't there an upside to your downside?

    Without answers to those questions, there's a lot here that seems to let the air out of your tires. The idea of a "rudderless" Cisco suddenly bereft of vision and the business culture Chambers has nutured for 15 years strikes me as fanciful, not to mention unsupportable. The comparison to Google/Apple seems like a long stretch. And the "rip the beating heart" line is simply hyperbole.

    As to the "lofty" stock price, I assume you're basing that opinion solely on the P/E. Except for one brief leap into the 30s and one quick slide under 14, Cisco's stock has traded in a pretty narrow range for more than five years.

    I understand what you're selling here, Anders, but I don't yet see the reasons to buy it.

  • Report this Comment On February 22, 2010, at 4:54 PM, ejs715 wrote:

    I think to understand what Cisco is doing, you have to look at Cisco's history. I'm not going to repeat what you can go look up here, but John Chambers has rattled on and on about "Market Adjacencies." I think the thing he mentions as a question he asks is, "Can we be innovative here?"

    There are several key innovations with Cisco's server platform that shouldn't go unnoticed by the pundits. If Cisco were just pumping out a "me too" product to compete with the likes of HP and IBM, then I would completely agree with you.

    The scope of how and why companies buy servers is changing. While no two people I've met can describe and/or agree upon a definition of "cloud computing", we know that something is changing fairly quickly. We have already seen sort of "phase I" of this process with virtualization. Take this to another level, design a platform around the next wave of compute requirements and you get Cisco UCS.

    I sure hope the fools here "get it." Cisco (and I'm a shareholder, too) is known for innovation and in general, business savvy. I'm quite certain John Chambers lost sleep over the decision to get into the server market and ultimately came to the conclusion that they were every bit as apt and able as HP is to compete in this arena.

  • Report this Comment On February 22, 2010, at 5:34 PM, TMFRhino wrote:

    Swoop1918,

    I'm not Anders (in fact I own Cisco and like him really respect their history of innovation), but to answer a couple of these comments.

    "How do we know the HP divorce signals a whole string of them to come? Isn't it more than possible that this change is HP-specific, rather than a sign of revolution? And even if your diagnosis is correct, isn't there an upside to your downside?"

    I think of the proof of further strained relations would come from closer partnerships with other networking vendors within this space. We're still at an early stage here, but its clear that conflicts of interest will rise between IBM/Dell and Cisco. To what amount of damage this does, I'd disagree with Anders. I talked to a couple people in IT and they thought the HP/Cisco split meant less than the media attention it garnered. HP and Cisco are at a competitive level that hasn't been reached yet with the other competitors. Potential upside to the move would be that they gain more through their server sales and other end-to-end data center product gains than they lose from possible market share (and/or margin) erosion from added competition.

    "As to the "lofty" stock price, I assume you're basing that opinion solely on the P/E. Except for one brief leap into the 30s and one quick slide under 14, Cisco's stock has traded in a pretty narrow range for more than five years. "

    They fetched prices in their fairly tight range under a different competitive dynamic. That is, they controlled 70% of a very lucrative (and growing) market. If Anders beliefs hold true, and they lose some networking share and their profile becomes similar to their immediate "big tech" peers, it's pretty difficult to support this premium. Even if this move was necessisitated by the lines blurring between servers and networking, that maybe illustrates that people had been over-estimating Cisco's long-term networking advantage in recent years.

    Now, that's partially me just playing devil's advocate here. As I mentioned earlier, from my chats with a couple people, I don't believe this is quite the threat as Anders does. That being said, Cisco's moves do leave me sweating a bit.

    Foolish Best,

    Eric Bleeker (TMFRhino)

  • Report this Comment On February 22, 2010, at 8:04 PM, SavvyTechFool wrote:

    Overall I think there are some pretty assumptive leaps here.

    What’s bad news for some is great news from others. I’m sure there is no one crying over at other Cisco partners like Dimension Data (DDT). Not only do they get to pick up the pieces by taking business that was HPs, but that can also partner with HP and resell their technology.

    As for Cisco they have recently expanded into 30 different sectors and have hands in pies all over. I think you underestimate John Chambers and his team at your peril. I’m sure they were under no illusion what they were doing when they brought UCS into the world.

  • Report this Comment On February 23, 2010, at 1:23 AM, loudcld wrote:

    Anders, I think you got is totally wrong. I already see the seeds "market adjacencies" sprouting and on the road to become billion dollar redwoods. You are forgetting that the number one focus should always be to listen to your customers. And Chambers has been closer to the customer than right now. Most of these market adjacencies are being driven by customer needs. I am a shareholder+ and the way I see it, the $140 billion dollar ship is on a path to bulk up to $300 billion in 2 years. By the way, sales are picking up not slowing down. The distribution channel is doing fine and I have heard Chambers answer this question at least twice in the last 6 months.

  • Report this Comment On February 23, 2010, at 1:30 AM, TheBIGRagu9 wrote:

    That the problem of equity analysts...they understand market trends but not the underlying technology that drives market trends. I actually will predict the opposite...Cisco will have a materially higher market cap than HP in the next 3 years because Cisco is willing to understand and solve the problems that matter while paying for and rewarding top talent. In contrast, HP is more interested in optimizing the bottom line than investing for the future...not to mention they treat their employees like livestock (see glassdoor.com). For the sake of human civilization, Cisco has to win...otherwise, the world as we know it is over.

  • Report this Comment On February 23, 2010, at 3:53 AM, TMFZahrim wrote:

    Like everyone else here, I really hope I'm wrong. Cisco is too good a company to screw things up this royally. I guess we'll see how the cookie crumbles over the next couple of years.

    Anders

  • Report this Comment On February 23, 2010, at 4:53 AM, Ononeathome wrote:

    As I sit here and read the article and all of the responses I wonder how many of you people are actually in the trenches on a daily basis; I am.

    Cisco's market share is shinking across the board ( switches and routers both) and let's be clear about one thing cisco gets into any market asking "how will this sell more switche and routers".

    Consider

    HP professional services is the largest professional services org in the world. As of 2010 the account managers receive NO quota relief for selling any cisco.

    IBM GS, the second largest int he world, has OEM agreements with both brocade and juniper. And, oh no!, the IBM GS account managers, as with HP, do not as of 2010 get Quota relief for selling cisco.

    Dell, strongest in healthcare, oem relationship with juniper.

    Now to look at the technology. Cisco is, and clearly has been for at least 10 years, a technolgy follower and most certainly are today. They have no capabilty left to inovate and instead throw around their weight and follow (very far behind). To bring this to a

    point over 100 of the worlds largest 100 ISPs have juniper at their core of their network and are continuing to expand their spend with cisco. Why? Because with the old cisco equipment the ISPs can not make money.

    What is the market strategy for cisco? We are a data center company no wait we are a cloud computing company no wait we are a security company no wait we are a telephone company no wait we are a software company no wait we are the home media company. When John bought flip for 750 million and less than 6 months later steve jobs introduces an iPod with a built in video camera John must have said "oh well there goes a billion down the drain". And sure enough if you look at the stats on both flicker and YouTube the highest percentage of users uploading pics or vids are apple device users ... Flip just continues to fall further and further down the list.

    To be clear servers are a commodity item. It is something that you buy a lot of for as cheap as you can. Cisco had a very small lead with the amount of memory that they could install being greater than anyone else, a tech they license from another company nothing that they thought of, and now that company is licensing that tech to all of the other companies as well. Lead gone. Acording to joh himself he only has 400 companies (world wide) "testing" his servers, not buying, testing. There is not one customer that I have in the US that is willing to pay the "cisco tax" for servers.

    When you can put maintenance on chairs that you buy fro cisco, and you can with their high end video system, you have a company that is desperate for growth and has no idea how to get it.

    John's Diet Dr Pepper can is almost out of soda. He will be fired for entering into the server market palce and cico will never fully recover from the HUGE mistake.

    I am a stock holder in juniper. I sold all my stock in cisco over 12 years ago

  • Report this Comment On February 26, 2010, at 8:29 PM, teriburton wrote:

    Do you think Cisco will ever start paying a dividend? I for one, have owned Cosco forever, and now I am at the age where I like dividend paying stocks.

  • Report this Comment On February 27, 2010, at 9:24 PM, ObscuredVision wrote:

    Thank you Anders for your thought provoking article. The only thing for certain to come from this thread is that everyone wants a sure thing. Anyway, it sounds like the possibility of a dividend is unlikely as is the idea of doubling in two years. Yet, it doesn't sound like it's time to jump ship either unless you want a dividend or are looking to make a bundle in the next two years.

Add your comment.

DocumentId: 1117857, ~/Articles/ArticleHandler.aspx, 4/18/2014 8:39:31 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement