Cisco Systems (CSCO 1.16%) had a bit of a scare last week when a report suggested that habitual disrupter Amazon.com (AMZN 1.66%) was contemplating entering the lucrative market for networking switches that Cisco has long dominated. Cisco shares fell 4% on the news. With Amazon Web Services (AWS) being the largest cloud infrastructure provider in the world, it made quite a bit of sense that the e-commerce titan would consider such a move, seeing as how its cloud operations continue to grow along with its own internal needs for networking switches. Amazon could save on costs by in-sourcing the component (Amazon is a prominent Cisco customer) while also selling them to third-party customers.
Cisco and its investors can now breathe a sigh of relief. Kind of.
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A partial denial
MarketWatch reports that Amazon is "not actively building a commercial network switch," according to a statement that Cisco provided to the outlet. The Cisco spokesperson said AWS CEO Andy Jassy confirmed as much to Cisco CEO Chuck Robbins, noting that "Cisco and AWS have a long-standing customer and partner relationship." An AWS spokesperson backed up the statement without elaborating further.
However, Cisco may not be entirely out of the woods, as Amazon declined to comment on whether or not it was developing networking equipment for internal use. The statement merely says that Amazon isn't interested in commercializing any such product to sell to third-party customers. Amazon still very much has a strong incentive to utilize "white-box" switches with customized open-source software that would allow it to better customize the performance for its own specialized needs.
If Amazon did so, Cisco could stand to lose a prominent customer. The silver lining is that Cisco's customer concentration risk isn't too great, noting in its most recent 10-K that "no single customer accounted for 10% or more of revenue" in each of the last three fiscal years. That said, Cisco has been struggling with revenue growth for years, with growth oscillating somewhat inconsistently. Losing a major customer like Amazon wouldn't help in that regard.
CSCO Revenue (Quarterly YoY Growth) data by YCharts.
The good news for Cisco is that it has withstood these types of "white-box" threats in the past, which are not new concepts in the networking space. Those types of offerings may save costs up front, but don't offer the kind of support that large enterprise data center operators need at scale. Saving up front only to incur greater expenses in support and maintenance later on is a poor trade-off, and IT managers factor all of these variables into their long-term operating budgets.
Still, if there's any company that can innovate in order to find a way to bring more of its networking needs in-house, it's Amazon.
