Cisco Effectively Manages Pricing Pressure in the Switch Market

321 Pacific Ave., San Francisco, CA 94111 | www.blueshiftideas.com

INITIAL REPORT

August 2, 2012

Companies: BRCD, CSCO, DELL, EPA:ALU/ALU, EXTR, FFIV, HPQ, IBM, JNPR, MLNX, NTGR, PANW, RVBD,

TPE:2332, VMW

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David Franklin, df@blueshiftideas.com, 415.364.3780

Summary of Findings

Seventeen of 23 sources said pricing pressures have continued

in the small to midsize business (SMBs) and consumer switch

markets. The high-end, large-enterprise switch market is more

stable but also has experienced some flexible pricing.

Cisco Systems Inc.‘s (CSCO) premium pricing for its large

enterprise switches is the norm in China, but U.S. sources said

Cisco‘s prices for this market have been stable to down.

Sources in the United States and China alike said Cisco is the

leading switch provider for large-scale enterprises.

IT equipment distributors said Cisco and Netgear Inc. (NTGR)

are the leading switch providers among SMBs and consumers.

Cisco offers these markets low prices and solid technology.

Huawei Technologies Co. Ltd. is the dominant supplier of low-

end switches in China. Cisco has kept Huawei at bay in the

United States, but one Cisco competitor expects this to change.

The switch market is expected to experience little to no growth

in the United States but to grow 10% to 30% in China year to

year. One international retail equipment distributor said the

European and Asian markets were down 20% year to year.

Cisco‘s biggest threats are from changes in networking

technology, as illustrated by the emergence of OpenFlow.

VMware Inc. (VMW) has purchased Nicira, which could expand

the use of OpenFlow and reduce demand for switches, including

Cisco‘s.

Pricing

Pressure

Cisco

Managing

Pricing

Pressure

Switching

Market

Enterprises Using

Cisco Switches

Industry Specialists

Competitors

IT Equipment

Distributors

Data Centers N/A N/A

Silo Summaries

1) ENTERPRISES USING CISCO SWITCHES Of our nine sources, six are in the United States and three

are in China. Cisco‘s switch prices have been stable for

three U.S. sources, are considered premium by another,

and have decreased for the fifth source. The sixth U.S.

source commented only on Huawei‘s move into low-end

pricing. In China, Cisco has the reputation of successfully

providing high-end products to larger Chinese enterprises.

Cisco is China‘s overall market leader, but Huawei is the

country‘s dominant supplier among SMBs.

2) INDUSTRY SPECIALISTS Two sources in the United States and one in China said

Cisco is the dominant switch vendor throughout all U.S.

markets and China‘s high-end market. Its switch pricing is

under pressure, but Cisco is effectively dealing with the

pressure in the United States and is priced accordingly for

China‘s premium market. Huawei dominates China‘s SMB

market but is not yet a prevalent supplier to the United

States.

3) COMPETITORS These five sources (four in the United States and one in

China) said pricing pressure on switches is strong, but

Cisco is expected to maintain its lead position in both

countries‘ high-end markets for the next six months.

Huawei is becoming a strong competitor in China. Cisco is

using political pressure to subdue Huawei in the United

States, but one source does not expect that to work in the

long run.

4) IT EQUIPMENT DISTRIBUTORS These three sources said Cisco and NetGear are the

dominant switch vendors in the retail sales space

catering to SMBs and consumers. Cisco‘s low-end pricing

is competitive, and rebates are being offered to spur

sales. D-Link is gaining share and has established a solid

position among midsize businesses. Huawei is not yet a

competitive factor in the United States.

5) DATA CENTERS These three sources (one each in the United States, Latin

America and China) said Cisco is the premium-priced

provider of well-known products. However, it lacks a

presence in the cloud, and its premium pricing limits it to

larger companies. Huawei is successful in Latin America

and China as a low-cost provider, but does not appear to

be gaining ground in cloud computing in the United

States.

Research Question:

Is Cisco’s enterprise switch business succumbing to competitive pricing pressure?

Cisco Systems Inc.

321 Pacific Ave., San Francisco, CA 94111 | www.blueshiftideas.com

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Background

Cisco Systems‘ switching business, which represents just over 31% of the company‘s total sales revenue, has been under

extreme pricing and product performance pressure from many competitors, including Netgear, Brocade Communications

Systems Inc. (BRCD), Juniper Networks Inc. (JNPR), Hewlett-Packard Co. (HPQ), Mellanox Technologies Ltd. (MLNX) and

Chinese manufacturers D-Link Corp. (TPE:2332) and Huawei.

CURRENT RESEARCH Blueshift‘s first report on Cisco‘s switching business assessed how successfully the company has met the pricing and

technology challenges being presented by switch competitors. We employed our pattern mining approach to establish and

interview sources in six independent silos, comprising 23 primary (including eight repeat sources) and four of the most

relevant secondary sources focused on the networking industry:

1) Enterprises using Cisco switches (9)

2) Industry specialists (3)

3) Cisco competitors (5)

4) IT equipment distributors (3)

5) Data centers (3)

6) Secondary sources (4)

Next Steps

Blueshift will continue to monitor the switching market‘s pricing climate and Cisco‘s ability to defend its share in the United

States and China. We will review Cisco‘s efforts to take on Huawei in China and to prevent Huawei‘s expansion into the U.S.

market. Finally, we will research the emerging changes in technology toward software-defined networks and the effects on

Cisco‘s switches business.

Silos

1) ENTERPRISES USING CISCO SWITCHES Of our nine sources, six are in the United States and three are in China. Cisco‘s switch prices have been stable for three U.S.

sources, are considered premium by another, and have decreased for the fifth source. The sixth U.S. source commented only

on Huawei‘s move into low-end pricing. In China, Cisco has the reputation of successfully providing high-end products to

larger Chinese enterprises. Cisco is China‘s overall market leader, but Huawei is the country‘s dominant supplier among

SMBs. The switch market is expected to be flat in the United States and up 10% in China year to year. The migration to cloud

computing likely will reduce demand for switches.

Enterprise IT executive for a multibillion-dollar power company; repeat source

Cisco remains the company‘s main provider of networking hardware. Purchases

have declined in recent years but should pick up again as the economy

improves. Cisco‘s pricing has been level in recent months. Competitors offer

similar pricing, but the source‘s company has invested heavily in Cisco products

and sees no reason to change.

―We‘ve seen relatively stable pricing from Cisco, with what we would

consider to be standard increases in support. We have contracts with

Cisco to govern this.‖

―We use Cisco products almost exclusively. I believe someone installed

a Juniper box before my time just so we could say we had some

diversity.‖

We‘ve seen relatively stable

pricing from Cisco, with what

we would consider to be

standard increases in support.

We have contracts with Cisco to

govern this.

Enterprise IT Executive

Multibillion-dollar Power Company

Cisco Systems Inc.

321 Pacific Ave., San Francisco, CA 94111 | www.blueshiftideas.com

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―Cisco has not changed as our core network solution provider. We have done fewer lifecycle replacements over

the last couple of years, but we plan to increase spending as the economy improves. At a minimum, we will

continue to purchase to replace equipment that is far enough outside of lifecycle to be a risk.‖

―The competition generally has competitive prices to Cisco. But we have too much time and skills development

invested in Cisco for another vendor to be a serious contender in the medium term. I don‘t have any visibility

into what Huawei is offering, and I haven‘t seen anything that would lead me to believe that we would want to

deviate from our present network strategy.‖

Chief IT architect for a construction supply firm with operations in more than 50 countries; repeat source

This source will continue to use Cisco as its main switch and router vendor, but overall purchases are declining as the

firm consolidates its worldwide operations. Cisco‘s prices were down during the last round of negotiations. He does not

see any strong competition to Cisco in core network hardware and does not believe Huawei could adequately service a

large global enterprise.

―Cisco‘s prices have been lower [during the past three to six months].

We have a kind of enterprise agreement with them that we negotiate

every 12 months, and we‘ve reduced the scope of the contract.‖

―We use Cisco core network routers, location switches and Wi-Fi

infrastructure around our operations, which include more than 50

countries and more than 3,000 sites.‖

―We‘re buying fewer Cisco products due to the optimization of our

business, closing plants and locations and optimizing network

segments. We still use Cisco, but due to the dynamics of our business,

we are consolidating operations.‖

―For us, Avaya [Holdings Corp.] and Alcatel [Lucent S.A./EPA:ALU/ALU]

are the main competitors [to Cisco], but more in IP telephony than core

network elements. Huawei, from our point of view, is not able to

manage global accounts like us.‖

Chief technology officer for a boutique media company

IP network equipment purchasing has slowed as the source‘s company migrates some infrastructure to the cloud. The

number of devices that need to communicate with the cloud is increasing exponentially, forcing IT managers to seek new

port configurations to better fit their needs. Cisco provides those configurations at a reasonable cost. Huawei is not really

a viable competitor in the enterprise space.

―I have reduced my dependence on high-throughput switches as our need to maintain connections within a

rapidly expanding network of private servers has eased. The cloud lets us scale back on all new back-end

capacity: fewer servers coming into the network, fewer LAN connections between them, fewer heavy industrial

switches to support those connections.‖

―While the back end is becoming more streamlined—or more to the point, not getting more crowded—the front

end of our intranet is filling up fast. It used to be that you needed a little more than one port per work station to

enable the desktop to access the network. Now you need ports for the VoIP lines, ports for all the IP devices like

presentation screens, ports to allocate to the wireless access points that keep everyone‘s tablets online. I‘m still

buying switches, it‘s just that I need a wider library of relatively shallow ports to support these front-end

connections.‖

―In a real way I‘m buying the modern equivalent of the old hubs in which the traffic comes out of a very robust

pipe—our physical connection to the Internet—and then diffuses immediately into a large number of thin data

streams. But we don‘t call it a hub anymore; we simply buy a switch that can manage 24 or 48 separate ports.‖

―Cisco provides those ports at a price/performance point that makes sense. I don‘t want to feed a full gigabit

[Gb] or, worse, 40 Gb to somebody‘s desktop. What are they doing with all that bandwidth? Why do they need all

that speed? The video on demand streams are another story. I do want the bandwidth there, but that‘s all in the

cloud and they‘re handling that piece for me.‖

―In the final analysis, street-level switches, the more ports the merrier, quantity over extreme high-performance.

Cisco does that. Netgear does that too, and we include plenty of Netgear equipment in our network. Lower-end

providers don‘t give us the ports, so that rules out the more consumer-oriented devices and the emerging

Cisco‘s prices have been lower

[during the past three to six

months]. We have a kind of

enterprise agreement with

them that we negotiate every

12 months, and we‘ve reduced

the scope of the contract.

Chief IT Architect

Construction Supply

Cisco Systems Inc.

321 Pacific Ave., San Francisco, CA 94111 | www.blueshiftideas.com

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markets manufacturers like your Huawei. Higher-end providers give us too much per port and charge

accordingly.‖

Director and founder of a consulting group for network and web application, development and operations

Cisco is the clear market leader, followed by Juniper. Cisco is recovering from diverting its energies in too many directions

other than its core switching and routing business, but it should do well this year. Cisco‘s Nexus switches are a big

success. The company will need to adapt to a new disruptive technology: software-defined networking.

―I‘ve noticed that Huawei is moving into the cheap market space in other countries. Companies with a very low

budget are buying Huawei switches because they‘re selling them very cheap. But people have told me that the

quality is so bad compared to what they‘re used to, which is Cisco.‖

―The good thing about Cisco is that in all this time, when they got diverted in so many directions, is they kept

their engineers and brainpower. And I‘ve heard good things about Nexus. These customers are happy that

they‘re getting something good. Cisco hasn‘t lost it. They just were not saying no when they should have said

no.‖

―Nothing beats Cisco and Juniper these days. Cisco came out with

Nexus at the right time. What I‘m hearing is, ‗We gotta have it.‘‖ Also, a

lot of small companies have been holding off investing in

infrastructure. When that happens, Cisco is going to see a lot of money

coming in.‖

―One reason Cisco has penetrated the market so deeply is its CCIE

certification program. If people get this certificate, they‘re influenced by

it: It‘s unlikely they‘ll go to a company and buy Juniper. Of course

Juniper caught up to Cisco with a certification program, but they don‘t

have that in a server market. … There has been a huge movement of

engineers trying to decide whether to stay in corporate back-ends or go

to start-ups or cloud services. For the most part these engineers like

Cisco and some like Juniper, and they‘re not likely to change.‖

―Cisco‘s long-term survival as a company depends on how well they

ride the next wave of disruptive technology: software-defined

networking [SDN]. That will determine whether they‘ll be Cisco 10 years

from now or Juniper. If they know where the universe is going, Cisco will

be there. SDN is a game changer. Instead of networking being defined

by hardware equipment, it will be defined by a software layer on top of

that that—software code will control the flow. SDN is still in its infancy,

but everyone better start learning it now.

―The main problem Cisco is facing is that it has gotten diverted from its

core competencies. It wanted to be everything to everybody. Its

switching and routing business was so successful. Then it got into

making set-up boxes for TV and WebEx for video conferences, and the

percentage of income from that was so small in comparison to its core

business. It was a textbook case of needing to be disciplined enough to

say no. They were buying up a bunch of small companies, and meanwhile Juniper was catching up to them. They

lost track of what they do best. Then [Cisco] CEO John Chambers went full circle and decided to concentrate on

what they do best again.‖

―Cisco got into the server business in another cycle, and it‘s not known for building servers. It‘s a totally different

beast. And it‘s not cheap.‖

―Cloud services are more and more network. The drive for innovation is there, and there are a few interesting

start-ups. Cisco is watching because they can buy them out. They couldn‘t buy Juniper because of the ideological

split. Juniper engineers hate the way Cisco stuff was architected—it was the new generation colliding with the old

school—and they said, ‗We‘ll never be bought by Cisco.‘‖

―It‘s hard to say it‘s a mistake that Cisco didn‘t buy VMware. There‘s a rule of thumb in engineering that that

version 3 of any technology is equal to version 3 from any other vendor of similar quality; they match each

other‘s feature-set. Cisco may have thought VMware was past its prime, and decided to pass up.‖

Cisco‘s long-term survival as a

company depends on how well

they ride the next wave of

disruptive technology: software-

defined networking [SDN]. That

will determine whether they‘ll

be Cisco 10 years from now or

Juniper. If they know where the

universe is going, Cisco will be

there. SDN is a game changer.

Instead of networking being

defined by hardware

equipment, it will be defined by

a software layer on top of that

that—software code will control

the flow. SDN is still in its

infancy, but everyone better

start learning it now.

Director & Founder

Web Applications Consultancy

Cisco Systems Inc.

321 Pacific Ave., San Francisco, CA 94111 | www.blueshiftideas.com

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Tech blogger and network architect for a large, public Southeastern university

Cisco will continue as the market leader in switching since it was the first to throw its support behind SDN in all its

products lines. Large Cisco customers are unlikely to switch to another vendor.

―Our network is totally Cisco. We has a regional network that is Juniper, but otherwise everything is Cisco. We‘re

not looking to change it. Familiarity is a big draw.‖

―What I‘m looking for if I‘m paying a premium for Cisco hardware is the ability to differentiate. It can be

commoditized, but if it is differentiated, that‘s what is going to keep us buying.‖

―If you‘re trying to find the value in Cisco, it‘s a little harder to find in the individual components. There‘s a lot

more value in how they fit together in an ecosystem.‖

―Cisco is in the driver‘s seat; they‘re the market share. They‘ve been pretty much controlling the roadmap. I‘m

fairly bullish on what they‘re doing now. By supporting software-defined networking, it‘s obvious that they have a

larger vision of a larger network. In this open-flow network, there may not be a vendor lock; it seems there will

still be enough wiggle room for vendors to compete.‖

―Cisco is pretty late to market with the trend toward data center consolidation, but they are the first to say they

are going to support SDN in all their product lines. They‘ve opened up the floodgates and the writing is on the

walls. This is going to force other vendors to deliver.‖

―If Cisco doesn‘t go after an open spec after VMware threw down the gauntlet, I would be amazed. I think they

move forward in an open route and figure out how to monetize it, they‘ll succeed. The money is there.‖

―Consolidation and virtualization have already happened in the server world, and these are new trends in the

networking world as well.‖

CIO for a multibillion-dollar real estate investment firm

This source has not seen any significant pricing changes with Cisco‘s networking products, and his company has not

veered from using Cisco as its main vendor. He does not see any major competitive issues from Huawei or HP.

―Cisco‘s pricing has been the same [in recent months]. Cisco has always been expensive.‖

―There‘s been no change in our purchasing patterns [during the past three to six months].‖

―Cisco is our main network gear vendor.‖

―Huawei is certainly not making an impact in my shop. HP is significant but not very.‖

IT consultant for a Cisco switch user, China

Cisco and Huawei are China‘s two leading networking and switching products providers. Cisco occupies more market

share in large multinational companies in China while Huawei has a greater market share among SMBs. Technical

innovation is a necessity.

―The current competitive climate is very intensive. For high-end

companies like Cisco and Huawei, innovation is critical. Pricing

pressure will be prevalent and Cisco has not been competitive on price,

but their focus on technical innovation has kept them competitive.‖

―As the popularization of network computing continues to grow with

increased demand for digital communications and information

acquisition and delivery, more powerful networking and switching

products are required. The rate growth of this market may be above

10% per year.‖

―Popularization also causes competition, so innovation is a big

challenge faced by manufacturers. For example, switching providers

like Huawei have issued cloud engine data center switching products

and are quickly updating technologies to end users.‖

―Huawei and Cisco are leaders in the IP-based networking and

switching products market. Cisco is the world‘s leading producer

because of its high-quality product, while Huawei is the market tiger

from China. I think at least half of multinational companies are clients

of Cisco while some medium-scale foreign companies that have entered China‘s market in the past five years

also use Huawei. But I think Huawei is the most popular provider for China‘s large and medium-scale companies

and governments.‖

The current competitive climate

is very intensive. For high-end

companies like Cisco and

Huawei, innovation is critical.

Pricing pressure will be

prevalent and Cisco has not

been competitive on price, but

their focus on technical

innovation has kept them

competitive.

IT Consultant, Cisco Switch User

China

Cisco Systems Inc.

321 Pacific Ave., San Francisco, CA 94111 | www.blueshiftideas.com

6

―For old users of Cisco, the advantage of using Cisco is the stability, but for new companies, whether they

choose Cisco or Huawei makes little difference in technology concerns.‖

Human resource and outsourcing consultant, China

The IP-based networking and switching products market is growing, but Cisco will not see significant growth because of

competition from companies like Huawei and TP-Link Technologies Co. Ltd. Cisco‘s prices remain among the highest in

the market. Huawei has government support, which provides a strong edge.

―The IP-based networking and switching products market is still

growing, along with community intranets. I am confident the market is

growing at a rate of at least 10% although Cisco will not see such high

growth.‖

―Cisco has been under pricing and innovation pressure. Obviously,

Cisco is the most expensive switching product provider in China. For

old users of Cisco, it would be too much trouble if they changed to a

new switching provider, so they usually stay on with the same

provider.‖

―Cisco currently has offered no price decrease. I think the reason is the

quality and technical advantages are growing.‖

―Competitive pricing is just the norm; the real competition is in

technical innovation.‖

―The major issues facing the market is the technical innovation and the

business license through the government. Clients need to get the right

technical solution, not just a machine.‖

―Cisco and Huawei are leading the market. Huawei provides solution to

smaller clients with government support. Other companies are not

directly supported by government.‖

Technical engineer for a major bank data center, China

This source uses both Cisco and Huawei products. She said the IP-based networking and switching products market

continues to grow 30% each year. Cisco is safe from competitors in the high-end market, but lacks a pricing advantage

among SMBs.

―The IP-based networking and switching products market is still growing. The Chinese banking system is growing

rapidly with additional networks and the upgrading of older networks. Not only the data center headquarters, but

also those bank branches in different regions are growing. So I think the IP-based networking and switching

products should grow with the banking business, around 30% each year.‖

―The current competitive climate is very difficult, but it cannot threaten Cisco‘s position in the next three years.

Cisco‘s advantage is in the large customer base of large companies and its products‘ high security level. The

disadvantage for Cisco in expanding its market share in China is that midsize companies prefer Huawei …

because Huawei has similar technology and provides very flexible service.‖

―Cisco leads the market in networking switching products because it provides the highest quality and occupies

the largest market share in large companies.‖

―The major issues facing the market are innovation and quality. Cisco provides the highest quality although at a

highest price. Financial companies usually don‘t care much about the price because they are required to have

the highest security and stability. Now Huawei also has very high-level security guarantee. We also use Huawei‘s

products in some other hardware facilities, but the core networking system remains Cisco.‖

―Our purchases from Cisco increased in the past three to six months due to upgrading and expansion.‖

―Huawei‘s prices are half that of Cisco‘s, and other Chinese companies provide even lower prices than Huawei.‖

2) INDUSTRY SPECIALISTS Two sources in the United States and one in China said Cisco is the dominant switch vendor throughout all U.S. markets and

China‘s high-end market. Its switch pricing is under pressure, but Cisco is effectively dealing with the pressure in the United

States and is priced accordingly for China‘s premium market. Huawei dominates China‘s SMB market but is not yet a

Cisco has been under pricing

and innovation pressure.

Obviously, Cisco is the most

expensive switching product

provider in China. For old users

of Cisco, it would be too much

trouble if they changed to a

new switching provider, so they

usually stay on with the same

provider.

Human Resource & Outsourcing

Consultant

China

Cisco Systems Inc.

321 Pacific Ave., San Francisco, CA 94111 | www.blueshiftideas.com

7

prevalent supplier to the United States. The switching market is expected to see little to no growth in the United States, but

could increase 30% in China as networking computing is expanded.

Stuart Miniman, B.S., M.B.A., principal research contributor for Wikibon; repeat source

Cisco‘s enormous customer base, high-quality products and marketing skills will see it through this period of upheaval

and change in the network switching market. It has been preparing for next-generation networking, and needs to offer

top-notch customer support and not take loyalty for granted. VMware‘s purchase of Nicira will not erode Cisco. The need

for switches will always exist, even if VMware develops the most innovative software to date.

―Cisco has a huge installation base, lots of loyalty and excellent

products. Of course, pricing is always a concern. HP came out and said,

‗Hey, we can do everything Cisco can do, and we‘re way cheaper.‘ But

that seems to have flattened out. Cisco no longer has that price

erosion; the bleeding has stopped.‖

―In general, networking switching is not a real growth business. For a

long time—nearly 15 years—if you were talking about networking, you

were talking about Cisco. There was nothing to add; it was so dominant

in the market. It‘s a different landscape now.‖

―The networking marketplace is more competitive now than it was just

a few years ago. First, you have the transition to higher speeds, with

more customers moving to 10 Gb Ethernet, and 40 Gb and 100 Gb

solutions beginning to become available. What are really driving

networking change are the trends of virtualization, convergence and

the cloud. Cisco has been preparing for this and is pushing innovation.

They‘ve been very successful in the last two spinouts, and they are

good at getting ahead of the curve.‖

―Back three years ago or more, tech writers used to call Cisco ‗Snow

White and the Seven Dwarves‘ because that‘s what the competition

looked like on charts at the trade shows. There would be Cisco, and you‘d see these seven little squiggles at the

bottom of the page. The squiggles were the competition, with each one representing just a tiny fraction of the

market share. Now there aren‘t seven dwarves anymore—a couple have gone out of business—but the

companies involved are getting a bigger share of the market. The dynamic has changed greatly over the last

three years. Besides Cisco, you have Hewlett-Packard, Juniper, Dell [Inc./DELL], Brocade. … Still, data centers

and enterprises don‘t have data that shows wholesale switching from Cisco.‖

―The acquisition of Nicira by VMware has really gotten everybody going.

There‘s a real buzz about it. Cisco has been the 800-pound gorilla. And

some people are saying, ‗Well, Cisco is on the run now.‘ But the last

time I checked, VM wasn‘t selling servers or switches, so even if it ends

up being the coolest software out there, you‘ll still need to buy a

switch.‖

―Besides outside competition, Cisco has to be careful not to cannibalize

its own products. If I can just stick a card in your existing switch, I may

not need to buy your new product. That puts real pressure on the

company. It needs to be able to grow its top line.‖

―Networking switching is a tough market, and Cisco has tried branching

out. At one point the CEO of Cisco was talking about 27 different

adjacencies, and he said that any one of them could be a billion-dollar

business. But Cisco has already killed off the Flip business, and its

business-only tablet is dead too. Cisco is flexible though. They are good

at getting out their vision, one that might take three to five years to

achieve.‖

―You can never take things for granted. I have talked with some

customers who were less than thrilled with the support they‘re getting

from Cisco. Their feeling was that they were overpriced and had them

over a barrel.‖

Cisco has a huge installation

base, lots of loyalty and

excellent products. Of course,

pricing is always a concern. HP

came out and said, ‗Hey, we

can do everything Cisco can do,

and we‘re way cheaper.‘ But

that seems to have flattened

out. Cisco no longer has that

price erosion; the bleeding has

stopped.

Principal Research Contributor

Wikibon

The acquisition of Nicira by

VMware has really gotten

everybody going. There‘s a real

buzz about it. Cisco has been

the 800-pound gorilla. And

some people are saying, ‗Well,

Cisco is on the run now.‘ But

the last time I checked, VM

wasn‘t selling servers or

switches, so even if it ends up

being the coolest software out

there, you‘ll still need to buy a

switch.

Principal Research Contributor

Wikibon

Cisco Systems Inc.

321 Pacific Ave., San Francisco, CA 94111 | www.blueshiftideas.com

8

―The huge presence of Huawei at the last Interop caught everyone by surprise. [CEO John Chambers] has two

jobs as far as competition from Huawei goes. He has to keep Huawei out, and he‘s trying to move of his $40

billion overseas back tax-free. He‘s been successful on the first count, but he hasn‘t been doing a good job

getting the money back: He has to pay taxes on the money from overseas if he wants to bring it back and use it

in an acquisition. He hasn‘t gotten a tax holiday as he had hoped.‖

―The U.S. isn‘t alone in putting trade restrictions on Huawei. Australia one of the others that have done so. What

they‘re saying is that there‘s a potential security risk on the Ethernet side. With an optical product, there‘s no

risk—it‘s protocol-agnostic. But when you have IP forwarding, you have to look at the packets to see where the

traffic is going, and you could unencrypt the data if you wanted.‖

President of an IT strategy consultancy; repeat source

High-performance Ethernet is an extremely crowded field with a relatively narrow potential customer base. Cisco‘s real

strength is in the mass switching market and among large IT consumers that want a relatively unified hardware

environment. Although the company can undersell any domestic competitor in that side of the market, margins are low

enough that additional competitive pressure could hurt. Cisco has the means to acquire technology needed to broaden

its footprint in the high-performance switching market.

―There are too many people selling switches in the 10-Gb-and-up range.

Anyone you care to mention is there: Brocade, Juniper, Hewlett-

Packard, niche manufacturers like Mellanox. It‘s not a huge market yet

so these are really R&D programs subsidized by the relatively few

enterprise customers that do need that kind of connectivity.‖

―Cisco is in that field, but its core is bread-and-butter equipment below

1 Gb. It has a slight edge higher up because of the efficiencies it offers

when it comes to an integrated compatible network. Obviously, if you

have all Cisco devices, you have less bureaucratic overhead from

dealing with multiple vendors and potential conflicts. It isn‘t a big edge,

but for every IT manager obsessed with a diversified supply chain

there‘s another who wants to streamline the vendor pool to the

absolute minimum.‖

―In the bread-and-butter world, Cisco can beat anyone on price simply

because they have the scale. I think they sell twice as many devices under 10 Gb as all of their competitors put

together. Overseas, they have a somewhat harder time, but in places like China they‘re a luxury brand and so

don‘t even play in the price game. Right now, Cisco seems to be consolidating its grip on the bread-and-butter

market while flirting with its price strategy up above that. I don‘t know what will happen there.‖

―I think Cisco has priced its low-end equipment—the Linksys models and so on—about as low as they go. That‘s

fine. I doubt their U.S. rivals can match in the long term, so they‘ll have to move up and fight for their share of

the 10 Gb world.‖

―Remember, Cisco has $8 billion in cash in a typical quarter. That can buy just about every significant

competitor put together with the exception of Juniper, HP, giants like that. And that‘s without going into debt.

They‘re serious serial acquirers. … If it looks like anyone‘s got a slam-dunk winner in the 10–100 Gb space and

that space starts to gather critical mass of its own, Cisco will buy and suddenly become the top dog up there.‖

―As it is, 10 Gb and 40 Gb sales are soaring worldwide. The base is relatively low, but we could see a deal soon.

Brocade looks vulnerable. Netgear is probably off the table, simply to avoid monopolization of the consumer and

small enterprise switching market. But I‘d wait for a clear winner to emerge and then watch the M&A headlines

start.‖

Technical specialist within a private company, China

Cisco will remain be the No. 1 supplier in networking and switching products for the next five years. It is protected from

Huawei by its dominant position within the high-end market and through its technological advantages. Huawei‘s

advantages are lower prices and its strategic growth plan.

―I believe there will be more and more users of IP-based networking and switching products leading to an overall

increase in demand of about 30% compare to a year ago.‖

―Cisco is the top supplier of switching products. Many famous companies choose its products.‖

―For those mature companies, price, quality and innovation are all important.‖

In the bread-and-butter world,

Cisco can beat anyone on price

simply because they have the

scale. … Right now, Cisco

seems to be consolidating its

grip on the bread-and-butter

market while flirting with its

price strategy up above that.

President, IT Strategy Consultancy

Cisco Systems Inc.

321 Pacific Ave., San Francisco, CA 94111 | www.blueshiftideas.com

9

―My company‘s switching product purchases from Cisco have been

increasing a little in the past three to six months because we are

upgrading our network.‖

―All suppliers face the same challenges. The biggest challenge is to

provide high-quality product at a low price, so pricing pressure is the

major issue.‖

―Most companies succumbed to the pricing pressure. Cisco‘s prices

are twice as high as Huawei‘s similar products, so only very large

customers with very high technical and security requirements will

choose Cisco. Huawei has been developing fast in recent years, and its

pricing is acceptable for most of the larger companies.‖

―For high-end quality, Cisco is still better than Huawei. For example,

China Mobile, China Telecom and Bank of China have very high

security requirements in networking, and such companies must choose

Cisco.‖

―Cisco‘s advantages are the maturity and high service quality of its

distribution channels, while Huawei is developing the channels now.‖

3) CISCO COMPETITORS AND THEIR CUSTOMERS These five sources (four in the United States and one in China) said pricing pressure on switches is strong, but Cisco is

expected to maintain its lead position in both countries‘ high-end markets for the next six months. Huawei is becoming a

strong competitor in China. Cisco is using political pressure to subdue Huawei in the United States, but one source does not

expect that to work in the long run. The switch market is expanding rapidly in Asia and continues to grow in the United States

because of demand in telecommunications and IP networking.

Executive for a Silicon Valley networking company

Cisco will maintain its market share during the next year. It has a strong product and loyalty in the market‘s high and low

ends. However, the industry is changing rapidly, and industry experts are unsure whether Cisco‘s next spinout will

embrace the networking world‘s changes.

―It doesn‘t seem to me that Cisco will be losing market share anytime soon. They have major account control in

the enterprise space, and those customers will not be switching to another vendor or to other technologies in

the short term.‖

―Cisco has a great story. They‘re putting a good feature set out there at the high end of the market, which pays a

lot. And Cisco is also selling routers to all the little guys. Outfits like Riverbed [Technology Inc./RVBD] can‘t

compete; they don‘t have the clients or the footprint.‖

―There is a huge demand for data storage solutions these days. Data is growing by more than a third each year,

and institutions need to store their data in more than one place to keep it secure. Because of this, the inter-data

storage center space is becoming much more important. I know Cisco is looking at this space very closely.‖

―It‘s possible that internally Cisco doesn‘t have clarity on what the next step is. They have competitors cutting

prices drastically, and they have a whole new industry challenging the way networks are designed. Cisco‘s

response has been to come out with a better northbound API story and let the industry run wild with theories

about a spinout that may or may not fill some of these holes.‖

Engineering executive and industry specialist who used to work for a Cisco competitor, West Coast

Cisco and Juniper will remain the domestic market leaders for IP-based networking and switching products for the next

six months. However, Cisco can expect a challenge from Huawei, and has lobbied Washington, D.C., to restrict Huawei‘s

U.S. business. The source said that tactic may not work forever. He also thinks switch prices will decrease.

―In the next three to six months, Cisco and Juniper will continue to lead the U.S. market, and the Chinese

company Huawei will lead sales of switches globally.‖

―Cisco is dealing with a very formidable opponent in Huawei, which is a lot more efficient. Huawei also has more

of a sense of mission. Huawei is really leading the markets, but politics is preventing it from taking U.S. markets.

Huawei is a worker-owned company.‖

Most companies succumbed to

the pricing pressure. Cisco‘s

prices are twice as high as

Huawei‘s similar products, so

only very large customers with

very high technical and security

requirements will choose Cisco.

Huawei has been developing

fast in recent years, and its

pricing is acceptable for most

of the larger companies.

Technical Specialist

China

Cisco Systems Inc.

321 Pacific Ave., San Francisco, CA 94111 | www.blueshiftideas.com

10

―Cisco has dealt with pricing and competitive challenges politically, by lobbying Washington. They have taken the

easiest path. And they‘re not going to win that way. At a global level, they are losing business. Why? The pricing.

Cisco has a much higher overhead; go to their offices and you can see. They are selling to the big dudes and

making the big bucks. They are losing their edge as a global company.

As long as Huawei, for example, can‘t sell things here, Cisco is not

getting much pressure. If you exclude the U.S. market, Huawei is heads

and shoulders above Cisco. And Cisco knows this, by the way. They are

constantly trying to figure out what to do. … They‘re lobbying

Washington, but it‘s not going to work forever. If the U.S. is open to

global markets, you can‘t do this. The U.S. may want to protect its

domestic market, but others could say that too. … The U.S. is saying

that it‘s a security concern, but Huawei has shown willingness to be

audited from a security point of view.‖

―Switching product purchases from Cisco are increasing. You have

more end-point increases so you need more switching products. …

Termination points can be servers or terminals, so you increase the

need for switches. … But pricing pressures are always prevalent

because Cisco is a less dynamic company than it should be.‖

―The market for IP-based networking and switching products is going to

keep growing. IP-based package switch networks will still be with us for

the foreseeable future. Certain aspects of circuit switching are coming back to the data centers, but packet

switches with the Internet are going to continue for some time because the edge of the network is growing. You

can look at the growth of end-point devices to estimate the percentage of change.‖

―The major issues facing the market are pricing pressure, innovation and quality. In the world economy, the

current competitive climate for network switching products is price-driven. Innovation matters, but networking

has seen so much innovation, it will take time for people to catch up with everything that has happened over the

last 40 years. As I said, new circuit models are coming back. Is that innovation or old ideas coming back in a

new garb? If you think of innovation as leading to improvement, yes, this is part of it. but if you think of

networking as new ideas, innovation is not really driving it. Product innovation is going to continue but at a

slower pace.‖

―As for data centers and enterprises switching from Cisco switches to other suppliers, it‘s sufficient to note that

Google [Inc./GOOG] assembles and makes it own switches with a team of eight software engineers. That should

tell you enough about what Cisco‘s problems will be.‖

―The switching products should be dirt-cheap by now, so why are they not? All the protocols have been

implemented. Everyone knows these platforms, and everyone can make these switches now.‖

Product executive for a network equipment manufacturer; repeat source

Demand for switching and other IP networking equipment is robust; emerging

markets are building out their broadband infrastructure while North America and

Western Europe are embracing enterprise wireless environments. Seasonal

weakness masks solid year-to-year improvement. Cisco is a strong competitor

with an almost unassailable presence in North America in particular. The

industry has no lack of innovation; if anything, vendors are rolling out ultra-high-

speed equipment faster than enterprise customers can digest the rate of

improvement.

―The world is hungrier for networking equipment than at any point in

the last five years, adjusted for seasonal variances of course.

Equipment purchased before the 2008 recession is aging now. Much of

it is far behind the current state of the art while loads on the networks

have increased exponentially. People are buying faster switches and

routers to get back up to speed, so to speak.‖

―In Asia, this is still the first heady build-up, similar to what the United

States experienced in the 1990s, only into a far bigger market. There

are easily 10 times as many people in Asia as there are in the United

Cisco is dealing with a very

formidable opponent in

Huawei, which is a lot more

efficient. Huawei also has more

of a sense of mission. Huawei

is really leading the markets,

but politics is preventing it from

taking U.S. markets. Huawei is

a worker-owned company.

Engineering Exec & Industry Specialist

Cisco competitor

Cisco has an enviable position

in its home market and a

strong brand worldwide. In

Asia, it‘s known as a premium

vendor. Elsewhere, it‘s the de

facto standard, with products

up and down the spectrum to

suit whatever your needs may

be. It has its weak points, but

they‘re the name everyone

wants to beat.

Product Executive

Network Equipment Manufacturer

Cisco Systems Inc.

321 Pacific Ave., San Francisco, CA 94111 | www.blueshiftideas.com

11

States, and while they don‘t all need residential modems, you see the potential here for rapid growth.

Meanwhile, in the developed world the push is toward wireless access points in the enterprise as well as the

residential markets.‖

―We‘re up something like 25% over last summer even though we‘re down 10% quarter to quarter. It happens.

Summer is slow in terms of corporate procurement cycles. It‘s the year-over-year number that matters. I can‘t

speak for our competitors, but our share feels stable, maybe a bit stronger so they‘re keeping up more or less.‖

―Cisco has an enviable position in its home market and a strong brand worldwide. In Asia, it‘s known as a

premium vendor. Elsewhere, it‘s the de facto standard, with products up and down the spectrum to suit

whatever your needs may be. It has its weak points, but they‘re the name everyone wants to beat.‖

―Where Cisco is vulnerable is that it‘s unwilling to become a true commodity vendor on the Asian side, so it fails

to capture the commanding heights there as it once did in the United States. And then there are other holes in

its product line where competitors can build a niche for themselves and expand from those positions. I‘m

thinking of various port configurations in the 100 Mb to 1 Gb area and then above 10 Gb is still anybody‘s prize

to win as they can.‖

―Innovation is not an issue for just about anyone short of the real commodity vendors, Huawei and other ultra-

low-price manufacturers. Even they may have some surprises in store as they leap upmarket. Everyone we

consider a real competitor is blazing up the trail to 40 Gb, 100 Gb and beyond in order to differentiate ourselves

and get the high ground. That‘s a lot of very fast equipment in a world where most premise deployment still runs

in the 10–100 Mb range. Cisco has its entries in that high-speed market, but it‘s not really known for its high-

speed offerings, which may hurt it in the long run. But for now, this is a developing market so there‘s plenty of

time for the field to firm up.

Market analyst/communications for a Cisco competitor in the Ethernet space

Cisco will continue to be the network leader in switching during the next six

months and likely beyond. However, more big companies have made acquisitions

that have allowed them to compete with Cisco. Cisco defections could occur if

clients are able to get reliability, support and lower pricing from another vendor.

―Pricing has always been a big issue for Cisco. IT managers are looking

for good support and reliability, and they can get that from someone

else. It is going to be an interesting time for the company. In the old

days you would never get fired for buying Cisco. But the landscape is

changing, and I imagine that alarms are starting to go off for Cisco right

now.‖

―When you talk about networking, the leader would definitely be Cisco. It

will continue to lead in the next three to six months, no question. You

see other companies making inroads with their acquisitions; IBM, Dell,

HP are all competing with Cisco on that front.‖

―I‘m sure some companies are no longer going to Cisco for networking.

A couple years ago, [one large company] looked at Xsigo and Cisco and

decided to go with Xsigo. And now Xsigo has just been acquired by

Oracle.

Software-defined networking is the big buzzword right now. It‘s kind of

like cloud was a few years ago, before the cloud was more baked.‖

Technical specialist for a private company that is a Huawei customer, China

Cisco remains the leader even though its prices are too high for most companies. Cisco is focused on high-end clients

and on technological innovation.

―Price is the issue for small clients, while for the tech industry as a whole innovation is the most important issue.

Those who can lead the technical trend will win market share.‖

―The market is growing for sure, especially for emerging markets like China, India, etc. The percentage should be

about 20%.‖

―Among all the brands in China, Cisco is still the strongest leader with good brand, quality and technology

although Huawei has shown increasing power in competing with Cisco in recent years.‖

Pricing has always been a big

issue for Cisco. IT managers

are looking for good support

and reliability, and they can get

that from someone else. It is

going to be an interesting time

for the company. In the old

days you would never get fired

for buying Cisco. But the

landscape is changing, and I

imagine that alarms are

starting to go off for Cisco right

now.

Market Analyst/Communications

Cisco Competitor

Cisco Systems Inc.

321 Pacific Ave., San Francisco, CA 94111 | www.blueshiftideas.com

12

―We don‘t plan to purchase more networking switches in the next three

to six months because our business stays almost the same each year.‖

―Huawei is a powerful competitor. They are more flexible, which is a

good advantage for emerging markets such as China and India. Cisco

is more structured and process-driven. It should swift quickly like

Huawei.‖

―Cisco cannot compete purely on price. Their strength is their brand

name, their innovation and large successful customer base.

―Huawei has gradually entered foreign markets like the U.S., India and

countries in Africa although it is not as strong as Cisco outside of

China. If it provides high-quality service like Cisco, it may squeeze

Cisco‘s market share in the future.‖

―I feel that Huawei updates technology very quickly although we usually

don‘t need every new update. At least it provides the latest choices for

us.‖

4) IT EQUIPMENT DISTRIBUTORS These three sources said Cisco and NetGear are the dominant switch vendors in the retail sales space catering to SMBs and

consumers. Cisco‘s low-end pricing is competitive, and rebates are being offered to spur sales. D-Link is gaining share and

has established a solid position among midsize businesses. Huawei is not yet a competitive factor in the United States. The

switch market is steady in the United States but has fallen as much as 20% in Europe and Asia for one global source.

Sales manager for a global IT distributor

Cisco‘s Linksys switches remain popular among Western enterprise customers who appreciate the sophistication of the

technology and the confidence the brand provides. Very little true price pressure has emerged although lower-level or

outdated products are selling at a discount to clear out obsolete inventory. Sales of network equipment in both Europe

and Asia have plunged year to year but have recovered somewhat on a sequential basis. Huawei is not an appreciable

player in the North American market.

―Cisco still rules the Ethernet switching world. The company has been expanding its presence in England and

Europe in general and is our top seller in its category in Asia as well. In our product mix, it accounts for maybe

70% of our unit switch sales. Hewlett-Packard is also a factor through the old 3Com products, and then the rest

is really niche vendors—high-end products like Juniper‘s EX2200 and EX4200—or glorified consumer devices

that we sell for small accounts.‖

―The technology is among the best in the world as far as an affordable

mass enterprise solution goes. There are more advanced switches out

there, but they tend to be extremely fast and extremely expensive. Most

of our accounts are happy to pay about $100 a port for Cisco

equipment. They rarely want anything more, and they rarely want

anything less, either. So I don‘t know how much price pressure you‘re

really seeing here.‖

―What we are seeing is that across the board there‘s a generational

shift where anything below 1 Gb in speed is dropping out of the

enterprise, so slower-rated equipment is being priced down to keep the

units moving. That actually serves Cisco and the other premium

vendors because their equipment is higher up the food chain and their

would-be competitors are getting squeezed out.‖

―In terms of regions, North America is steady year over year and over

the last three to six months. Maybe a few percentage points growth for

the traditional switches, but the real action here really belongs to the

wireless routers, which everyone is buying. Europe and Asia have both

cratered for us, down as much as 20% over the last year, but Europe

Among all the brands in China,

Cisco is still the strongest

leader with good brand, quality

and technology although

Huawei has shown increasing

power in competing with Cisco

in recent years.

Technical Specialist

Huawei Customer

China

What we are seeing is that

across the board there‘s a

generational shift where

anything below 1 Gb in speed is

dropping out of the enterprise,

so slower-rated equipment is

being priced down to keep the

units moving. That actually

serves Cisco and the other

premium vendors because

their equipment is higher up

the food chain and their would-

be competitors are getting

squeezed out.

Sales Manager, Global IT Distributor

Cisco Systems Inc.

321 Pacific Ave., San Francisco, CA 94111 | www.blueshiftideas.com

13

has recovered a bit quarter over quarter. Asia hasn‘t really come back in the last few months.‖

―Huawei isn‘t really a big seller for us. We don‘t push them, and very few of our customers ask about them,

especially in North America.‖

Business-to-business technology executive for a leading retail chain; repeat source

Cisco and Netgear remain the dominant switch manufacturers in the SMB space. Cisco has the edge in this market

segment thanks to its willingness to provide lowest-price options to truly cost-sensitive buyers as well as higher-end

offerings for larger budgets. Pricing throughout the sub-gigabit switch market is in decline. Sales are steady.

―We work primarily with utility switches with 10- to 100-Mb speeds. Cisco is our top seller overall in that area for

us through the familiar Linksys models. We do have a few gigabit models from Netgear for slightly bigger

businesses, but nothing above 24 points and top speed of 1 Gb. All together, the Netgear models come close to

Cisco in terms of dollar sales, but Cisco is far ahead on unit sales. They own the low end.‖

―The power of Linksys is value for price. These switches don‘t give a small business more bandwidth than it

really needs, any more than they give a household more bandwidth than it can reasonably use. That actually

matters. Scale is useless to most of our customers.‖

―If every business in America could afford a 10 gigabit network, they still wouldn‘t need all the ports that

normally come with those huge hub-level appliances. Most only need eight to 12 ports at the most. And besides,

they definitely can‘t afford $4,000 and up for a switch, so it‘s moot.‖

―Linksys and Netgear provide sub-gigabit speeds and eight to 12 ports, which is just right for the small business.

And from there, they compete on price. Linksys has the cheapest switches in our catalog, under $40 retail. They

win on that front. Cisco is very happy to ensure that they‘re the entry-level vendor because that gives them the

scale and the installation base to remain the dominant force deeper in the network and higher up the food

chain. Also, building so many low-end switches helps to defray the commodity costs of the higher-end products

they sell to huge corporations, so the profitability on that side is somewhat subsidized.‖

―Of course Cisco is a significant competitor throughout the switch space. Netgear holds up somewhat better

near the top of our range—what you would call the middle market—but it‘s by no means an absolute position,

more like a relative sweet spot. And then above our range Cisco becomes a big player again.‖

―Prices throughout the 10–100 Mb line are declining as bigger enterprises gravitate around the gigabit and up

from there. We aren‘t seeing many small businesses ‗graduate‘ to gigabit switching, but maybe in a year or two

they‘ll start upgrading in that direction.‖

―Switch sales are steady. People keep creating new networks, and at least a small switch is essential. VoIP in

the small enterprise is taking off, and they need switching for that. Even those who migrate to the cloud or start

out on the cloud need some baseline level of equipment at the premise to get to the cloud in the first place. The

cloud is no threat to switching, the router, any of the old connectivity appliances. The cloud only threatens the

server at the premise.‖

Spokesman for a consumer electronics chain; repeat source

Netgear has a better-selling product line in the small business and consumer switching markets. Linksys switches at this

level are cheap but represent a brute solution compared with the somewhat more flexible devices from Netgear. D-Link is

emerging as a midlevel threat to both companies‘ leadership in this space. Switch sales are seasonally slow. Most low- to

mid-market models from all manufacturers are significantly rebated, but this is nothing extraordinary.

―We sell Linksys from Cisco, but to be honest Netgear is the brand of choice for our typical customer. All the way

up to 1 Gb switches, the people who know their way around network equipment choose Netgear for themselves,

and above that we don‘t really play.‖

―The reputation the Linksys switches have is as a true utility appliance, something to plug in and abuse until it

gives out and maybe you can afford something better. They‘re perfectly serviceable little boxes, but there‘s

nothing special that makes them stand out. So Cisco prices them as the ‗nothing special‘ alternative to the

Netgear equipment, which has a bit more sizzle and can‘t really undercut Cisco even if it wanted to do so.‖

―We actually sell a lot more D-Link than we did last year at this time. They‘re aggressively moving into this

market to stay ahead of the mainland Chinese manufacturers like Huawei. I hear Huawei is shaping up as a

huge competitor over there, but they‘re not a factor for us. What their success does for us is push us D-Link

equipment at an attractive margin that we can pass on to our customers. They‘re good equipment, and they

compete well against Cisco on price and Netgear on quality.‖

Cisco Systems Inc.

321 Pacific Ave., San Francisco, CA 94111 | www.blueshiftideas.com

14

―People don‘t buy many switches this time of year except on de novo projects and as replacements for failed

equipment. It‘s actually a lot faster than last summer because the government contracting collapsed last

summer and nobody had any clarity on procurement. That‘s not a factor this year so the comparison looks

unusually good. But it is a slow category for us right now.‖

―Because it‘s a slow season, the manufacturers traditionally rebate older models by a substantial amount. Most

of the models we carry are on sale right now. The exceptions are in the 1 Gb models from Netgear and some

ultra-low-end—and practically obsolete—models from obscure or niche manufacturers that are already priced to

move. Cisco‘s rebates aren‘t really any deeper than we might expect, and they‘re no deeper than anyone else‘s.

Their price point tends to be low anyway so the net pricing might look surprising, but it‘s not.‖

5) DATA CENTERS These three sources (one each in the United States, Latin America and China) said Cisco is the premium-priced provider of

well-known products. However, it lacks a presence in the cloud, and its premium pricing limits it to larger companies. Huawei

is successful in Latin America and China as a low-cost provider, but does not appear to be gaining ground in cloud computing

in the United States. Demand for switches in the cloud computing environment is limited and is not expected to be a large

market.

Data center operator for a global investment banking firm

This source generally avoids Cisco gear because he believes the company spreads itself too thin and offers fine products

but lackluster support. He would not consider Huawei in his network but thinks HP and Extreme Networks Inc. (EXTR)

have some appealing offerings—HP for its free maintenance and Extreme for its technology.

―We use very little Cisco in our network infrastructure. I still use some of their routers for our MPLS

[multiprotocol label switching] network, and these routers are supplied by our vendor.‖

―I am somewhat of an ‗anyone but Cisco‘ person. You can‘t go wrong with their switches. However, they have

acquired a lot of companies over time and have failed to integrate a number of them successfully, in my opinion.

I don‘t love their support. I have been customers of companies acquired by Cisco and, generally, support and

innovation have gone downhill. I still deal with the same people at Riverbed and can call a tech‘s cell phone.

That does not happen in the Cisco world.‖

―I don‘t really know [about pricing changes] since I don‘t really

purchase their gear much.‖

―Cisco tries to be everything for everyone. I don‘t think there is an

advantage to sticking with any one vendor. I like best of breed. The

reason I believe Riverbed stays on top is because they are able to

focus on what they know best and continue to do it well. At some point,

you get lost in Cisco.‖

―I would take Riverbed over Cisco for WAN acceleration. I would take

F5 [Networks Inc./FFIV] over anyone for load balancing. I would take

Palo Alto Networks [Inc./PANW] over anyone for firewall.‖

―I never looked at Huawei and probably would not. I don‘t trust them. I

believe that, a while back, they may have tried to steal secrets.‖

―I am not sure about HP. They have an interesting proposition because of their lifetime free maintenance. That

is a fairly big cost savings over time. I would look at them if I were replacing or starting over again. I would

definitely look at Cisco again, too. Most vendors use Cisco as the benchmark for building ancillary technologies. I

do like Extreme a lot and think they have great technology. I am not sure why they have not grown more.‖

Head of a utility-oriented cloud services firm with operations in Latin America; repeat source

Emerging markets are moving straight to the cloud, eliminating much of the projected demand for high-performance

enterprise switching. Cisco is known all over the world as a premium brand but is perceived as too expensive for the

premise-level deployments that global customers need. Huawei is taking advantage of this opportunity. Data center

operators will always require high-performance connections between their own devices in order to run their cloud

environments. Cisco is not an especially dominant player in that market segment.

I would take Riverbed over

Cisco for WAN acceleration. I

would take F5 over anyone for

load balancing. I would take

Palo Alto Networks over anyone

for firewall.

Data Center Operator

Global Investment Banking Firm

Cisco Systems Inc.

321 Pacific Ave., San Francisco, CA 94111 | www.blueshiftideas.com

15

―People thought the next big build for the network equipment makers would be repeating the United States

broadband rollout across China, India, South America and ultimately places like Africa. That‘s not going to

happen. Global enterprise is leapfrogging straight to the cloud and to wireless connectivity. That‘s a different

infrastructure mix, a thinner client-side mix where most of the real heavy bandwidth is broadcast from central

data farms.‖

―What this means is a business in Brazil, for example, won‘t buy a lot of

servers and need to have them all talk to each other. He wants to rent

server time on a cloud that can actually be physically anywhere on the

planet, and then buy the slim bits of firmware he needs to access that

cloud on demand. He wants big wireless. He might want some

switching if he has cable to the premise or legacy wireline to the

premise, but on the whole he just wants the ability to suck spectrum.‖

―Cisco has the switches that would normally go into the premise.

However, by emerging markets standards these are still expensive

devices, and the absolute need for them is lower because of the

wireless/wired issue I talked about. They‘re very well regarded but if

someone buys a switch, they‘ll buy an Asian model from D-Link, Huawei

or someone like that.‖

―In terms of the data center, we don‘t really consider Cisco a high-level

product. It‘s a great product and I should probably take a closer look at

their pricing, but it‘s not one of the names I personally associate with

the heart of a true large enterprise network. It‘s for the last mile, the

user-facing side.‖

―As the cloud transforms Western computing, Cisco is happy to sell its

switches into the holes that are still left to fill. They‘re cheap switches here, and so far the company doesn‘t

seem to have balked at the pricing. I don‘t know if they could raise prices if they wanted to do so anyway. The big

40 Gb, 100 Gb switches, on the other hand, are never going to go into any but the hugest private clouds run by

gigantic enterprises as dinosaur graveyards, and into public clouds. That‘s never going to be a huge market.‖

―We are buying those big switches, and they‘re not cheap. But we‘re building our network of data centers from

scratch—we‘re still a young company without legacy equipment—and so our spend is going to look accelerated

compared to what someone more established is buying.‖

Networking support professional for a Cisco switching product user, China

Cisco is the leader of switching products but occupies only the high-end market because of price. Huawei products are

acceptable for midsize to large enterprises.

―Cisco is the top supplier in switching products market. However, they are challenged in the Chinese market by

their high-priced products limiting them to conduct business with only the large companies that require high

security and the latest innovation. Huawei prices are about half that of Cisco‘s so they dominate the smaller

companies and low-end market. Lately, they have had success attracting higher-end customers.‖

―It‘s very prevalent to see price competition in switching products market. Cisco has pricing pressure by

competing with Huawei too. In order to keep its advantage, it should make supply channels more flexible and

efficient.‖

―The IP-based networking and switching products market is still growing. I think it grows at 15% to 20% per

year.‖

―In the past three to six months, my company has been upgrading networks, but we still choose UTT [Shanghai

UTT Technologies Co. Ltd.] because … we cannot afford Cisco and don‘t need such high-end products.‖

Secondary Sources

A review of secondary sources uncovered discussion of VMware‘s purchase of Nicira, which could allow VMware to compete

with Cisco. Meanwhile, Cisco plans to cut expenses by laying off 1,300 additional employees, but is staying technically ahead

of its competition with the addition of 1-Gb enabled access points and of new switching equipment aimed at the growth of

Cisco has the switches that

would normally go into the

premise. However, by emerging

markets standards these are

still expensive devices, and the

absolute need for them is

lower. They‘re very well

regarded but if someone buys a

switch, they‘ll buy an Asian

model from D-Link, Huawei or

someone like that.

Head of Utility-oriented Cloud Services

Firm

Latin America

Cisco Systems Inc.

321 Pacific Ave., San Francisco, CA 94111 | www.blueshiftideas.com

16

mobile devices accessing networks. Finally, Cisco management voiced its plans to protect U.S. market share and face off with

Huawei in China.

July 24 Information Week article

VMware announced the purchase of Nicira, an OpenFlow networking protocol start-up, on July 23. The company now is

positioned to compete with networking vendors like Cisco, currently a business partner. Sources quoted in the article said

this could be the start of a networking war.

―‗The Nicira acquisition will make the Cisco-VMware relationship much more of a competitive one,‘ said John

Vicenzo, VP of marketing at Embrane, seconded by CEO Dante Malgrino, a 10-year veteran of Cisco, working on

Catalyst 6500 switches.‖

―‗We believe we are in the beginning of the war between physical switch vendors and hypervisor switch vendors,‘

said Kyle Forster, co-founder and product manager of Big Switch Networks, another OpenFlow switch startup, in

an email message.‖

July 11 eWeek article

Cisco expects to be the first vendor to offer 1-Gb access point capability on enterprise wireless local area networks

(WLAN) even though additional technology improvements must be implemented before customers can put it to use. The

achievement may prove to be a valuable competitive advantage and is expected to be quickly mirrored by competitors.

―Cisco Systems says it will be the first networking vendor to deliver 1-gigabit-per-second speeds on enterprise

wireless networks when it introduces an 802.11ac-based access point next year, but a few other things have to

also happen before that actually means something.‖

―Although Cisco may claim bragging rights as the first networking vendor to publicly declare a coming 1G-bps

WLAN access point, Cisco‘s competitors—particularly Aruba Networks [Inc./ARUN] and Hewlett-Packard—may not

be far behind.‖

―While noting that competitors are expected to introduce 1G-bps access points in competition with Cisco,

Current Analysis‘ Spanbauer lauded Cisco for enabling its existing Aeronet 3600 WLAN access point devices

already shipping and installed to be easily upgraded to 802.11ac when the time comes.‖

June 5 Computer World article

Cisco rolled out the ASR 5500 switch designed to improve mobile carriers‘

capacity by 10 times when feeding wireless systems into their wired networks.

The device also will help Cisco become more competitive in the telecom

segment.

―Less than a week after releasing its latest study on global IP (Internet

Protocol) traffic, which forecast an 18x increase in mobile data traffic

between 2011 and 2016, Cisco is rolling out a more high-powered

switch, the ASR 5500, to transport and process that data.‖

―Cisco expects to help carriers save money and effort when they need

to respond to ever-increasing volumes of mobile data traversing their

networks.‖

―The performance boost coming in the ASR 5500 is critical for Cisco. …

Though there are different ways to measure capacity, both Ericsson

and Alcatel-Lucent claim to have terabit-class routers for mobile

networks. … Cisco has to work a bit harder than those competitors to

win mobile deals because it can‘t bundle its equipment with radio

access networks.‖

June 4 The Economic Times article

After losing share to several competitors, Cisco management announced its intentions to protect its U.S. market and beat

Huawei in its home market of China.

―Five years ago, with a grand plan to conquer the East, networking giant Cisco Systems opened a front in

Bangalore, and posted its trusted generals to lead the march.‖

―What it did not plan on was fighting a Chinese dragon—rival Huawei Technologies—which is chomping away at

Cisco‘s market share. To its credit, Cisco now admits the threat and is gearing up to take the spectre head on.‖

The performance boost coming

in the ASR 5500 is critical for

Cisco. … Though there are

different ways to measure

capacity, both Ericsson and

Alcatel-Lucent claim to have

terabit-class routers for mobile

networks. … Cisco has to work

a bit harder than those

competitors to win mobile

deals because it can‘t bundle

its equipment with radio access

networks.

Computer World Article

Cisco Systems Inc.

321 Pacific Ave., San Francisco, CA 94111 | www.blueshiftideas.com

17

―While Cisco used to be a dominant player, rivals such as Juniper Networks, Hewlett-Packard and Huawei have

been steadily eating into its market share, according to Naresh Singh, principal research analyst at research firm

Gartner. Juniper has roughly 9% market share in the router and switches segment and is looking to double its

share, while Huawei has a 10% market share, data from research firm Infonetics Research show. In routers and

network switches, Cisco‘s share has fallen to 55% from 66% five years ago, IDC data from last year show.‖

―[Cisco CEO John] Chambers went a step further to say that Cisco wouldn‘t stop at protecting its home market—

the US—but will aim to beat Huawei in their home market China as well. It remains to be seen if Cisco and

Menon can walk the talk when it comes to taking on the Chinese rival.‖

Additional research by Scott Martin, Diane Hembree, Seth Agulnick and Silvia Yu

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