Cisco takes it to the next level

Cisco announced their Q1 FY2007 results last night. There was rejoicing in the Street (Wall Street, that is). Lots of other folks cover the specifics of their revenue numbers and the like. That's for other Wall Street types to deal with. All I know is that they grew about the size of Juniper year over year, which is astounding growth given Cisco's size and that we have not been tele-ported back to 1999.

Reading the earnings call transcript (here), you see a bunch of interesting quotes from John Chambers. On the quarter: "It is very difficult to single out unique products in Q1 because, candidly, all of our top products did remarkably well." They did mention routers, switches and wireless, VoIP and networked home from the Advanced Technologies group.

But what about security? Interestingly enough, Cisco mentioned security grew in the "high single-digits." It is a bit interesting that security was not part of the spending orgy.

I can already hear the Cisco-haters out there saying it's because their products are not "best of breed" and the NAC Framework doesn't work. Yada Yada. The other security vendors shouldn't get complacent. Why? Because Cisco is proving that "Big is the new small" and that increasingly carriers are embracing Cisco as a "strategic partner" as the enterprise has for years.

To get a feel for what that means in the enterprise, here's another Chambers quote from the earnings call: "Today, I would say in the enterprise customers, especially the Fortune 500 around the world, maybe more than half of them use Cisco as a strategic partner, and a huge number of them standardize on us architecturally." To me "strategic partner" means sole source, or basically you need to knock the champion out to even have a chance to compete.

This is bad news for pretty much every security vendor that is not Cisco. As Cisco increasing controls all levels of the network architecture, that is going to drag along a lot of security products by default. Other vendors won't lose to Cisco because they'll never get the chance to play.

This is happening today. In some recent vendor briefings, quite a few made the point that they don't lose to Cisco if the procurement gets to an eval. But the vendors next sentence is about how they aren't in enough deals. The universe of competitive deals is going to continue to get smaller.

How does this happen? Don't technology buyers know they should talk to multiple vendors? What's in play here is what a former boss of mine called the "secret yearning" back to the days of IBM ruling the world. These folks appreciated when IBM did everything. This miss it because the Big Blue made their life easier and their stuff worked good enough. Until it didn't, and then they had to adapt. They didn't like that adaptation process too much.

Cisco now gives them a feasible way to get back to the days of yore. At this point, Cisco is so well regarded at the CEO/CIO level that it's OK to just buy from them. And it isn't going to get easier to compete, because Cisco plan is to own everything that has to do with the network and then some and integrate it together. More words from Chambers: "I think what more and more people are realizing is that these products will be loosely and then very tightly coupled."

To bring that back to our world, the security products are now loosely coupled with the networking stuff. Very loosely. But if you hear the story and see the roadmap they've laid out - security is everywhere and that's when it's "tightly coupled."

Cisco will sell lots of security products because it's a network after all, and it needs to be secure. And if anything, organizationally the responsibility for network security is increasingly falling back into the hands of the networking folks. Right, that means more Cisco.

Just to be clear, I'm not a fan of sole sourcing much of anything. I think there are risks in getting everything from one vendor. But the pragmatist in me also realizes that integration reduces the cost of operating an environment and makes managing the environment easier. Especially in resource and money constrained mid-market companies.

So what's my point? Basically, Cisco has a controlling position in all aspects of networking, across most customer segments (except maybe SMB) and all geographies. Their early strength in the enterprise is leading to strength in the service provider and the service providers and retail channels will continue to drive Cisco (at least the Linksys and Scientific Atlanta operating units) into the home.

Cisco has replaced Intel as a dominant market maker. There are legitimate alternatives to Wintel now. Of course Intel is still a huge company, but they are much less influential in setting direction and just dominating the mind share of technology buyers. Microsoft is still there, but now it's Cisco as the clear other guy. As I mentioned in my Battle of the Titans Incite from January (Redux here), these two are going to fight over control of the security infrastructure. That's pretty obvious now.

And what does the mean for every security vendor that is not Cisco or Microsoft? It means you better have a good answer as to how you fit in a Cisco and Microsoft world. And that you are fighting for the minority of the market that doesn't want to go end to end with one of the dominant players.

So where are Cisco's blind spots? First they have to execute on the vision. They have laid out a pretty compelling roadmap for security, but it's not even close to being there. Customers will wait, because it's Cisco, but not forever. Interestingly enough, it'll come from one of two places.

As always, they need to be wary of new competitors with disruptive technologies. But given how long it takes to upgrade networks, I don't see that really happening. AMD is making inroads on Intel because the switching costs are low and there is no real performance impact. All of the stuff works together. Routers and switches are a tougher sell. Sure big companies usually have more than one player, but a bulk of the business goes to the leader. This is evident in routers. Juniper has done a good job of becoming the #2 in routers, but it's not like they are threatening Cisco's dominance.

More likely, it'll be some type of anti-trust action. You know the old adage: "If you can't beat 'em, they must be a monopoly, so sue 'em." I don't know from where or why someone would bring an anti-trust suit against them, but it's bound to happen. They are getting too big and too successful. In a fit of desperation, perhaps a Nortel or Alcatel move to prove Cisco cleaned their clock because they didn't compete fairly. Stranger things have happened.

You'd hope that Cisco will learn from Microsoft's and now Intel's experience dancing with that Devil, and John Chambers does spend an awful lot of time in Washington hobnobbing with influence peddlers (neither Bill Gates nor any of the Intel CEO's were particularly interested in playing that game). But how else is anyone going to find a chink in their armor?

Seriously, I'm interested in other opinions. Add a comment to the post and we can get a dialog going.