Yesterday Cisco announced that it will lay off 6,500 employees and sell a manufacturing plant in Juarez, Mexico to Foxconn to shave off an additional 5,000 employees. This follows Cisco’s decision to discontinue its Flip camera products and its Eos video/social platform.
It wasn’t long ago that Cisco was expanding into new markets and burning through billions of dollars acquiring companies like WebEx, Tandberg and Flip. So what happened?
Too Much Success
Cisco’s current predicament is a classic story of being the victim of one’s own success. During the peak of the dot-com bubble, Cisco passed Microsoft to become the most valuable company in the world. After all, the company was selling the gear that made the Internet work. It was also seeing some success as it expanded into corporate VOIP products, which we’ll come back to.
The crash hit Cisco hard. Just a year after surpassing Microsoft in market cap, Cisco had laid off 11% of its workforce. The trouble for Cisco was two-fold: 1) It owned its market, but if the market took a dive, so did Cisco. 2) Investors wanted growth, and the enterprise network hardware market seemed to have grown as much as it could. On the occasion of Cisco’s acquisition of WebEx in March 2007, ZDNet’s Marguerite Reardon reported that Cisco had between 70-90% of the switching and routing market, but investors – like they always do – wanted to see more growth.
Cisco started down its new road to diversification in 2003, when it acquired Linksys for $500 million, bringing Cisco into the consumer networking market. According to Reardon this was not only a new market for Cisco, but a new approach to acquisition. Previously, Cisco had mainly acquired smaller companies, often ones that hadn’t even brought their technology to market yet. In this case, Cisco bought a market leader to enter a whole new market.
Cisco followed the Linksys acquisition with the $6.9 billion acquisition of Scientific Atlanta, a company that sold broadband networking technologies such as digital cable boxes and cable modems.
By 2007, Cisco claimed that half of Internet-connected U.S. households used either Linksys or Scientific Atlanta products. With both the home and enterprise networking gear markets all rolled up, Cisco was going to have to continue expanding into new markets. And to avoid more of the antitrust accusations the company faced in 90s as it expanding into offering telephony products, it was going to have to venture outside of the network hardware world.
The Great Social and Collaboration Grab of 2007
In early 2007, Cisco moved into completely alien territory by acquiring white label social network vendor Five Across. That was followed by the acquisition of certain assets of Utah Street Networks, the company behind the social network Tribe.net.
But these acquisitions weren’t big bets. It was Cisco’s $3.2 billion acquisition of WebEx in March 2007 that really marked the beginning of the new Cisco. This was a big ticket acquisition of a market leader in a genuinely new market for Cisco – a real sign that Cisco was serious about moving beyond networking gear and into software.
Cisco rounded out 2007 by announcing Eos, a platform for delivering multimedia social websites probably powered by the Five Across and Utah Street technology.
Cisco’s most well known diversion into other markets was the acquisition of Pure Digital Technologies, the company behind the Flip Video camera. It may seem like a bad move now, but it has to be considered within the context of Cisco’s video strategy at the time.
Cisco’s Video Obsession
As Cisco was expanding into the social and collaborative space, it was also pushing deeper into video. While the company’s social networking ambitions may have seemed to have come out of the blue, video was a more natural progression.
In the 90s, Cisco began expanding into telephony by launching its earliest VOIP products and via a series of acquisitions. It seemed like a natural fit with its existing enterprise network infrastructure products, but as noted earlier it led to some scrutiny from the FTC. Video was always a part of the equation.
Cisco launched its Telepresence line in 2006. Despite being priced at $300,000 during the midst of a recession, Telepresence was Cisco’s fasting growing product in 2008 according to Fast Company. Cisco was also running its own internal YouTube-like video sharing site for employees. Video was so central to the Cisco of 2008, there was even speculation that Cisco would buy Adobe.
In January of 2009, not long before the Pure Digital acquisition, Chris Arkenberg wrote: “Anything that drives more bandwidth through those increasingly clogged arterial Intertubes makes Cisco very happy. Video is huge and hosting more and more of it will require companies to budget for bigger & better routers to handle the throughput.”
The Pure Digital acquisition must have seemed like a natural intersection between Cisco’s successful consumer technology lines and its burgeoning enterprise video technology.
Party’s Over
Maybe the cracks were already showing as far back as 2008 when Cisco started losing network equipment marketshare. The company also quietly laid off 2,000 people in 2009.
But for the most part the social and video party continued. Cisco released its enterprise social networking platform Quad in June 2010, and announced two social CRM products in November 2010.
The party finally came to an end in April when Cisco announced that despite selling 2 million Flip Video cameras, the product would be discontinued. It announced the end of Eos in May.
What Now?
The general consensus is that the Flip just wasn’t generating enough profit, probably due to the rise of smartphones that can shoot and share video – something Cisco should have seen coming in 2009. Cisco has talked about restructuring and refocusing, but we’re not sure what that means yet.
In an internal memo released to the public, Cisco CEO John Chambers wrote: “As I’ve said, our strategy is sound. It is aspects of our operational execution that are not.” But there was still no clarity as to what, specifically, Cisco will be changing.
At the moment, Cisco is still promising consumer technology, video technology and social technology. What else, if anything, will be cut remains to be seen. Rumors have been circulating that the company may next sell off WebEx and Linksys.
In the meantime, Cisco has lost marketshare in its most important area and as Stacey Higginbotham of GigaOM put it, “it also allowed rivals to set the agenda for the next big trend in networking: the idea of one unified network.” Higginbotham is referring specifically to OpenFlow, a foundation consisting of companies like Facebook, Google and Yahoo which we covered here.
Big data and cloud computing are changing organizations’ networking needs. Companies like Dell, HP and Oracle have been taking advantage of this. Cisco hasn’t completely missed the cloud ball – it has its Unified Computing System. But there’s a perception that while it was screwing around with video, Cisco was ceding the cloud to other vendors. Cisco was expanding into other markets in a futile attempt to please investors and in so doing it may have done serious damage to its core business.
Are things really so dark for the company? Probably not. Cisco still has an impressive marketshare, and the sorts of technology coming out of OpenFlow won’t be applicable to every business.
But as a public company, Cisco’s fate (much like that of RIM) remains as much in the hands of investors as it does of customers. The good news for Cisco is that good products and profitability never go out of style and Cisco is in nowhere near the predicament RIM is in.
Disclosure: HP and IBM are ReadWriteWeb sponsors
