Ok, first, Cisco is far from dead. Any company with 40+ billion dollars in revenue (and still profitable) is not doing all that badly. However, they are seeing incredible pressures from many different sources right now (a sinking demand in some areas, continued pressure from competitors and a lack of sales growth in many emerging markets).
In their upcoming quarterly release, Cisco missed profit estimates by a pretty wide margin. As well, they have lowered down their expected growth rates (by 50%). They have tried to keep costs under control (by shedding tens of thousands of jobs), but at some point, you can only cut your way to profitability for so long…..you need to resume growth of your topline.
In order for their future growth plans to look more rosy (and so that investors don’t jump off of this stock like it was on fire), Cisco has presented IoT as their big growth engine. It went on to talk about how it was going to be the future of the company.
However….can IoT make much of a difference in the short, medium and long term for Cisco?
Cisco is a really big company….I mean, like, really big. This is a company that sells 4B in a month. For a new product family to make a significant impact on Cisco’s top line, it would have to be selling at least 300-500M per month, and there is no way that IoT will be anywhere near there in the next year.
More importantly, a company is run not by what revenue comes in from the top but rather by what revenue falls to the bottom line. New product mixes aren’t usually profitable for the first little while. There are significant costs to getting projects / products off the design table and to the point of making money. Cisco made a large investment in IoT, and in order for it to grow to the point that it needs to, it will have to invest billions more. So, the odds of it having ANY positive effect on the bottom line is likely quite small.
Ok, how does a company move an idea into a multi-billion dollar income stream on an annual basis? Some companies will take the long route…they will grow the product organically, making the occasional tuck-in acquisition to help bolster new markets or to add new technology/skill sets that they were missing (SAP comes to mind here).
However, I suspect Cisco will take a page from Larry Ellison’s book and just buy their way into this market. It is quite reasonable to see Cisco making acquisitions in a number of different areas. An acquisition of a company like Sierra Wireless would make a lot of sense. Cisco would be able to use a lot of their technology “know-how” to bolster their Linksys line, to better attack the home and SOHO market. As well, Cisco has made steps into the rugged mobile space, and since this is where Sierra is dominant, it would be a great tuck-in step. Finally, Sierra’s AirPrime division could be very beneficial to Cisco’s plan to create a complete eco-system.
As well, I suspect that they would try to get heavily into the Big Data space. While companies like IBM and Oracle have ventured in here, there would be a few strong targets for Cisco to bolster its recurring revenue model.
All of these acquisitions cost money and take time to reap the benefits. I would think that in the later part of the “medium term”, Cisco would start to see some serious benefits from these purchases.
I have said before in previous blogs that Cisco is well positioned to dominate much of this space. They have products in many homes and businesses that could easily be leveraged to produce IoT solutions. As well, they are a trusted name in much of the Enterprise / Government space, and would be able to get in front of the right people to push these solutions. Finally, they have a strong understanding of how to integrate hardware and software, something that most companies do not understand.
I think Cisco will succeed in the IoT space….if they want to. This was something that was pointed out in a Rant by my business partner, Richard Hobbs, recently. I loathe the idea of agreeing with Richard on most things, but I do agree with him here. I am not convinced that Cisco is really in this for the long-term. I see them being under such pressure to produce that they are not likely to want to play the long-term game that may be required to be the dominant force in IoT.
The idea of Cisco going bankrupt doesn’t make sense to me, and is extremely unlikely. They do have good positions in many key markets and they should see some of those woes go away over time. I think they can be great in the IoT space, but it will take time, and this may be a luxury they do not have.
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