Original URL: http://www.theregister.co.uk/2011/04/12/cisco_consumer_restructuring_servers/

Cisco Flips consumer unit out with trash

John Q Public is an adjacency too far

By Timothy Prickett Morgan

Posted in Data Networking, 12th April 2011 14:42 GMT

Selling digital gadgets to consumers and breaking into the server racket, all the while alienating some of the server-makers who were pushing Cisco Systems networking gear, has been tough on Cisco's profits in recent quarters. And the restructuring that the networking giant has announced is an admission that things are not going as planned.

As El Reg previously reported, Cisco CEO and chairman John Chambers last week posted a long mea culpa memo to employees, admitting that the company's strategy of moving out beyond its core switching, routing, and telepresence businesses into 30 market adjacencies – including a number of different and not particularly profitable consumer products – had not been good for Cisco's bottom line or its morale. "We have disappointed our investors and we have confused our employees," Chambers wrote.

Gary Moore, who used to run Cisco Services and who was named chief operating officer at the company in February, was given the task of coming up with a restructuring plan. But Chambers is still doing the talking.

"We are making key, targeted moves as we align operations in support of our network-centric platform strategy," Chambers said in the statement announcing the restructuring. "As we move forward, our consumer efforts will focus on how we help our enterprise and service provider customers optimize and expand their offerings for consumers, and help ensure the network's ability to deliver on those offerings."

That plan is more or less what Wall Street and Cisco partners had been expecting. First and foremost, Cisco is mothballing its Flip video camera business, for which the company expended $590m in stock and $15m in retention bonuses back in March 2009.

In the statement released this morning before Wall Street opened up for business, Cisco said it would close down this business and "support current FlipShare customers and partners with a transition plan." It is a wonder that Cisco could not find someone to take Flip off its hands, but perhaps it is less embarrassing to kill it then to sell it for a fraction of what Cisco shelled out for it two years ago.

Cisco is also pulling its Umi home telepresence product line into its Business TelePresence product group, and will furthermore sell the product through its enterprise and service provider partner channels instead of directly. The Umi home video conferencing system was launched in October 2010, and not exactly to rave reviews because it was expensive relative to most consumer budgets.

The company is also refocusing its Linksys and Valet home router businesses "for greater profitability and connection to the company's core networking infrastructure," according to the statement, which adds that high-speed networking is expanding into the home environment, driven by video content of various kinds. Cisco will continue to sell home networking products through retail channels, as it currently does, but it looks like Cisco is trying to figure out how to use more common parts across its enterprise and commercial routing products to get the gross margins up where they belong.

Finally, Cisco said it was mulling over what to do with the Eos digital content management system, which is a service that is hosted in Cisco's data centers and delivered under a SaaS pricing scheme. Eos is a homegrown product, coming out of its Media Solutions Group, that Cisco launched in January 2009. It is not easy to reckon what Cisco is contemplating with Eos from its statement. Just try: "Assess core video technology integration of Cisco's Eos media solutions business or other market opportunities for this business."

Cisco said in its statement that it would book charges against its third and fourth quarter fiscal 2011 financial results for no more than $300m to cover the restructuring in these consumer businesses. The charges will be detailed in a future conference call with Wall Street, and will include laying off approximately 550 employees in the fourth quarter.

Turning HP and IBM into 'frenemies': Not so clever now, heh?

Cisco's problems run deeper than having $40bn-deep pockets that allowed it to indulge in its expansion into lower-profit consumer businesses that, in theory and very likely in practice, would have helped drive up network bandwidth demands at service providers and inside of corporations.

What seems to have escaped Cisco is that the network traffic was going to go through the roof even if it never expanded into these consumer adjacencies, as Chambers talks about them. And, more importantly, network requirements would have busted through the ceiling even if Cisco did not make a move two years ago into the converged server-networking market with its "California" Unified Computing System. Millions of Apple iPads and a zillion smartphones were going to do the job, along with Netflix, YouTube, Hulu, and other video-streaming services.

All Cisco had to do was wait, and then count the money.

All Cisco seemed to be focused on was growth for the sake of growth and propping up its share price. This is a mistake that young companies make. It nearly killed IBM two decades ago, for instance.

As a server market watcher, I welcomed Cisco's entry in the server space two years ago because of the interesting value proposition that Cisco was offering and because of the engineering work the company had done to make a converged blade server platform. Cisco shook things up, that's for sure. But maybe more things got shaken than Cisco was bargaining for.

Turning Hewlett-Packard and IBM into frenemies instead of allies in the networking arena may not be worth it, over the long haul, if Cisco cannot maintain a sustainable engineering and price/performance advantage with its UCS machines over these two server makers. Particularly with Juniper Networks, Mellanox Technologies, Arista Networks, Extreme Networks, and others that compelling alternatives to Cisco gear.

HP made a decision to get serious about networking ahead of Cisco's jumping into the server racket, so maybe HP started cheating on Cisco first. The poker cards were in the air and the guns were out by the time HP shelled out $2.7bn to buy 3Com in November 2009. IBM ate Blade Network Technologies for $400m last September and is rebadging Juniper and Broadcom gear, a big reversal for Big Blue. The company sold off its networking business to Cisco in 1999 and became one of its biggest champions in the data center.

It is hard to say how much of an impact the lack of pushing by HP and IBM, the two largest server makers in the world, has had on Cisco's top and bottom line. And with upstarts like Arista Networks coming out with faster and denser switches, Cisco has problems here, too.

Cisco's statement today did not address any of this, of course. Wall Street and the Cisco top brass want a scapegoat and it is getting one in Cisco's consumer businesses. We get the feeling that this is far from over, particularly if sales of UCS servers, either directly or through the Acadia Vblock partnership with EMC and VMware, do not pick up.

Cisco has done remarkably well in ramping up its UCS business – as well as Sun Microsystems did with its initial Opteron-based Sun Fire x64 servers back in the middle of the last decade. But a strong start does not make a business sustainable and profitable at a level to which Cisco shareholders have become accustomed. ®