| Cisco Systems (CSCO) 35 11/16 +1 1/8: Since we covered the Cisco numbers pretty exhaustively on our Short Stories page late yesterday, we want to take a different look at the company this morning. Clearly, the company is suffering broadly from the economic slowdown and specifically from the capital shortage in the service provider sector. Those factors are cyclical, and Cisco will not suffer any permanent damage from either. The question that must be asked, however, is whether something more enduring is at work here. Is it possible that cyclical weakness is being used as a scapegoat for more damaging long-term shifts in Cisco's business? We have been writing for months that Cisco's market is changing to one that values best of breed over best of brand. Service provider customers are much less impressed with the Cisco brand than enterprises -- they are interested in the best technology, and Cisco often doesn't offer the best technology. There is a reason why Juniper (JNPR) has gone from 0% market share of the core router segment just a couple years ago to roughly 30% today. That gain has been Cisco's market share loss. Many other competitors are also attacking Cisco in the service provider segment, including NT, LU, CORV, CIEN, SCMR, RBAK, and ONIS. They won't all beat Cisco, but the competition is intense and the playing field is not as familiar to Cisco. Also notable is that even the enterprise market appears to be deemphasizing brand and placing more emphasis on best of breed. Extreme Networks (EXTR) has seen strong growth in the enterprise switch business which is Cisco's home turf. To be sure, the Cisco brand still counts for a lot in the enterprise business, but there does appear to be a subtle shift in attitudes underway. As networking technology moves from just an internal plumbing issue to a key competitive asset, enterprises are becoming more focussed on buying the best instead of the best-known. Cisco will undoubtedly recover from the cyclical issues plaguing the entire technology sector, but a key question for the market is whether these cyclical factors are the only reasons for the weakness expected in Cisco's business over the next two quarters. The danger is that other, less obvious changes are occurring in the industry that will leave Cisco as a less dominant force in the industry when the economic clouds clear. - Greg Jones, Briefing.com |
