Moving On Down

he recent push by Cisco Systems into the SMB market has some small-business solution providers wondering if the vendor is venturing into unfamiliar territory without a map.

Promising to invest $2 billion in the effort, the enterprise networking behemoth this summer said it plans to launch some 30 products in the course of a year specifically targeted at the SMB market. That followed the launch earlier this year of the SMB Select partner program, a somewhat scaled-down version of Cisco’s existing partner program, designed to make it easier for smaller VARs to work with the company.

As it makes these moves, Cisco contends that it will have no problem maintaining its high-value, high-price image in a market known for cutthroat price competition.

However, the fact that a company used to 65 percent margins on its products is moving into a market known for razor-thin margins has many in the industry asking, Does Cisco get small business?

Indeed, in a recent CRN online poll, 41.5 percent of respondents said Cisco should stick to what it does best--targeting the enterprise--and leave the SMB market to the established players. Some 37.7 percent of respondents gave Cisco the benefit of the doubt, saying success will depend on what happens over the next year. Only 20.7 percent of respondents said Cisco has what it takes to connect with the SMB market (see chart below).

“Cisco has a great channel for the enterprise, but they don’t understand the SMB market,” said Shane Vinup, president and CEO of Cyber Advisors, a Brooklyn Park, Minn., solution provider that handles Cisco and D-Link networking gear. “Their salespeople, especially, don’t have the patience for the SMB market.”

Cisco’s SMB moves also have many solution providers questioning where its Linksys division fits into the mix.

When Cisco bought Linksys to get a piece of the home networking market, Linksys was already well on its way to becoming a player in the small-business networking space.

Since the acquisition, Cisco has continued to categorize Linksys as a home or SOHO networking player, only recently upgrading its role to include small businesses with 20 or fewer employees. All the while, Linksys has pursued its small-business networking strategy, adding new, more robust products and in February launching its Partner Connection channel program, which now has more than 3,000 registered VARs.

But the words of Cisco and the actions of Linksys created confusion in the channel. With Linksys pushing up and Cisco pushing down, where does one stop and the other begin? It’s a question both Cisco and Linksys partners are asking. And a question neither company has had much of an answer for yet.

To clear up some of the confusion, the two companies are moving away from a “seat-count” definition of small business and instead are going after different customer profiles. Simply put, Linksys will focus on products that are easy to install and can be managed by an end user, while Cisco will focus on products that require professional installation and management.

But is the message getting out?

“I haven’t gotten a clear picture from them yet,” Vinup said. “But I do understand they are trying to reinvent a part of their business, and it’s important not to dilute the Cisco brand name. There is a lot of investment and trust in the Cisco brand name.”

Jack Brandt, president of Technology Support in Houston, agreed that Cisco hasn’t been clear on its positioning of Linksys. Both a Linksys and a Cisco partner, Brandt said sometimes there are clients that could go either way. “In those cases, you have to go with your gut,” he said. “If you have a 50-user environment and they want wireless, it really depends on the network. Every network is unique. They are all custom-built.”

If customers want VoIP, the obvious choice is Cisco, Brandt said. “But if they are just going to be routing e-mail and going to the Web, they could go with Linksys and save a lot of money,” he said.

Gia McNutt, CEO of Special Order Systems, a Rocklin, Calif., solution provider that sells both Cisco and Linksys, concurred. “A lot of small businesses buy on price instead of on features,” McNutt said. “We will always lead with Cisco, but there are some companies that think it’s too expensive. Those are the customers we steer to Linksys.”

That’s fine with Charlie Giancarlo, president of Linksys and CTO of Cisco. In the SMB space, “Cisco is focusing its efforts on products with high added value and pricing them accordingly,”he said.

Paul Mountford, senior vice president of worldwide channels at Cisco, said Cisco does indeed have a map of the SMB market, and that map shows the location of customers willing to pay more for Cisco.

Cisco is targeting the SMB segments that are looking for high value and high feature sets, he said. Cisco breaks the market into four tiers: enterprise adopters, or small businesses that behave like enterprises; cutting-edge adopters that value technology and use it as a strategic advantage; value-price adopters that use technology but are driven by price; and “laggers,” companies that adopt technology late in the cycle because they have to remain competitive.

According to research from AMI Partners, the 470,000 enterprise-type companies that comprise the first group account for about 45 percent of annual IT spending by SMBs; the 1.3 million companies in the second group, the cutting-edge adopters, represent about 31 percent of the money spent; the 1.8 million price-driven companies in the third group account for 16 percent of the market; and the 3.6 million companies in the latecomers group represent just 8 percent of the market.

Cisco’s SMB offerings will be targeted at the first two groups, Mountford said, while Linksys is aimed at the third.

“We can talk about a 20-seat company, and we have, but what really matters is what tier that company falls into,” Mountford said. “A 20-person financial services firm will require more sophisticated technology than a car wash with 200 people.”

To bridge the categories, Cisco and Linksys in September launched a program that lets customers trade in their Linksys products for Cisco gear as their networking needs become more complex. Focused on Linksys’ small-business product line, the Linksys To Cisco Trade-Up program provides Linksys customers with mail-in rebates of up to 100 percent of the purchase price of their Linksys gear when they trade it in for selected Cisco products, said Allen Powell, director of channel sales for Linksys.

“I think it’s a smart move to give them a way to trade up as they grow,” McNutt said. “It really makes the connection between Cisco and Linksys.”

Faced with Cisco’s imminent entry into their market, plucky small-business networking vendors and their solution provider partners are rallying around a unified battle cry: Bring it on.

Keith Karlsen, executive vice president of D-Link, said Cisco is going to have a tough time moving from the Fortune 100 to the little guy. “Cisco can release as many products and programs as it wants. I am not worried,” he said. “I’m not sure Cisco has the inclination to deal with the realities of the small-business market. They are telling us that pricing isn’t an issue for small business, and it is.”

Helen Chan, a Yankee Group analyst who specializes in the SMB market, agreed. Small businesses look for reliability, security and feature sets when shopping for IT products, but price is a very important factor, regardless of the type of business, she said.

“From a brand perspective, Cisco has an edge because they are known as being very reliable,” Chan said. “But they also are known as being very expensive.”

For his part, Cyber Advisors’ Vinup is sticking with D-Link in the sub-100 space. “D-Link started in the small space and is working its way up into the enterprise,” he said. “That gives them a lot better understanding of what small businesses need. They need all the features, but they also need an affordable price.”

For now, Cisco still isn’t the first company that comes to mind when you think of small business. But if it releases the right set of products and sharply focuses its relationship with Linksys, even skeptical solution providers say it could become a strong competitor in the SMB space.

 Published for the Week Of October 11, 2004