Is Cisco In Danger Of Losing Its Networking Crown?

As Cisco Systems continues to diversify its product offerings and move from being just a routing and switching vendor to a full solution player, it's opening the doors for others to stake a claim on some of Cisco's turf.

While VARs typically see Cisco as the top dog of networking technologies, they are noticing other players creeping up, with ProCurve Networking by HP and Juniper Networks being the two most notable threats.

A recent UBS Investment Research survey found that Cisco is losing some of its clout with solution providers, likely due to it focusing more on segments like VoIP, security, wireless, Web 2.0 and a host of others.

Cisco putting its hands in several cookie jars, coupled with fluctuations and uncertainty in network spending, has VARs keeping a keen eye on other, lower-cost networking vendors they say could prove to be true rivals for the incumbent champion's network supremacy.

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"If I was Cisco I'd definitely be wondering what's going on," said Jamie Vost, vice president of sales at Novanis Enterprise Solutions, a Springfield, Ill.-based solution provider.

The UBS survey found that solution providers are seeing the competition heating up to control the enterprise LAN and that more VARs will turn to alternative vendors to fill their customers' needs, mainly due to the lower costs and higher returns. According to the survey, VARs see ProCurve and Juniper chipping away at Cisco's visibility in the channel, mainly due to their lower cost and mostly similar functionality.

Another recent survey, performed by Goldman Sachs, also showed that Cisco is slipping in routing and switching, despite seeing market-share increases in nearly every other category it serves. In enterprise routers, Goldman Sachs said, Cisco declined from 84 percent to 82 percent market share and in switching it dipped from 71.7 percent to 71.4 percent.

As VARs see other networking vendors clawing and scratching in their fight to be No. 2 to Cisco's No. 1, UBS's survey found that enterprise demand for Cisco gear is weakening, opening the door for the ProCurves and Junipers of the world to swoop in and snag a piece of the action.

According to UBS, surveyed VARs expect just 4 percent growth from Cisco gear over the next 12 months. That's down nearly a half-percentage point compared with a March 2008 survey and down 1.8 percent from a year ago. In Europe, VARs expect to see only 1.6 percent growth from Cisco sales. In addition, 58 percent of VARs expect to see weaker orders, compared with just 33 percent expecting weaker orders in March.

Frank Kobuszewski, vice president of the technology solutions group at CXtec, a Syracuse, N.Y.-based solution provider, agreed that smaller, lower-cost vendors are popping up more frequently on VAR radar screens, but he said Cisco's large installed base could keep the competition at bay for the immediate future.

Cisco still has "a massive switch installed base," Kobuszewski said, adding that roughly 50 percent of CXtec's hardware sales are switches. Still, Kobuszewski said, vendors like ProCurve, Nortel Networks, 3Com and Juniper are making strides in the bread-and-butter networking arena as Cisco spreads its wings further to incorporate other technologies.

"They all make very good switches," he said. "And when it comes to the edge, a switch is a switch."

Don Gulling, president of Ocala, Fla.-based solution provider Verteks Consulting, a large 3Com partner, agreed. He said the current economic climate is ripe for smaller, value-conscious brands to infiltrate networks while also creating opportunities for smaller VARs to engage larger customers that once ignored them.

"Now we're seeing those customers giving us a shot," Gulling said. "I do see customers re-evaluating their vendor relationships and giving smaller IT shops another chance. Customers are willing to listen now and VARs have got to be on the lookout for that."

Kobuszewski said that despite more vendors looking to erode Cisco's market share, he hasn't noticed their products garnering higher margins just yet. But as customers are looking for the best price for performance available, VARs are seeking out alternatives.

"The more alternatives that we have to let the customer know they've got choices, the better off we are," he said. And for Cisco to maintain its dominance it has to not only focus on the advanced technologies it has begun offering, but also keep alive the message of its "foundation business," which is routing and switching, Kobuszewski added.

NEXT: Where HP Is Gaining Ground

Novanis' Vost, however, said he's seen first-hand how lower-cost competition can change the game. Novanis deals both in Cisco and ProCurve. In the six years it been a ProCurve partner, he said, he's seen the Palo Alto, Calif.-based networking arm of HP slice up pieces of Cisco's pie, offering him strong profits at the same time.

"What I've seen the last 12 to 18 months, I've seen ProCurve taking off," he said, adding that some large accounts, including major universities, have started taking out their Cisco gear and swapping in ProCurve.

And that's not just happening at the edge, it's happening at the core as well.

Vost said part of the dynamic stems from ProCurve's lifetime warranty on most of its gear, which in rocky economic times can be perceived as an attractive alternative to Cisco's SmartNet maintenance program. Add to that the generous margin typically offered by alternative vendors, and Cisco partners will start to take note, he said. ProCurve has also gotten more aggressive with partner programs, marketing campaigns and rebates, helping it connect with VARs and flex its muscle.

"It's kind of like a perfect storm, and I think ProCurve is going to explode," Vost said.

Going back three to four years, Vost said his business was split 90 percent Cisco and 10 percent ProCurve. Year by year, ProCurve sales have grown as Cisco has declined. Vost predicts that in a year or two his Cisco and ProCurve businesses will be split at an even 50-50. For Vost, ProCurve gear has become easier to sell as his base of clients seeks out lower-cost alternatives.

In its VAR survey, UBS cited ProCurve as Cisco's "main long-term threat" and Cisco's biggest LAN switching competitor. Seventy percent of respondents said HP would be more successful in its Cisco coup if it expanded outside LAN switching into other networking product areas, such as ProCurve's recent acquisition of wireless networking vendor Colubris.

Sixty percent of VARs surveyed said they see ProCurve and other low-cost alternatives stealing away Cisco partners.

"ProCurve is the real threat at the low end for Cisco," said Yankee Group Senior Vice President Zeus Kerravala. "A lot of companies want an alternative to Cisco. With ProCurve, you get a lot of the functionality of the Cisco switch, just not with all of the features."

Respondents to CRN 2008 Channel Champions survey also noted that ProCurve can turn a strong profit. In the SMB networking space, ProCurve beat out Cisco from a financial perspective, raking first for product margins, spifs and rebates, along with its service attach rates.

Despite ProCurve's increase, Kerravala noted, Cisco will still continue to perform. Kerravala said Cisco will always have an edge based on its high-quality gear and expansive feature set. Companies that buy Cisco and VARs that sell it know Cisco carries a premium price tag, but they also know what kind of bang they'll get for their buck, he said.

"A Cisco switch will do more than ProCurve's," Kerravala said. "The reason people continue to buy Cisco is you have a large installed base of Cisco-certified engineers out there. The cost of running an alternate vendor from an operations standpoint is more expensive. But there will always be VARs that want an alternative to Cisco, especially in the data center."

And while Cisco refuses to directly discuss the competition, it is no stranger to competitors. Cisco is quick to point out that for VARs selling point products and solutions, a quick and high margin may be attainable, but VARs can boost their overall value with Cisco's solution-based approach.

"We do embrace good, healthy competition," said Wendy Bahr, Cisco's vice president of channels in the United States/Canada theater. Regardless, Bahr said, Cisco does not let the competitive landscape influence its decision-making. Cisco has gotten to where it is, she said, by listening to partners and customers and launching a full solution play as opposed to a string of point products and pieces.

"Customers want turnkey, end-to-end, robust solutions," she said, adding that the solution approach gives VARs the opportunity for added revenue through services wrapped around Cisco's technologies, something other vendors lack.

"The market condition is in a state of flux," Bahr said. "Even if the macroeconomics are worrisome, at this point in time what customers and partners want to achieve is a solution to a critical business issue. What I listen to the most is what the partners and the customers are saying."

And, according to Bahr, they're saying a lot. She said partners are still seeing strong profitability and focus on the long-term outlook of Cisco investments over saving a few up-front dollars.

"We talk about all the elements that go into partner profitability and meeting their needs with robust solutions," Bahr said. "A single, less expensive component can't always solve that problem."

Bahr also cautioned VARs that relying on lower prices as a business strategy often falls flat. "Using price as a leading strategy never bodes well. If you go down that path, where's the value in that proposition?"

Along with ProCurve making the grade, VARs are also starting to consider Juniper a viable alternative. In January, Juniper unveiled a new line of Ethernet switches, the EX Series, the Sunnyvale, Calif.-based vendor's first-ever enterprise switching line.

NEXT: Juniper On The Rise

VARs responding to the UBS survey took note of Juniper's switching momentum. The UBS survey found that Juniper's EX Series switches are gaining acceptance from VARs, which is a turnaround on UBS' prior survey. VARs are now optimistic about Juniper's potential against Cisco, although more U.S. VARs are feeling that way than European VARs. Overall, UBS found, two-thirds of respondents felt that Juniper's new LAN switch will improve its position as a viable No. 2 to Cisco, while 59 percent expected strong channel adoption of the EX line.

Mike Banic, Juniper's vice president of product marketing, Ethernet platforms business group, said Juniper's growing strength in the channel comes from its recognition that fewer devices were needed and that the network needed to be easier to manage. That, coupled with the systematic rollout of the EX line, got it on VAR radar screens.

"Their top concern is selling more and lowering their costs per revenue dollar," Banic said of solution providers. VARs are also facing bigger deals, but still need to execute on projects in less time and for less money, another factor that makes alternative vendors attractive.

So far, Banic said, the EX line has been deployed in 100 customers and in 2008's second quarter brought in $10 million, a sign that the channel is taking notice.

Kobuszewski said it's still too early to tell where Juniper will play in the LAN landscape. He said its timing might be right, but Juniper is still "late to the game."

Despite UBS' assessment, Kerravala said Juniper is more of a perceived threat to Cisco's channel dominance than an actual threat. "Juniper doesn't have the products, not in the enterprise," he said. "What matters is breadth of product. They're missing a lot of components to compete for LAN business."

It's the completeness of Cisco solutions, Bahr said, that keep Cisco's channel strong and focused. "We don't look at a particular point or technology, we're more about the solution."

With that solution vision, Bahr said, Cisco will continue to stay one step ahead of competitors and maintain the channel relationships necessary for solution providers to succeed.

Verteks' Gulling, however, said VARs should be on their toes to seize opportunities with smaller, lower-cost vendors. He's started preaching smaller vendors' interoperability with Cisco as a main selling point.

"Time and time again, people that were all Cisco have less money," he said. "Smaller vendors, like 3Com, are going to have a lot of opportunities in Cisco shops."