Cisco facing up to challenges

Climbing the stack

Cisco's incumbency in and long-time relationship with large enterprises also provides some insulation from the saturation and pricing trends, Passmore notes. But it forces Cisco to "move up the stack" and rely more on software sales in order to maintain its 60+ percent gross profit margins.

Cisco, for example, has been modularizing and repricing its traditional IOS software, and is branching out into the unified communications and collaboration space and into software-driven service-oriented architectures (SOA). Cisco recently acquired Web conferencing and collaboration service provider WebEx for $3.2 billion, and last year unveiled its own contribution to SOA -- Service Oriented Networking Architecture (SONA), an attempt to better marry applications and networks.

Cisco is also a big player in Network Admission Control (NAC), with software for its switches and routers, network-attached clients, and security monitoring and response systems.

But as Cisco fills out its software portfolio, it collides with entrenched behemoths --- and partners -- like Microsoft and IBM. Increasingly, it becomes a challenge for Cisco to balance its reliance on these companies while competing with them as it broadens its software presence.

Dzubeck says Cisco will run square into IBM in SOA/SONA. Two years ago, IBM bought Data Power, a privately held maker of integration and security appliances for processing XML and Web services traffic, ingredients IBM believes are key to its SOA initiative and that will go up against Cisco's SONA.

Unified communications (UC), collaboration and NAC will pit Cisco against Microsoft as well as IBM's Lotus Notes group. Microsoft has an alliance with Cisco competitor Nortel in unified communications, and is a key member of the Trusted Computing Group (TCG), an organization promoting specific NAC standards, of which Cisco is not a member.

Microsoft earlier this year released its NAC client protocol publicly through TCG. Cisco rival Juniper demonstrated interoperability with the protocol.

Cisco is offering its NAC work to the IETF, which is also defining a NAC client protocol.

The foundation for unified communications is VoIP, and Cisco has a leading position in the market alongside Nortel and Avaya. Cisco acquired social networking firm Five Across earlier this year and views that technology as key to helping businesses connect with customers through individual profile pages, friend lists, discussions, and posting of blogs, videos and podcasts.

Where the rubber meets the road, however, is in the applications built to ride on top of the unified communications platform.

"Much of Cisco's growth is tied up in the things that the network enables you to do," says Zeus Kerravala of the Yankee Group. "Owning UC and presence is important not only from the fact that you get the sales revenues, but that is the platform for the next 10, 15, 20 years.

"The question is, 'Who's platform are you going to build it on,'" Kerravala says. "Cisco's been positioning itself as the vendor you would build on, but the one thing Cisco doesn't really understand is how to build a software ecosystem. The company that does is Microsoft."

The Cisco/Microsoft battle for next-generation network applications is just beginning and could play out over decades, Kerravala notes.