The Economy

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The Economy

Every tech company is going to feel the sluggish global economy. That said, given its size, the breadth of its product portfolio, and number and size of its customers, Cisco is going to be impacted by the problems in the Eurozone, a decelerating economy in China or government agencies in the United States holding onto their IT dollars. As CEO John Chambers said during a conference call with analysts and journalists in May: "One of the primary reasons Cisco sees these trends so much earlier than our peers in the market is, we're pretty pervasive. We're in every industry, every country, everything except the consumer in large volumes. And so we can see a hiccup in state and local spending in the U.S. perhaps two to four quarters before other people, our peers, get it on their radar screen."

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Slowing Enterprise IT Spending

The uncertain economy is making enterprises and service providers skittish, and those organizations are keeping a tighter hold on their IT dollars. Cisco customers don't necessarily believe another global recession is on its way, and have told Cisco that they plan to spend more in the second half of 2012. "However … in the very next sentence, they said, ‘We are waiting to see what happens in Europe and what happens with government policy,'" Chambers said. Cisco needs those businesses spending again.

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Changing the Business Model

Cisco is particularly sensitive to the fluctuations of the economy and IT spending because much of its business comes from sales of such hardware products as servers and routers; as Chambers said, 80 percent of the company's business is new every 120 days. Now Cisco is looking to move more of its business to a model seen in the software industry—with more software of its own, and through such businesses as WebEx—where customers can be charged by the month, creating a more predictable stream of revenue, according to Chambers. In addition, Cisco is continuing to push into areas like video—European regulators on July 24 OK'd Cisco's $5 billion bid for NDS Group—that are more resistant to macroeconomic trends.

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A year after announcing 6,500 job cuts in a bid to reduce expenses by $1 billion, Cisco officials on July 23 said they were cutting another 1,300, or about 2 percent of the workforce. A company spokesperson said in an email to the media that eliminating the jobs was "part of a continuous process of simplifying the company, as well as assessing the economic environment in certain parts of the world." And there's speculation more are on the way as the company's transformation continues, even as Cisco takes on 5,000 employees from NDS.

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Software-Defined Networks

SDNs are the hot trend in networking. Virtualization came to servers years ago, and to storage after that. Now that idea is coming to networks. Essentially, SDNs aim to take the programmable intelligence now found in expensive, complex switches and routers from Cisco and others and put it into the network control plan, creating a more dynamic networking infrastructure, which is important for hyperscale and cloud data center environments. Established box vendors like Cisco, with its funding of startup Insieme, and Juniper say they are embracing the software approach, but they're also trying to protect their profitable switch and router businesses. Meanwhile, a host of smaller startups are pushing the SDN vision, and Cisco was dealt a blow July 23 when VMware, a longtime partner, bought SDN startup Nicira.

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Collaboration is an important business for Cisco, which is pushing to offer greater integration of such key products as WebEx and Jabber. However, in the first three months of the year, revenue in collaboration was essentially flat, thanks in part to slowing enterprise and public sector spending and poor execution on Cisco's part. In addition, there is growing competitive pressure. For example, Microsoft, which is a Cisco partner, now owns Skype and could choose to leverage that technology for its video collaboration efforts. Avaya recently bought video conferencing vendor Radvision, and a growing number of smaller companies are now offering software-based options that are less expensive than Cisco's pricier hardware-based video collaboration solutions. In addition, Juniper in May announced it was investing in one of those smaller vendors, Vidyo.

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Cisco offers a host of cloud-ready Wide Area Application Services for WAN optimization and application acceleration, an increasingly important market that some analysts have pegged at more than $1 billion. However, Cisco, with its integrated software and hardware offerings, has trailed Riverbed Technology in the space, and Riverbed just took another significant step forward July 24, when it announced a partnership with Juniper.

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Cisco took a public relations hit in late June when, as part of the rollout of its Connect Cloud service, the company pushed out an update for its Linksys Smart WiFi routers. The update automatically sent users to the cloud service, upsetting many who could no longer use their passwords to log into the routers. At the same time, Cisco's privacy policy indicated that the company could collect information about the users, including their Internet histories. The situation caused an uproar and had Cisco on its heels for weeks. Linksys is the last remnant of Cisco's consumer business, which it all but shuttered last year.

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