Cisco’s success in the ITC industry is based on its invention of IP networking and early promotion of Local Area Networking. Its first-mover advantage has allowed it retain its position as the dominant player in the enterprise networking market, where it has maintained a market share above 50% for ever. Cisco is one of a handful of ITC suppliers on the verge of generating net profits of more than $10b a year. My Figure shows a comparison of its annual revenues and net profit from 2003 to 2020. The downward glip in its profits in 2017 was mainly due to its payments to the American government in order to move its saved money around to take advantage of the significant tax cuts made by president Trump.
Its revenue growth has slowed somewhat in the last decade due in part to the increasing maturity of the market for routers and switches, where it continues to take the majority of falling sales. 2020 wasn’t kind to Cisco or any other enterprise IT hardware supplier who wanted to ship products for physically supporting workers in offices, since the pandemic has created a long sustained period of working from home; while it has been much better for those including Cisco for supplying the means of collaboration for those forced apart.
Product revenues have remained level at around $30b a year for Cisco since 2009 (see my Figure). As a proportion of revenues they have declined – representing 72% of total revenues in 2020 from 83% in 2003. The nature of the products hasn’t changed as much as it might; it added blade servers in 2009 to its hardware business; its application and security businesses have been catalysts more for services than software (and hence ‘product’) in its revenue mix.
My Figure above shows the evolution of Cisco’s product revenues by type. Although switches and routers have declined as a proportion of the total over time, they still accounted for 55% in 2020. Like any supplier, protecting its patents has been vital to Cisco’s ongoing success; with its IP (in this case ‘Intellectual Property’) usually built-in to the silicon of the devices it sells. Its products aren’t ‘industry standard’ in the way that Intel’s chips are, they are proprietary and likely to stay that way through the dominance of its success in the enterprise network market.
Remarkably Cisco’s sales in the Americas has actually grown as a proportion on the total over time (from 55% in 2003 to 59% in 2020) while those of Asia Pacific and EMEA have declined slightly over the same period. It has constantly developed its application and security business over this time, which are arguably better at addressing more sophisticated needs of enterprise customers in its home country – at least at first. Its international expansion has been limited by the powerful rise of Huawei, which has made constant inroads into the enterprise network market alongside its worldwide leadership in service provider networks. I expect this competition to grow more intense as 5G technology is rolled out in mature markets, especially as it allows the transmission of large amounts of data wirelessly and erodes the distinction between ‘enterprise’ and ‘server provider’ activities. In less advanced markets – especially in Africa – Huawei is capturing more of the revenue opportunities as businesses strive to catch up.
Cisco’s acquisition strategy has been used to develop new directions for the company such as collaboration workloads with WebEx and Tandberg in 2006 and 2010, cybersecurity (Sourcefire in 2013 and Duo Security in 2018), as well as all kinds of application and cloud management. Almost all of its hardware products have its intellectual property built into the silicon, so it has also acquired a few semiconductor companies such as Leaba in 2016 and Luxtera in 2019. It also occasionally offloads parts of its business as well – divesting itself of its Connected Devices division to Technicolor in 2015 and its Service Provider Video Solutions division to Primera Funds in 2018. It uses acquisitions for ‘market acceleration, market expansion, and new market entry’, as it does in its venture funding of startup suppliers. It doesn’t rely on them to take over/rejuvenate problematic whole product areas, or to take the whole company in a new overall direction.
Cisco has been one of the most consistent suppliers in our market… and is likely to stay so in the future. It was lucky enough to have alternative offerings in 2020 for those organizations who had to shift and secure their IT solutions rapidly to accommodate remote-working. The post-pandemic recession will make achieving revenue growth almost impossible in 2021 and for a few years hence; so I expect it to concentrate even harder on maintaining strong absolute profit than in the past.
Information Technology and Communications research
