FBR’s Scott Thompson wrote:
The platform, which comes in three different sizes (6000-core, 4000-aggregation, 2000-edge), dramatically simplifies
high-end networking for service providers. It is a family of converged optical routers that provides a glimpse into Cisco’s strategy for the network transformation as it blurs the lines between optics, switching, and routing. Cisco’s acknowledgment that network architectures are undergoing significant change is an important shift in tone from a year ago, when Cisco’s marketing message seemed to question whether the transformation was necessary or even taking place. Cisco seems to position the NCS platform as an overlay fabric that “glues” the existing network infrastructure together. We see the NCS launch as Cisco’s acknowledgment that a multi-product, legacy network design will not work going forward, but we question if the focus on an additional piece of hardware is a step in the right direction. We expect carriers could, over several years, use it to simplify and displace many traditional functions of edge, aggregation, and core of the network. Meanwhile, we continue to believe carriers are likely to spend significantly less with vendors like Cisco as early as calendar 4Q13.
* Cisco has the right intentions, but will carriers adopt the strategy? The NCS solution seems to be hardware intensive and contingent on sizable capital investment. This runs counter to our checks that indicate capex trends at telcos in 2H13 and FY14 will not be as strong as they were in 1H13. Recall that AT&T’s CEO Randall Stephenson recently confirmed that AT&T is driving change, which is resulting in cost savings of nearly 70% versus NCS’s targeted TCO savings of 45%. We believe other SPs will follow suit and start changing buying patterns over the next six to 18 months as they migrate from current proprietary hardware systems to “bare metal” commoditized hardware.
* Could NCS affect Cisco’s existing product portfolio? We see Cisco’s NCS platform as a near-term catalyst to help offset slumping routing and switching growth and market share. However, we need to take some time to analyze the impact of collapsing the routing, switching, and optical layers into a single platform. At first pass, allowing operators to aggregate layers and simplify the network design could diminish demand for stand-alone routers, switches, and optical transport in total. We also remain concerned about the pricing models associated with the platform. Industry analysts have indicated Cisco has been less than transparent with pricing detail, which is not a positive sign.
Press Release: Cisco Delivers Network Convergence System to Power “Internet of Everything”
Cisco this week introduced the Network Convergence System (NCS), a network fabric family designed to help service providers handle rapidly growing volumes of Internet traffic in cloud, mobile, video and machine-to-machine applications. A key focus for NCS is the “Internet of Everything” – the trillions of programmable device-driven events generated by networked devices and sensors.
NCS is a solution combining hardware, software and silicon, featuring the recently announced nPower X1 integrated network processor. It is designed to help service providers build services and capabilities to build business from the explosion of data being generated by new devices being used to monitor our world. Cisco cites data from Machina Research projecting market opportunities of $174 billion in health care, $284 billion in manufacturing and $850 billion in smart homes.
Addendum from FBR’s Scott Thompson:
In an article published today on Barron’s Tech Trader Daily, Cisco’s CEO John Chambers took a giant leap forward in reestablishing the networking vendor’s credibility. After months of Cisco’s marketing machine denying that white box and cloud services are a threat, Chambers set the record straight.
According to the publication, “when asked what Cisco’s biggest competitive threat is, Chambers mentioned that at or near the top of the list is service providers who just buy cheap ‘white box’ routers and switches.” We applaud CEO Chambers for his candidness and believe it sets Cisco on a solid foundation to begin to publicly address (and correct) one of several significant threats the business faces. While it is encouraging to see that CEO Chambers may be focused on the right risks, it also makes us question why Cisco’s marketing message has been misaligned with how executive management truly perceives the business environment.
CEO Chambers also stated that Cisco may compete against the likes of Amazon, which could offer IT as a service (IaaS) on a much cheaper network infrastructure and at a fraction of the price, by training its sales force to sell against it. We are skeptical of this strategy and do not believe that the solution will be that simple.
While we view today’s announcement as the second positive step forward in as many days, we look forward to seeing Cisco come out with good solutions for its very real threats before we become more comfortable with the direction that the company seems to be heading.