Open source could alleviate Cisco’s growth woes

Cisco Systems’ stock has plummeted nearly 20 percent since announcing its finanicial results for the quarter ending Oct. 31. While Cisco’s revenue and growth were solid, its forecast left investors and analysts stunned. One vendor says that open source is encouraging competition in Cisco’s arena, which could increase pressure on Cisco’s performance. If so, what should Cisco do, and how should IT decision makers prepare?

Cisco’s revenue slows down

Cisco projected revenue growth of 3 to 5 percent for the next quarter and 9 to 12 percent for its 2011 fiscal year (Nov. 2010 through Oct. 2011). Both ranges fell below the 13 percent targets that Wall Street analysts expected.

On the earnings call, Cisco CEO John Chambers explained that a slowdown of sales in the government sector was to blame:

We did see challenges; for example, in the U.S., say, government business, down approximately 25 percent year-over-year from an orders perspective. To give you an idea of how rapid a change this was, the state government business was down 48 percent [from the prevous quarter] from an orders perspective.

Open source competitor Vyatta’s CEO, Kelly Herrell, thinks there’s more to Cisco’s slowing revenue growth than its prospects in the government sector alone. Herrell writes in response to Cisco’s results:

Routing was a central focus of discussion by analysts, because it’s always been assumed that it was a guaranteed cash cow for Cisco. That’s no longer the case; the routing market is changing fast.

Routers are the bulk of the Layer 3 networking market. Layer 3 plays the most crucial role for Internet plumbing. This complex set of protocols enables the connectivity between devices over a distance, and between virtual machines in an integrated or cloud solution. That explains why the market for Layer 3 products is more than 2X the size of the entire market for Layer 4 through 7.

The Layer 3 overhaul is upon us now. But the new wave of Level 3 infrastructure clearly isn’t coming from Cisco.

Open source is enabling alternatives to Cisco

Herrell’s company of course competes with Cisco’s router business, so it’s perhaps no surprise that he believes that open source software routers, such as Vyatta’s offerings, are threatening Cisco’s cash-cow router business. Herrell claims, “Vendors and partners adjacent to Cisco’s router business used to recommend or resell Cisco. They no longer have to. Vyatta has removed that barrier and enabled them to add complete L3 functionality as software.”

Vyatta’s products, which range from the open source and unsupported Vyatta Core to commercial Vyatta Subscription Edition and Vyatta Plus, have been adopted by companies such as CBS, Toyota, and Rackspace. Vyatta serves up nearly 25,000 downloads of its software-based routing technology per month and is closing in on 750,000 downloads in total.

Vyatta customers typically opt to use software-based routing technology on commodity x86 hardware. Herrell claims that the resulting price/performance ratio is far and above the price performance of Cisco’s hardware routers in the vast majority of cases.

Give customers a choice of open source and commercial software

In light of Cisco’s internal experience with open source and the lessons learned by traditional software vendors faced with open source entrants, the most effective response from Cisco would be to promote its own open source offering — that is, fight open soure with open source.

Cisco’s contributions to Linux and other open source projects are well documented and marketed. As such, it’s not as if Cisco doesn’t have the internal skills or executive support to promote an open source offering to customers. Plus, Cisco can learn from IBM and Oracle, among other large IT vendors, that have been able to balance a portfolio of open source and commercial products.

Cisco’s first inclination may be to lower price points or introduce a lower-featured version of its router product line to compete with open source offerings. Such an initial response to open source alternatives is natural: Vendors typically don’t want to open-source an existing closed source product without significant competitive pressure to do so. And sometimes even not then. Instead, vendors introduce a new open source offering, either through an acquisition or in the form of a new, internally developed project meant to be open source from the beginning.

Consider how Oracle and Microsoft initially responded to the threat of MySQL: by offering closed source “express” or “community” versions of their commercial products for a low cost or no charge. Next, consider the unique and complete story that Oracle now has with both MySQL and Oracle DB in its product portfolio. Few could argue that Oracle’s database revenue has fallen off a cliff since acquiring MySQL. Next, consider the application server market, where the two revenue share leaders, IBM and Oracle, both offer open source and commercial products.

Cisco needs to give customers the choice of open source or commercial router offerings; the open source version would be stand-alone software, and the commercial version an integrated hardware and software stack. Being able to address the needs of customers, big and small, with varying degrees of affiliation to open source or commercial products demonstrates an understanding that customers differ and want choice.

IT decision makers: Plan for an acquisition

It’s clear that IT decision makers searching for options to reduce networking infrastructure costs should consider open source products such as those from Vyatta.

Furthermore, buyers choosing an open source network routing provider should plan for a scenario in which the vendor is acquired by the likes of Cisco. Considering Cisco’s history of acquisitions, it’s prudent to expect Cisco to address open source competition in a core product area like its router business. Don’t be surprised if Cisco does so in a similar fashion as other large IT vendors: through an acquisition.

Follow me on Twitter at SavioRodrigues. I should state: “The postings on this site are my own and don’t necessarily represent IBM’s positions, strategies, or opinions.”

This article, “Open source could alieviate Cisco’s growth woes,” was originally published at InfoWorld.com. Read more of Rodrigues et al.’s Open Sources blog and follow the latest developments in open source at InfoWorld.com.