Cisco Gets Hammered; Is Software Defined Networking to Blame?

It seems that Cisco laid and egg and the market is punishing it.

Chastising tech giant Cisco for not pre-announcing its disappointing quarterly earnings and for its global losses, CNBC's Jim Cramer said Thursday that "open rebellion" was brewing among its investors. 

"This was the worst quarter for any Dow stock this year," Cramer said on "Squawk on the Street,"
Cramer added: "Go to the conference call—open rebellion is beginning."

What was interesting is that Cisco recently lost a big contract with Amazon that was supposedly worth $1 billion.

The first was a deal with Amazon. Cisco thought it was going to sign $1 billion deal for network gear for Amazon, one of the largest network deals ever, the source said.

Instead, Amazon shocked Cisco by buying only about $11 million, using cheaper hardware and SDN for the rest of its needs, the source said.

The second was that Chambers asked his top executives to do an analysis on what would happen if Cisco plunged into the SDN market. They concluded it would turn Cisco's "$43 billion business into a $22 billion business," our source said.

So instead of shelling out $1 billion for hardware Amazon just bought some cheap switches and had the rest of the network upgraded with this SDN solution. Some of the sales woes for Cisco might have come out of different companies and countries saying "instead of paying Cisco $1 billion for hardware why don't we just buy $11 million in hardware and pay whomever for a SDN solution." I'm pretty sure that Amazon's SDN solution didn't cost like $900 million but a fraction of that amount. It also seems like every networking and software company like VMware, Brocade, Juniper, etc. are all racing into the SDN space. In fact VMware is putting millions into a so-called software defined datacenter which turns all of the networking hardware that you needed before into software that can be run on any box. They are seeing a new frontier that takes the networking away from some $100,000 metal box sold by Cisco and turning it into a bunch of virtual machines running on some generic off the rack server.

Cisco is trying to close the gap on SDN but as they say above it will cannibalize their own expensive router and switching business. They can sell you the cheap SDN but you will probably not buy any of their expensive metal boxes to run your network. Also there is nothing that keeps you from buying Ciscos SDN solution rather than Brocade's or VMware's. In fact you might want to go with VMware if you already have a virtual setup for your servers if you can install their SDN solution seamlessly.

From what I see Cisco is in for much more pain going forward. There is a newer, cheaper, technology that does exactly what they are doing and companies are catching on to that fact. Amazon seemed to be the first but if another big networking hardware buyer like the US Government or Twitter or someone decides to go with an SDN solution instead of a whole bunch of expensive metal boxes Cisco is cooked.