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Will Tech Giants Disappear? Cisco’s CEO Thinks So

Cisco Chief Warns Tech Industry Of “Brutal Consolidation” In Coming Years
By: Troy Kuhn
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Cisco Systems, Inc. (CSCO) CEO John Chambers appeared for the 23rd time on Cisco Live, the company’s IT conference, with this message: the next few years will be “brutal” for the technology industry. He predicted that there will be a lot of consolidation in the IT industry, and a few big names may be relegated to nothingness within a few years.

Chambers pointed out that technology has been evolving at speeds twice those seen three years ago. He warned companies: “You’re going to see a brutal, brutal consolidation of the IT industry.” He went on to add that within the next ten years, a lot of high-tech players currently in the industry will be extinct. He was pointing fingers at big legacy tech companiesMicrosoft Corporation (MSFT), International Business Machines Corp. (IBM), Hewlett-Packard Company (HPQ), and Oracle Corporation (ORCL) – saying a few of them will go belly-up within a few years.

Chambers did not say exactly which of the big five tech companies would disappear, but seemed to be hinting at HP and IBM, which he said have failed to see any revenue growth in the last two and a half years. He substantiated his argument citing research from Gartner and companies’ own earnings reports.

Chambers also said that Cisco’s original competition is already dead, and claimed that almost all of its current competitors – Juniper Networks, Inc. (JNPR), Check Point Software Technologies Ltd. (CHKP), Ruckus Wireless Inc (RKUS), Palo Alto Networks Inc (PANW), Avaya Inc., Aruba Networks, Inc. (ARUN), Huawei, Arista, F5 Networks, Inc. (FFIV), ShoreTel, Riverbed Technology, Inc. (RVBD), Fortinet Inc (FTNT), Polycom Inc (PLCM), and Brocade Communications Systems, Inc. (BRCD) – will vanish by 2018.

Chambers is banking on the Internet of Things to help Cisco post revenue growth in the coming years. The company’s recent acquisitions of SourceFire and Meraki will help the networking giant work towards its goal. The CEO promised investors: “You’ll see us make a huge leap versus our peers.”

Cisco’s dominance in the networking market is threatened by VMware, Inc. (VMW), which is playing on its software defined networking (SDN) technology. VMware acquired a startup, Nicira, for $1.26 billion in 2012. Nicira’s founder is the person behind SDN, a disruptive innovation that threatens to render Cisco’s hardware systems obsolete.

SDN technology gives ordinary routers and switches high-end features and computing power. It is the next step from cloud computing, and resolves issues users face when working in the cloud.

Businesses that are trying to save costs and hassles from saving data in-house are migrating to cloud computing. But data transmission to and from devices to cloud servers even on today’s 4G networks and high-speed Wi-Fi can be slow when companies are dealing with terabytes of data. In terms of bandwidth per user, the US ranks 35th in the world.

“Fog computing”, as it has been named by Cisco, is the same SDN technology that VMware has been working on for the last five years. It is Cisco’s solution to the problems in frequent communication and data transfer cloud computing currently faces. Cisco’s IOx architecture-based routers and switches will act as hubs for gathering data, and with computing capability installed, will be able to make decisions on their own. The router will only communicate with the cloud if it has to notify it about something. Currently, Cisco has over 50 customers that are testing its ACI SDN (fog computing) software, and it has already sold 175 high-end routers that work with that software.

Cisco thinks that fog computing and the Internet of Things will grow into an industry worth $19 trillion over the next few years.

Cisco stock is currently trading at a price-to-earnings multiple of 12x, a discount of more than 17% to the industry average. Considering its blended forward 12-month price-to-sales ratio though, the company is trading at a multiple of 2.6x, which is a premium of more than 57% to the industry average.

Do you agree with Chambers’s outlook on the tech industry? State your views in the comments section below, and our analyst will reply to you shortly.

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