|By Michael Bushong||
|October 1, 2013 11:00 PM EDT||
[This post is intended to examine potential strategic implications. I am not trying to evaluate products or determine the relative value of competing solutions.]
John Chambers was quoted in a Barron's blog last week talking about Arista. The entire article is worth reading (it covers a lot more than just Arista), but I want to highlight his comments specific to Arista:
When I pose to Chambers that Arista Networks, the Santa Clara, California startup that is storming the data center with very successful products, is the “most serious competitor” the company has, he replies “Not even close."
There has always been somebody who is going to be our toughest competitor –Cabletron, Synoptics, Wellfleet were really tough originally 15 to 20 years ago. Arista will be in one area of the market, the data center. They use merchant silicon. I know every account they’re in, I know exactly what they’re doing. Watch what happens when we announce Insieme, which will probably be this next month [he later clarified he was referring to November].
So what does this all mean?
The industry dynamics are well understood. A maturing market, new technology, increased competition. So why the seemingly dismissive tone that could be perceived as either disdain or condescension towards Arista?
When Arista announced their latest generation of products in April of this year, the most press-worthy part of the announcement was their "breakthrough price of less than $1200 per wire speed port". Their subsequent 7500E launch also featured aggressive pricing, driving 10GbE ports down to under $600. Arista has been a long-standing leader in adopting merchant silicon, and this practice has allowed them to compete aggressively on price. To be fair, Arista competes more on total cost than just chassis price, leveraging their automation capabilities within EOS along with access to Linux tools for integration. The point is that price has played a prominent role in their strategies to date.
To understand how this plays out, we need to examine the dynamics of price in virtually any market. Cisco is a dominant incumbent with high margins. As long as they maintain their market share, they actually should not care too much about how competitors price. The market will support a small number of price players along with the more premium brand. And while Arista has been a clear success story (their growth has been exceptional and their products strong), the reality is that their sales have been a rounding error if you stack them up with Cisco's revenues in the same space.
So up until this point, Cisco has been content to let the price battle wage without really responding. What is interesting about the Chambers comments is they suggest a shift in strategy, which is likely a subtle admission that Cisco is not going to let Arista maneuver unchecked any longer. The reference to merchant silicon in Chambers' quote is no doubt a reference to this year's product announcements. So what might Chambers be foreshadowing?
The nice thing about price differentiation is that it is ridiculously easy to understand. Sales guys can put up a PowerPoint slide with two bar graphs and point to the smaller number as reason to make a purchase. And despite all the talk of Total Cost of Ownership (TCO), price is actually the dominant purchasing criterion. In fact, IDC estimated that price (or CapEx) made up 63% percent of the purchasing decision.
The bad thing about price differentiation is that it is also the most easily countered. What happens if Cisco announces dramatically lower price-per-port when they spin Insieme in? They don't even have to beat Arista; they just have to be close enough that the price part of the equation is roughly a draw. If Cisco does this, the most newsworthy element of Arista's big product launch is largely neutered. That is not to say that Cisco will match on TCO but rather that their go-to-market strategy will effectively counter what Arista had previously launched.
These dynamics are made all the murkier when you consider the other elephant in the networking room. Arista is expected to file for IPO shortly. IPO success requires favorable valuations. Valuations are based on things like operating margins and growth. If Cisco is aggressive and undercuts Arista pricing significantly, this could raise product margin questions for would-be investors. And with a primary differentiator countered, it could also raise questions about Arista's rate of growth.
You have to wonder what the endgame is in all of this. Is Cisco worried only about losing market share? Or is Chambers also looking to impact an Arista IPO? I actually have no idea what the real goal is, but the Barron's quotes have a tinge of disdain in them in my opinion. While Arista isn't the antagonist that VMWare has been for Cisco, I can't help but think this one is a little personal. And it wouldn't surprise me if Chambers learned a lesson from when Juniper went public, committing to more decisive actions before things get away from him.
For customers, everyone should keep a close eye on how this plays out. If this really does signal a price war, how will white box switching solutions compete? If the primary differentiator for white box is price, what happens if the pricing delta shrinks substantially? Or are companies going to increasingly look to monetize software in which case all of this is really just a distraction until new pricing models emerge? If the pricing is impacted by merchant silicon (as Chambers mentions), does Intel disrupt the pricing even more as they improve on Fulcrum and their DPDK?
Savvy customers will need to ask questions that extend well beyond simple roadmap and get to the heart of long-term strategy. Architectural decisions today that don't consider these macro strategic shifts could be rendered obsolete in fairly short order if this really is the start of something significant.
I don't mean any of this to be an endorsement for either strategy or either product portfolio. I find the strategic back-and-forth to be interesting though. Whatever happens, the outcome should be better for customers. Competition certainly drives innovation and keeps pricing honest, so the real winners here are likely to be consumers.