Cisco is a worldwide leader in data-networking equipment and software. As a dominant player in this global market, the company is well-positioned to capitalize on increasing demands for sophisticated technology throughout an economically developing world. Cisco derives about half of its sales from the U.S. with the rest split between Europe and the rest of the world.
Cisco benefits from the increased use of next-generation network applications that span different types of signals, including video (e.g.,conferencing, Internet), sound, data, and voice. The use of these high-bandwidth applications is fueling the need for an industry-wide networking upgrade. Cisco provides IP-based routers, switches and related technologies which can support greater bandwidth and manage different types of applications. Its primary customers include enterprise companies (over 1,000 employees), small business (under 1,000 employees), and service providers for data, video, and communications. As a result, its business growth is highly tied to the overall health of the economy. Cisco has limited offerings to end consumers at this time.
Cisco's revenue from their router business in 2010 was an estimated $6.5 billion. Routers enable the communication of data packets over the Internet. Cisco aims to improve the intelligence, security, reliability, scalability, and level of performance of information transfer with each new router it develops. There are three main types of routers that Cisco produces and sells:
Switches are used to build networks over areas ranging from local area networks (LAN’s), such as college campuses, and metropolitan area networks (MAN’s) across entire cities, to wide area networks (WAN’s) that cover even greater distances. Switches work specifically to connect and integrate the needs of end users with workstations and servers. This sector generated $13.5 billion in revenue in 2010.
Cisco has a wide array of advanced technology products that are divided in to six subsets:
Cisco's Advanced Technologies sector represents a superior opportunity for incremental growth. The company is expected to expand this product sector through research and development as well as acquisitions focused on opportunities that incorporate higher networking layers, more sophisticated security capabilities, and more complex storage networking demands.
Unlike the routers and switchers, the market for Cisco's Advanced Technologies is more dispersed and crowded. The company faces competition from other expanding networking companies in addition to specialized business vendors.
Cisco offers several services from this sector, including both technical and more involved support. Examples of these services include:
The growth of online video -- from YouTube, BitTorrent, and increasingly Television Studios' own forays onto the Internet -- has already led to massive increases in the amount of data traveling across the Internet. A single, 30-minute video clip requires many thousands of times the bandwidth that a single email message requires. As such, online video has already required that carriers spend massive amounts to upgrade their networks, and this spending has benefited Cisco, the largest manufacturer of routers to direct traffic on the Internet. So far, however, less than 1% of video is delivered over the Internet. If that were to grow significantly, then demand for routers would grow further. Internet traffic growth could increase as much as 46% per year, with a very large portion of that growth coming from video demand. Videos currently account for about 30 percent of internet traffic.
Convergence is a state of technology in which networks can exchange different types of signals (i.e. sound, video, data, etc) seamlessly. As end-point Internet technology has continued to develop, convergence has become a more realistic goal for networking companies. The majority of the current networking infrastructure (routers, switches, etc) are not capable of handling the new services that have sprung up in recent years which include conferencing, telepresence, closed-circuit TV and organizational broadcasts. With its impressive market share on so many segments of the networking industry, Cisco Systems is well positioned to capitalize on both the improvement of end user technology and the subsequent need for new and improved infrastructure demand that will continue to grow.
With its growing Advanced Technologies sector of business, Cisco is looking to take advantage of the demand for more sophisticated technologies that stem from convergence. The company makes products such as Internet video cameras and media adapters as well as voice and data products. The use of these products requires greater network capability and thus the purchase of improved routers and switchers, which Cisco also provides. This "pull-through" effect of Cisco's Advanced Technology product sales represents an important part of the company's potential for growth. Cisco's Telepresence, its next generation videoconference system, allows for video conferencing from all across the globe. It is a technology that creates an environment that is so convenient that it could relieve the need to travel and converse with others face to face.
Here are some specific examples of how technological convergence could affect Cisco’s growth opportunities:
Cisco derives a little over half of its sales within the United States and 21% from Europe. While these sales have fueled the company’s health, there are opportunities for growth in the company’s other geographic sales locations. China holds great potential for the networking industry as a whole because of its rapidly expanding economy and demand for routers to support its firewall policies; Japan, on the other hand, has experienced stagnation in its economy and therefore represents a region with lower future growth potential in sales of networking technologies. Cisco does not enjoy such a dominant market share in East Asia as it does elsewhere, and several key competitors--including Juniper in Japan--generate a larger share of business from this region. The company must also compete with entrenched regional networking companies such as Huawei (China).
Cisco has one of the highest gross operating margins among its competitors because of its size and scale. The size of the company allows it to maintain a large advantage in negotiating for many of its supply agreements. Furthermore, Cisco has the lowest operating costs (as a percentage of sales) in its industry. Cisco maintains cost levels at around 35% of total sales while other companies incur costs up to half of their total revenues. Cisco also has an impressive base of loyal enterprise customers.
One key advantage afforded to Cisco by its size is the ability to spend more on research and development than its competitors. As with most high technology industries, research and development spending can drive innovation of new products and stave off the obsolescence of older offerings.
In addition to other large networking companies with broad portfolios, and especially as it reaches into more specified product markets, Cisco also competes with niche networking companies like Symantec, the leader in internet security.