Cisco’s big announcement this week ahead of Cisco Live was their new Intent-based Networking push. This new portfolio does include new switching platforms in the guise of the Catalyst 9000 series, but the majority of the innovation is coming in the software layer. Articles released so far tout the ability of the network to sense context, provide additional security based on advanced heuristics, and more. But the one thing that seems to be getting little publicity is the way you’re going to be paying for software going forward.
The Bottom Line
Cisco licensing has always been an all-or-nothing affair for the most part. You buy a switch and you have two options – basic L2 switching or everything the switch supports. Routers are similar. Through the early 15.x releases, Cisco routers could be loaded with an advanced image that ran every service imaginable. Those early 15.x releases gave us some attempts at role-based licensing for packet, voice, and security device routers. However, those efforts were rolled back due to customer response.
Shockingly, voice licensing has been the most progressive part of Cisco’s licensing model for a while now. CallManager 4.x didn’t even bother. Hook things up and they work. 5.x through 9.x used Device License Units (DLUs) to help normalize the cost of expensive phones versus their cheaper lobby and break room brethren. But even this model soon gave way to the current Unified Licensing models that attempt to bundle phones with software applications to mimic how people actually communicate in today’s offices.
So where does that leave Cisco? Should they charge for every little thing you could want when you purchase the device? Or should Cisco leave it wide open to the world and give users the right to decide how best to use their software? If John Chambers had still been in charge of Cisco, I know the answer would have been very similar to what we’ve seen in the past. Uncle John hated the idea of software revenue cannibalizing their hardware sales. Like many stalwarts of the IT industry, Chambers believed that hardware was king and software was an afterthought.
Pay As You Go
But Chuck Robbins has different ideas. Alongside the new capabilities of Cisco’s Intuitive Network plan they have also introduced a software subscription model. Now, if you want to use all these awesome new features for the future of the network according to Cisco you are going to pay for them. And you’re going to pay every year you use them.
It’s not that radical of a shift in mindset if you look at the market today. Cable subscriptions are going away in favor of specialized subscriptions to specific content. Custom box companies will charge you a monthly fee to ship you random (and not-so-random) items. You can even set up a subscription to buy essential items from Amazon and Walmart and have them shipped to your home regularly.
People don’t mind paying for things that they use regularly. And moving the cost model away from capital expenditure (CapEx) to an operational expenditure (OpEx) model makes all the sense in the world for Cisco. Studies from industry companies like Infinity Research have said that Infrastructure as a Service (Iaas) growth is going to be around 46% over the next 5 years. That growth money is coming from organizations shift CapEx budget to OpEx budget. For traditional vendors like Cisco, EMC, and Dell, it’s increasingly important for them to capture that budget revenue as it moves into a new pool designed to be spent a month or year at a time instead of once every five to seven years.
The end goal for Cisco is to replace those somewhat frequent hardware expenditures with more regular revenue streams from OpEx budgets. If you’re nodding your head and saying, “That’s pretty obvious…” you are likely from the crowd that couldn’t understand why Cisco kept doubling down on bigger, badder switching during the formative years of SDN. Cisco’s revenue model has always looked a lot like IBM and EMC. They need to sell more boxes more frequently to hit targets. However, SDN is moving the innovation away from the hardware, where Cisco is comfortable, and into the software, where Cisco has struggled as of late.
Software development doesn’t happen in a vacuum. It doesn’t occur because you give away features designed to entice customers into buying a Nexus 9000 instead of a Nexus 6000. Software development only happens when people are paying money for the things you are developing. Sometimes that means that you get bonus features that they figure out in the process of making the main feature. But it surely means that the people focused on making the software want to get it right the first time instead of having to ship endless patches to make it work right eventually. Because if your entire revenue model comes from software, it had better be good software that people want to buy and continue to pay for.
I think Chuck Robbins is dragging Cisco into the future kicking and screaming. He’s streamlined the organization by getting rid of the multitude of “pretenders to the throne” and tightening up the rest of the organization from a collection of competing business units into a logically organized group of product lines that can be marketed. The shift toward a forward-looking software strategy built on recurring revenue that isn’t dependent on hardware is the master stroke. If you ever had any doubts about what kind of ship Chuck was going to sail, this is your indicator.
In seven years, we’re not going to be talking about Cisco in the same way we did before. Much like we don’t talk about IBM like we used to. The IBM that exists today bears little resemblance to Tom Watson’s company of the past. I think that the Cisco of the future will bear the same superficial resemblance to John Chamber’s Cisco as well. And that’s for the better.
Hopefully, sooner or later, Chuck drops the hammer on the code bug culture at Cisco..
I agree that the pay as you go model is the way to do it with a lot of this stuff, but it does hurt a bit paying for a license to “enable” 10G functionality on a SFP+ port of an ASR router for instance. Not going to lie 🙂 The key point though on how Cisco can sell it, I think you called out:
“People don’t mind paying for things that they use regularly.”
More importantly, people DO mind paying for things they will not use. That, I think, will be the value prop of the new pricing model.
Great post as always Tom.
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