You no doubt noticed that Cisco bought Splunk last week for $28 billion. It was a deal that had been rumored for at least a year if not longer. The purchase makes a lot of sense from a number of angles. I’m going to focus on a couple of them here with some alliteration to help you understand why this may be one of the biggest signals of a shift in the way that Cisco does business.

The S Stands for Security

Cisco is now a premier security company now. The addition of the most power SIEM on the market means that Cisco’s security strategy now has a completeness of vision. SecureX has been a very big part of the sales cycle for Cisco as of late and having all the parts to make it work top to bottom is a big win. XDR is a great thing for organizations but it doesn’t work without massive amounts of data to analyze. Guess where Splunk comes in?

Aside from some very specialized plays, Cisco now has an answer for just about everything a modern enterprise could want in a security vendor. They may not be number one in every market but they’re making a play for number two in as many places as possible. More importantly it’s a stack that is nominally integrated together to serve as a single source for customers. I’ll be the first person to say that the integration of Cisco software acquisitions isn’t seamless. However, when the SKUs all appear together on a bill of materials most organizations won’t look beyond that. Especially if there are professional services available to just make it work.

Cisco is building out their security presence in a big way. All thanks to a big investment in Splunk.

The S Stands for Software

When the pundits said that Cisco could never really transform themselves from a hardware vendor to a software company there was a lot of agreement. Looking back at the transition that Chuck Robbins has led since then what would you say now? Cisco has aggressively gone after software companies across the board to build up a portfolio of recurring revenue that isn’t dependent on refresh cycles or silicon innovations.

Software is the future for Cisco. Iteration on their core value products is going to increase their profit far beyond what they could hope to realize through continuing to push switches and routers. That doesn’t mean that Cisco is going to abandon the hardware market. It just means that Cisco is going to spend more time investing in things with better margins. The current market for software subscriptions and recurring licensing revenue is hot and investors want to see those periodic returns instead of a cycle-based push for companies to adopt new technologies.

What makes more sense to you? Betting on a model where customers need to pay per gigabyte of data stored or a technology which may be dead on the vine?. Taking the nerd hat off for a moment means you need to see the value that companies want to realize, not the hope that something is going to be big in the future. Hardware will come along when the software is ready to support it. Blu-Ray didn’t win over HD-DVD because it was technically superior. It won because Sony supported it and convinced Disney to move their media onto it exclusively.

Software is the way forward for Cisco. Software that provides value for enterprises and drives upgrades and expansion. The hardware itself isn’t going to pull more software onto the bottom line.

The S Stands for Synergy

The word synergy is overused in business vernacular. Jack Welch burned us out on the idea that we can get more out of things together by finding hidden gems that aren’t readily apparent. I think that the real value in the synergy between Cisco and Splunk can be found in the value of creating better code and better programmers.

A bad example of synergy is Cisco’s purchase of Flip Video. When it became clear that the market for consumer video gear wasn’t going to blow up quite like Cisco had hoped they pivoted to talk about using the optics inside the cameras to improve video quality for their video collaboration products. Which never struck me as a good argument. They bet on something that didn’t pay off and had to salvage it the best they could. How many people went on to use Cisco cameras outside of the big telepresence rooms? How many are using them today instead of phone cameras or cheap webcams?

Real synergy comes when the underlying processes are examined and improved or augmented. Cisco is gaining a group of developers and product people that succeed based on the quality of their code. If Splunk didn’t work it wouldn’t be a market leader. The value of what that team can deliver to Cisco across the organization is important. The ongoing critiques of Cisco’s code quality has created a group of industry professionals that are guarded when it comes to using Cisco software on their devices or for their enterprises. I think adding the expertise of the Splunk teams to that group will go a long way to helping Cisco write more stable code in the long term.

Tom’s Take

Cisco needed Splunk. They needed a SIEM to compete in the wider security market and rather than investing in R&D to build one they decided to pick up the best that was available. The long courtship between the two companies finally paid off for the investors. Now the key is to properly integrate Splunk into the wider Cisco Security strategy and also figure out how to get additional benefits from the development teams to offset the big purchase price. The essence of those S’s above is that Cisco is continuing their transformation away from a networking hardware company and becoming a more diversified software firm. It will take time for the market to see if that is the best course of action.