Will Cisco Be the Next Roadkill for AWS?

For the past three decades, Cisco Systems has dominated the world of enterprise networking. The company‘s routers, switches, and other equipment form the backbone of most corporate IT environments, connecting everything from PCs and printers to phones and data centers.

But the rise of cloud computing is upending the traditional IT landscape, and Cisco finds itself increasingly under siege by Amazon Web Services (AWS). As more companies move workloads to the cloud, they have less need for Cisco‘s proprietary hardware and are instead opting for commodity infrastructure controlled by software.

AWS, in particular, has expanded well beyond its initial focus on basic compute and storage to offer a full suite of services that compete directly with Cisco in areas like networking, collaboration, and security. The question now is whether Cisco can navigate this industry transition and avoid becoming the next tech titan felled by AWS.

The AWS Juggernaut

Make no mistake, AWS is coming after Cisco‘s bread and butter. Over the past decade, Amazon‘s cloud division has moved steadily up the enterprise IT stack, using its massive scale and rapid pace of innovation to disrupt market after market.

A prime example is Amazon VPC (Virtual Private Cloud), which lets customers create logically isolated sections of the AWS cloud where they can launch resources in a virtual network they define. VPC offers capabilities like IP subnets, routing tables, network gateways, and security settings that give enterprises fine-grained control over their cloud networking.

In essence, VPC provides a direct alternative to the complex web of routers and switches companies traditionally bought from Cisco. And it‘s not just a cheaper replacement, but offers greater agility and scalability thanks to its software-driven model.

AWS has also taken direct aim at Cisco‘s collaboration business with services like Amazon Chime and Amazon Connect. Chime is a unified communication platform that combines chat, voice/video calling, and remote screen sharing, going head-to-head with Cisco‘s Webex. And Connect provides a cloud-based contact center solution that competes with Cisco‘s on-premises offerings.

Even in the realm of cybersecurity, long a Cisco stronghold, AWS is making inroads. Services like AWS Shield, AWS WAF (Web Application Firewall), and AWS GuardDuty use machine learning and threat intelligence to protect applications from DDoS attacks, malicious bots, and other threats. This puts pressure on Cisco‘s traditional firewall and intrusion prevention products.

Perhaps the clearest proof point of AWS‘s ambitions comes from its annual re:Invent conference. The event has become a launchpad for dozens of new cloud services that steadily fill in the gaps of enterprise IT. In 2020 alone, AWS released new capabilities around 5G edge computing, machine learning operations, serverless data analytics, and IoT device management.

The cumulative effect of all these moves is that AWS is building an all-in-one platform for running modern digital businesses. And that spells trouble for legacy vendors like Cisco that make their money selling discrete infrastructure components.

Cisco‘s Cloud Conundrum

To its credit, Cisco hasn‘t stood still amidst the AWS onslaught. The company has made a number of strategic acquisitions and investments aimed at shifting its business mix towards software and recurring revenue. Key deals include:

• AppDynamics (2017) – Application performance monitoring
• BroadSoft (2017) – Cloud-based unified communications
• Duo Security (2018) – Multi-factor authentication and zero-trust security
• Acacia Communications (2019) – Optical interconnects for webscale data centers
• ThousandEyes (2020) – Network intelligence and visibility

Cisco has also tried to build its own public cloud to compete with AWS head-on. In 2014, it launched the Intercloud initiative, pledging to spend $1 billion on an OpenStack-based platform that would let customers move workloads between private and public clouds. But Intercloud failed to gain traction, and Cisco quietly pulled the plug in 2017.

More recently, Cisco has partnered with Google Cloud to offer hybrid cloud solutions that bridge on-premises environments with Google‘s public cloud. The goal is to provide an alternative to AWS for customers that want to avoid lock-in and maintain flexibility.

But despite these efforts, Cisco remains heavily reliant on hardware and one-time product sales. In its 2020 fiscal year (ended July 25, 2020), Cisco generated $49.3 billion in total revenue, of which 55% came from its core infrastructure platforms business selling switches, routers, data center networking gear and wireless access points. By contrast, software subscriptions accounted for just 11% of revenue.

The problem for Cisco is that growth in its hardware business has largely stagnated as enterprise IT spending shifts to the cloud. From fiscal 2017 to 2020, Cisco‘s infrastructure platforms revenue increased at a meager 2% compound annual growth rate (CAGR). Over that same period, AWS grew its revenue by 37% annually.

The stark divergence in growth underscores the risk Cisco faces as the cloud continues to eat away at its traditional markets. Unless it can accelerate its pivot to software and find new avenues for expansion, Cisco may well be consigned to the same fate as other once-dominant tech firms like IBM, Dell, and HPE.

Charting Cisco‘s Future

So what lies ahead for Cisco? Can it orchestrate a successful reinvention like Microsoft did under CEO Satya Nadella, or will it slowly bleed market share to AWS and other cloud titans until it‘s no longer relevant?

Cisco bulls will point to the company‘s still-massive installed base, deep customer relationships, and strong balance sheet as reasons for optimism. Cisco ended its last quarter with over $30 billion in cash and investments, giving it ample firepower for acquisitions and R&D.

The company also has a new CEO in Chuck Robbins, who took the reins from long-time leader John Chambers in 2015. Robbins has emphasized the need for Cisco to become more agile and software-centric, and he‘s overseen a significant restructuring that included layoffs and divestitures of non-core assets.

But skeptics will note that Cisco‘s transformation remains very much a work in progress. The company‘s pivot to subscriptions is still in its early innings, and it faces entrenched competition from the likes of Microsoft, Zoom, and Salesforce in collaboration and Palo Alto Networks, Fortinet, and Check Point in security.

Even more concerning is that Cisco‘s R&D spending has lagged rivals badly in recent years. In fiscal 2020, Cisco spent $6.3 billion on R&D, or about 12.8% of revenue. That pales in comparison to AWS‘s parent Amazon, which invested $42.7 billion in "technology and content" last year, up 37% from 2019.

The disparity reflects AWS‘s roots as a software-driven company born in the internet age, while Cisco came of age selling high-priced hardware in traditional enterprise environments. As IT workloads increasingly move to the cloud, that software DNA becomes a major competitive advantage.

It‘s also worth noting that Cisco‘s growth challenges are compounded by its sheer size. With nearly $50 billion in annual sales, Cisco would need to generate an additional $5 billion in revenue each year just to achieve 10% growth. That‘s a tall order in today‘s environment.

Conclusion

When the history of enterprise IT is written, Cisco will undoubtedly go down as one of the most important and influential companies of the past 30+ years. Its equipment has served as the plumbing for the modern internet, and its innovations in areas like VoIP and telepresence helped define the way we work and collaborate.

But the accelerating shift to the cloud threatens to make Cisco a relic of a bygone era. AWS and other hyperscale platforms are fundamentally changing the way IT is delivered and consumed, disrupting Cisco‘s core hardware franchises in the process.

To avoid being steamrolled by AWS, Cisco must urgently reorient its business around software, subscriptions, and services. Recent acquisitions and partnerships suggest the company recognizes the need for transformation. But executing that pivot is far from guaranteed, especially for a large incumbent with so much legacy baggage.

At this point, it seems more likely than not that Cisco will slowly but surely lose relevance in a cloud-first world. The company may not suffer a sudden implosion like Sun Microsystems or a long, drawn-out decline like IBM. But barring a dramatic reinvention, it‘s hard to see Cisco maintaining its leadership position in the face of withering competition from AWS and its ilk.

For enterprise buyers, the message is clear: The days of building IT infrastructure around proprietary hardware are fading fast. Cloud-native architectures and consumption models are the way of the future, and AWS is positioned to be the prime beneficiary. Cisco, meanwhile, risks being left behind.