In Brief: Cisco Systems

Cisco supplies the majority of the global Internet Protocol (IP) networking equipment in use today.  Management of the product line is allocated among four major divisions.  The next billion-dollar ideas are incubated in the Advanced Technologies division as “market adjacencies”—Cisco’s ideas for growth.  Three were added this quarter: virtual health, safety and security, and virtual communities.

Strengths

Cisco’s “intelligent urbanization initiative” envisions the Internet as a fourth utility that will generate multi-billions in revenue.  These quotes sum it up:

 “With the number of people living in urban areas growing from 3 billion today to 5 billion by 2030, urbanisation is a global trend impacting citizens, governments, and industries. This trend will also significantly impact the environment - the 20 most populous cities alone are responsible for 75 percent of the planet's energy consumption. In a world where all things are becoming connected, the network has become the next utility, enabling the holistic, intelligent and environmentally sustainable creation and management of cities, industries and public services."

        --  John Chambers, CEO

"It is estimated technology can reduce carbon emissions by 15 percent by 2020; an environmental savings of 1 ton of CO2 per capita that translates into $946 billion in financial savings. Additionally, cities that run on information can improve their energy efficiency by 30 percent within 20 years."  

                -- Wim Elfrink, EVP

Cisco hopes to gain the same kind of dominant position in this “Internet of things” that it has in the Internet-- networking and cable -- a 60 percent share of IP-based network infrastructure.

Cisco plans to reach into the home and provide a host of consumer services, from home energy management to home entertainment.  Its EnergyWise system is a software console / application platform for controlling phones, computers, lights, air conditioners and other energy-consuming devices for businesses. Cisco is encouraging partners to make applications and devices that sit on top of and interact with EnergyWise.

By lending strong support to standards for the industry, Cisco can facilitate its dominance in IP-based communications.  

Cisco projects mobile data traffic will grow a thousand-fold during 2005-2012, a major factor in its Clearwire alliance in the data-centric 4G network.  Rapid deployment, including projections for 80 cities by 2010, is encouraging the likelihood that WiMax will become the communications network for the Smart Grid.

Challenges

Cisco needs someone to lead its new Smart Grid division.  Head hunters have been beating the streets to find a General Manager.  

Cisco is new in the conservative power industry space.  Experience, familiarity, and relationship-building take time.  

Companies with Smart Grid interests are collaborating.  IBM, for instance, operates with similar assumptions and strategies to Cisco’s.

Networking equipment that connects buildings to utilities differs from corporate networking.  Corporations and utilities worried about security and performance may not want to open their networks to one another.  They may prefer the security of proprietary solutions.

Our View

Cisco’s strength has been in catching trends early.  The Smart Grid market is part of its vision for connected architecture in the cities of the future.  If the vision and solutions provided are on target, Cisco can carry the Smart Grid build-out with it.  

In five years or less, Cisco forecasts a billion dollars in sales in this category.  The company’s expected revenue for FY 2009 is close to $36 billion with margins near 64%, so this source of revenue can be an important contributor to the bottom line.

Cisco’s deep pockets (cash assets were $30 billion+ in January, 2009 and cash flow generation approximately 1 billion per month) and a strategy perfected in the ‘90s for buying expertise to round out development (it buys 15-20 private companies per year), suggests Cisco’s status as big gorilla isn’t in danger.  It’s likely to acquire companies that are strong in IP-based metering or distribution automation.  For example, in a recently sponsored competition, Cisco captured an idea for an IP framework where devices ask for power from the grid only when they need it, rather than passively consuming whatever is sent over.

With a standards-based IP network that can talk to any device at any location, Cisco can create the platform to manage and monetize it all. If Cisco has its way, the Smart Grid will look much more like telecomm and cable.  The network will be (in telecomm parlance) a “control plane” for billions of devices.  The network will manage the communications between those devices and, more importantly, host applications that are sent down to those devices on demand.