What's Up with Cisco's Collaboration Business?What's Up with Cisco's Collaboration Business?

[Editor's note: Since publishing this piece this morning, Cisco confirmed Jonathan Rosenberg's departure as CTO and Cullen Jennings, who had been Fellow in the office of the CTO, as his replacement.]

Industry watchers have started to question Cisco's Collaboration strategy, with the group this year grappling with a leadership overhaul; the Spark-Webex rebranding (which some say signals a misstep), and the BroadSoft acquisition, which sparked a flurry of speculation not only on its impact on Cisco but also the larger UC industry. And let's not forget this has all taken place with a backdrop of continued transition from hardware to software and a subscription-based model. Taken altogether, that's an awful lot of change with which to contend.

But change is necessary for progress, as the saying goes. And industry analysts and other third-party experts mostly seem to agree that Cisco is making strides with its Collaboration business, if not for a few bumps along the way. While we won't go over the leadership changes in detail here, see the companion piece, "New Execs Eye Change at Cisco Collaboration," to get insight direct from the current executive team on where they are taking their various business segments moving forward into Cisco's FY2019.

Chuck Robbins on stage at Cisco Live 2018

Where's the Growth Coming From?
Cisco recently released its FY2018 and Q4 financial results, which industry watchers greeted positively (see related No Jitter article, "Cisco's Turnaround Linked to Customer-First Approach"). Specifically, Cisco closed FY2018, ended July 31, with $49.3 billion in revenue, up 3% over FY2017. Q4 revenue hit $12.8 billion, Cisco's biggest quarter ever.

What's unclear, however, is how much revenue the Collaboration business contributed. During last month's earnings call, Cisco CFO Kelly Kramer noted "solid growth" in Collaboration segments including unified communications, telepresence, and conferencing, but neither she nor others at Cisco specified what that means by the numbers. For some perspective, I turned to UC analyst Zeus Kerravala, of ZK Research. By his estimate, Kerravala said he'd expect solid growth to mean a percentage increase in the high-single or low-double digits.

Part of the challenge is that Collaboration sits inside the Applications group, and Cisco didn't get that granular in its reporting. What we do know from the FY2018 report is that revenue from the Applications group grew 10% year over year, reaching slightly more than $5 billion, or roughly 10% of total revenue. Beyond Collaboration, the Applications group includes things like the Internet of Things business and AppDynamics, the application performance management company Cisco acquired in early 2017. And as Kerravala, pointed out to me, AppDynamics has been selling especially well for Cisco, and its growth could potentially mask some weaknesses elsewhere in the Applications group.

Source: Cisco FY2017 summary report 

How Collaboration Fits Inside Cisco
Better visibility into Collaboration's contribution should come later this month when Cisco publishes its 2018 annual report. For now, we look at the 2017 Annual Report, as shown on the right, for guidance. In FY2017, Collaboration products and services contributed 9% of total revenue, far behind Switching (accounting for the largest portion of revenue, at 29%), Services (26%), and NGN Routing (16%). In 2016, Collaboration contributed 9% of total revenue, as well, so when the 2018 report comes out we'll be looking to see if the Collaboration group has managed to move the needle.

Even if it has, the Collaboration business is really but "a pimple in Cisco's revenue posture," shared Tom Nolle, longtime independent consultant and founder of CIMI Corp.

But that's not to say Collaboration doesn't play an important role at Cisco. While other business groups outperform Collaboration on a dollar level, the collaboration portfolio provides Cisco a way to get its foot in the door with customers, Nolle added. As a topic, collaboration can promote meetings that in turn create the opportunity for more productive relationships and pull-through for the switch and router business -- "because collaboration doesn't work without access," he explained.

But as Cisco shifts its focus from traditional UC products toward team collaboration, a la Webex Teams, will it lose that pull-through opportunity? Anecdotally, from what Kerravala has heard from channel partners, Cisco's legacy products continue to do well, but selling Webex Teams can be a struggle, he said.

Cisco right now is trying to figure out what the next act is for its Collaboration business, Kerravala said. Of late, it's focused on being the "ease of use" collaboration tools provider, he said. But now with the arrival of user-friendly tools such as Slack for team collaboration and Zoom for video communication, where does Cisco go from here? Under the leadership of Rowan Trollope, who had been SVP and GM of Internet of Things and Applications, the Collaboration group put a lot of the emphasis on artificial intelligence (AI), but hasn't said much since his leave-taking in May, Kerravala said.

Of course, it seems that Cisco is clearly committed to AI within Collaboration, given that Trollope's replacement, Amy Chang, comes from the acquisition of Accompany, an AI company focused on relationships. Since Chang came on board, however, she has been lying pretty low and has yet to articulate her strategy. And as Kerravala noted, Cisco needs to make that strategy clear soon.

Cisco Collaboration's Place in the Market
With a company of Cisco's size and scope, it can be challenging to nail down market position; much depends on how you segment the market. However, it's worth mentioning that Cisco is among the Leaders in three collaboration-related Gartner Magic Quadrants for 2018: Unified Communications (its 10th year running), Contact Center (its sixth year running), and Meetings Solutions (its second year running).

Synergy Research Group's latest collaboration market numbers -- for Q4 2017 -- show Cisco maintaining a narrow lead over its top competitor Microsoft, evaluated based on revenues from enterprise voice, UC applications, telepresence, email software, enterprise content management, enterprise social networks, and a range of hosted/cloud communications and applications. As evidenced in the below chart, Cisco's leadership position in the collaboration business is due to its dominance in premises-based solutions, along with gains it's made in cloud/hosted solutions, SRG said.

"Cisco and Microsoft clearly set themselves apart as large-scale vendors whose portfolios span multiple major segments of the market and whose activities span the globe," said Jeremy Duke, founder and chief analyst for SRG. "Cisco is a clear market leader in North America and APAC regions, while Microsoft has a lead in EMEA and Latin America."

Teamwork, or team collaboration, applications are an emerging and "super-high" growth area, SRG also said in its report.

Source: MZA, 2017

Repositioning in Team Collaboration
In its market analysis, MZA looks more closely at the team collaboration segment. In terms of the volume of weekly active paid user licenses at the end of 2017, MZA found Microsoft to be the clear market leader in team collaboration, with Slack in second, and Cisco in third, as shown to the right.

Market positioning such as this could point to one reason Cisco pivoted its team collaboration strategy in April, rebranding Spark as Webex Teams and overhauling the Webex user interface and backend (not to mention why Trollope, who drove the Spark messaging, took his leave, as some have suggested). "This is not just a rebrand," said Gartner research director Mike Fasciani. When Cisco rebranded to Webex, "it re-prioritized around its strengths in meetings and calling services, leaving messaging as an add-on," he said. "The original vision for Spark got lost in translation."

Nolle, too, said he sees the rebrand as clear evidence of a misstep on Cisco's part. With its approach to team collaboration, Cisco is operating on a model that is no longer relevant, he said. It's hurt by the fact that it separates the act of collaborating from the object that's being collaborated over, and lacking the productivity tools that its competitors have, he added.

"The real question for Cisco is can it come up with a collaborative model that suits the notion of what you're collaborating on instead of the process," Nolle said. "Cisco can't transform ... without having something to do with the underlying object. Collaboration is the process of collective work on something. Microsoft and Google have both seen the light on that."

Cisco Collaboration CTO Jonathan Rosenberg dismisses such concerns. While not having a productivity suite has been a challenge, it's one the company has been fighting for years while still retaining a leadership position, he asserted. "It's possible to integrate with those technologies on the productivity side," he said. Further, the Spark/Webex rebrand is having the desired effect, that being to simplify Cisco's messaging around Webex relative to its team collaboration strategy, he said.

BroadSoft Changing the Game
While Cisco continues to flesh out its Webex story, it's giving new shape to its contact center strategy, too. This is in large part due to the finalization of Cisco's $2 billion acquisition of BroadSoft, closed in February. Since then, Cisco has brought BroadSoft's CC-One cloud contact center solution into is customer journey portfolio, rebranded as Customer Journey Platform, as shown in upper left of the below graphic. In fact, this development really marked the early stages of Cisco's growing emphasis on the contact center market -- one that Tom Puorro, VP and GM of Unified Communications Technology Group at Cisco, says will continue to ramp this fiscal year.

Cisco's strengths are traditionally in the mid-to-enterprise market, Puorro told me, and with BroadSoft traditionally targeting the low end of 0 to 200 seats, it opens up Cisco's market opportunity. With BroadSoft now a part of the portfolio, Cisco can better get its foot in the door with SMBs and grow its relationship as these businesses themselves scale up, he added.

Within and beyond the contact center space, Cisco is continuing to find "interesting" ways to use BroadSoft software, he told me, hinting at a host of new calling offers that will be coming soon. "The biggest challenge for the calling side of UC is going to be global rollout," he said. "Not everyone needs an office in Singapore, but some do, and to be able to offer a single bill and offer to customers is powerful. BroadSoft is in 12 countries today, and we're going to leverage that pretty hard."

2018 was all about integrating the BroadSoft technology and people into Cisco, and putting it in a position to accelerate in FY2019, he said. "We have really high hopes for BroadSoft in 2019."

Shifting to Software, Subscription, Cloud
As Cisco CEO Chuck Robbins continues to push all aspects of the business toward a software orientation, the Collaboration group continues to search for the right mix of hardware and software, Puorro said. "That doesn't mean decreasing total revenue in terms of hardware" – Cisco will continue to make phones and video endpoints, he said. "It just means more for software," with a focus on creating software-based services around hardware, SaaS, and licensing. "It doesn't mean we get out of hardware, but we spend more dollars on getting adoption of software to take off." And, as Rosenberg told me separately, that means enabling more incremental steps to cloud-based services.

That Cisco is executing on its vision to become a software and services company is clear, and the cloud collaboration space is a particularly compelling growth opportunity for the company, said Elka Popova, program director at Frost & Sullivan. However, it will take more time to see tangible results – Cisco can't "abandon mature revenue streams coming from established product lines," she added.

In fact, Gartner's Fasciani said this is why Cisco bought BroadSoft: to put it in the leadership position for cloud-based UC. "The first attempt with Spark Calling never got off the ground," he said. "Spark Calling never gained a footprint."

While Cisco may be better positioned now with BroadSoft as part of its portfolio, it has quite a way to go on its journey to become a leader for cloud-based UC. As Rosenberg told me, Cisco continues to sell a lot of on-premises gear. Roughly 10% to 20% of all calling sales today are cloud versus prem, and contact center sales are heavier on premises than cloud as well, he said. The strategy is to spend the next several years transitioning its prem-based installed base to the cloud. "Ultimately, all of them will go to the cloud," he said. "That's where the market is."

Competitive Strengths and Weaknesses
In working in close partnership with both Microsoft and Cisco, Fiona Lodge, Group SVP of CX & Digital Workplace Solutions at Dimension Data, has observed a number of trends around the two companies' competitive market stances.

For example, Microsoft excels in the SMB space and has seen good traction in mid-market, while Cisco still dominates the enterprise space. But even here, most enterprises already have a Microsoft Office 365 E3 license, which means that they effectively have a voice license in addition to the Cisco assets they hold. For some businesses, E3 is sufficient, Lodge said, but for a lot of enterprises, the perceived quality and reliability of Microsoft voice doesn't meet their requirements.

Cisco's advantage is that it really does understand voice and video, Lodge said. "Cisco spent 15 years going through that learning curve and has solid expertise at delivering high quality voice and video."

Additionally, most networks run on Cisco hardware. "Until and unless Microsoft invests in tighter integrations to the networking layer, Cisco will always have an advantage when it comes to quality," she said. Another strength in Cisco's corner is its "huge existing and loyal installed base," she added. "In today's fast-changing SaaS world, you'd expect that clients would be less worried about who the vendor is, but we have clients coming to us saying, 'We want UCaaS, but we want it on Cisco.'"

Fasciani pointed to Cisco's strong hybrid model as one of its top strengths. "It does cloud-to-prem connectivity better than anyone in the market," he said. And both he and Lodge pointed to Cisco's Collaboration Flex plan, which provides a good commercial bridge between prem and cloud, as a positive. "It's a really smart approach to easing the cloud transition," Lodge said (and based on what I learned in talking to Cisco executive leadership, we can expect to see similar flexible options for the contact center in the near term).

Cisco Collaboration's Next Act
All this said, Cisco remains a "fast follower" -- a typical incumbent position, Nolle said. "Cisco will wait until it sees something taking off and take advantage of existing assets to be a fast follower and dominate the space."

The industry experts I spoke to for this piece all have different perspectives on what are the critical success factors for Cisco as it evolves around cloud, software, subscriptions, and AI. For example, Frost & Sullivan's Popova said she believes Cisco needs to keep its eye on the essentials of stability, reliability, and security, in addition to working to better enable the service provider community and speed up its innovation around things like AI and machine learning (ML). Kerravala also said he sees AI as being a critical component of Cisco's path forward, and added to that the necessity of continuing to develop its hybrid strategy.

Nolle suggested that blockchain could be a game changer for Cisco if it approaches it right, but stressed again that it needs to focus on a new model for collaboration that addresses both the underlying object being collaborated on as well as the act of collaboration.

Lodge said she would like to see Cisco continue to invest in simplifying the end-user experience, while developing its partnerships with Microsoft, Google, and Apple, and Fasciani suggested adding a more strategic relationship with Slack to the picture as well. In addition, he said, making Webex more affordable for informal meetings may be key to growing its leadership in the meetings market.

Whatever the next act for Cisco Collaboration ultimately is, Rosenberg told me that he believes "fantastic execution" is the most important thing for the company. With BroadSoft now under its wing and being folded into the business, Webex (Spark) on a new path, and AI/ML being leveraged to provide better experiences with Collaboration products, there are plenty of things to watch closely as Cisco moves further into its FY2019.

For more insight from Cisco Collaboration's executive leadership on where the priorities are for individual business segments, see the companion piece, "New Execs Eye Change at Cisco Collaboration."

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