Is Cisco Set to Announce a New Chip?

Chipbrain2

By: R. Scott Raynovich

Networking hardware and software giant Cisco Systems is expected to make a big announcement on Wednesday regarding the "Future of the Internet." Of course, this could mean just about anything. But Raymond James analyst Simon Leopold has a theory: It could involve a new router including a proprietary Cisco chip.

The theory goes something like this: Cisco has an increasing need to compete with the likes of Arista Networks and Juniper Networks, which are beating the company to many deals in cloudscale deployments. In order to compete for webscale and cloudscale, Cisco could launch a new hardware device with a proprietary application specific integrated circuit (ASIC).

According to Leopold:

We think this provides a new way to do business with web scale operators. Cisco's sales into this vertical, by our estimate, contributes 1-2% of sales, and Cisco has expressed its intent to do better. We believe Arista and Juniper have secured a much more meaningful portion of sales from operators in this group (e.g., Amazon, Google, Facebook, Microsoft, etc.). Further, we think Cisco aspires to address operators' concerns about Broadcom securing too much market power, which we have discussed in the past as among the reason Cisco (and Juniper) continue to develop their own silicon (ASICs).
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    Cisco, of course, isn't saying much. You can see a preview of the event here.

    The logic behind Leopold's theory makes sense. Cisco has been trending toward vertical integration with components through its recent acquisition of chipmaker Luxtera and the pending acquisition of optical components producer Acacia Communications.

    As a networking hardware player in a world where hardware components are becoming increasingly "disaggregated" -- that is, sold as third-party offerings from the likes of Broadcom and Intel and then integrated into systems -- Cisco could build its profit margin by owning the chip manufacturing as well. It could also sell chips by themselves to customers that don't want the whole system.

    Leopold wrote in a research note last week:

    We think offering a network processor, routing chip or switching ASIC would align with Cisco's past acquisition of Luxtera and pending acquisition of Acacia. In addition to Cisco's software pivot, we envision it adjusting offerings for customers that want a Do It Yourself (DIY) model like web scale as opposed to purchasing a fully functional network element from Cisco as its historic enterprise and commercial customers have.

    It's a fun theory. Now let's see if it is true! The announcement is scheduled for 9:30AM PST on Wednesday, Dec. 10th.

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