If only you could have the problem of having a 2% investment in a company whose share price has gone to the moon, right? Well, that's where Cisco is with VMware. While its equity stake looks smart at this stage, in the longer term Cisco is going to have to make a bid for either EMC (VMWare's parent company) or figure out the next step to get in the virtualization game.

Here's the problem: Virtualization and cloud computing, VMware's bread-and-butter, is the technology flavor of the decade, and Cisco is relying heavily on a strategic partnership with VMware to get it done. Sources in Silicon Valley are chattering about what Cisco will do about virtualization, a party its been largely left out of. As VMWare's price has shot up while Cisco's share price has stagnated, it's now become all but unaffordable to for Cisco -- VMware now has a market capitalization of $33B.

The problem is compounded by VMware's expanding influence with a raft of companies, including Cisco competitors. Today it's announced, for example, more partnerships with HP (A Cisco competitor), EMC (its parent company), and Verizon (a big Cisco customer). HP, which is now selling more networking gear following its purchase of 3Com, is clearly becoming more of a threat to Cisco.

There has been a lot of speculation that Cisco would make a play for EMC, VMware's parent company, whose market cap is $38B -- and captures most of the value of VMWare. To boot, with Cisco owning roughly 2% of VMWare, it would receive a small amount of that money back.

What will Cisco do? I'm sure Cisco executives are fretting about this in private. The virtualization boom has the potential to shift the entire networking landscape away from Cisco, and they'll have to make some kind of move, otherwise they'll be stuck selling increasingly commoditized Ethernet and routing gear, cable boxes, and Flip cameras.

In the long run, it's hard to rule a technology paradigm shift through a strategic partnership -- you have to own the technology. And that engenders Cisco's biggest strategic problem at the moment.