Cisco is hoping to make its enterprise customers as loyal to their routers and networking gear as consumers are to their Apple iPhones or Android smartphones. During an investor briefing today with Oppenheimer, Dan Lohmeyer, vice president of product management at Cisco, said the secret sauce that makes Cisco’s devices compelling to users is now built into the software, which companies must license on a subscription basis. “You can keep the software even when you refresh the device underneath,” Lohmeyer said. “It makes the devices stickier. You can refresh the device and use the same software.”
The company started this migration away from tightly coupling hardware with software two years ago when it launched its Cisco ONE software suite. The software can be purchased separately from the underlying hardware and customers can buy different layers of software. For example, enterprises can buy a base layer of software that includes core networking, security, and management features. They can then upgrade with another layer of software more specific to their needs. For example, a data center or WAN user may want location-based analytics in their software package, or they may want another layer of security that provides extra malware or intrusion protections.
According to Lohmeyer, the transition away from revenue based upon hardware purchases to a subscription-based software model is working well. Cisco claims more than 18,000 companies are using its ONE software, including 95 percent of the Fortune 100 companies.
Building Meraki’s Model
Lohmeyer called the Cisco ONE initiative an attempt to “Meraki-fy” its business. In 2012, Cisco purchased Meraki for $1.2 billion as a way to improve its WLAN and cloud networking business. Lohmeyer’s reference to “Meraki-fy,” alludes to Meraki’s flexibility in allowing enterprises to pick the gear they want, and then select the level of management and software.
“Customers want it simplified,” Lohmeyer said. “And this model gives us a way to deliver more frequent updates to customers.”
Customers also like the new model, Lohmeyer said. “Because they are often getting more value from it.” Although the Cisco ONE software suite may cost more, customers are spending less overall because they aren’t having to purchase extra software packages from third-party vendors.
Universal Software Licensing
As part of this effort, in late May Cisco created a software licensing agreement for use across its product areas, including collaboration, security, and infrastructure products. In addition to streamlining the licensing process, the new Enterprise Agreement will act as a sales tool that incentivizes customers to buy “bundles” of software products.
Cisco has been saying it wants to move to a subscription-based revenue model for several quarter In the company’s last earnings call, Cisco said the portion of product deferred revenue related to recurring software and subscription businesses grew 57 percent to $4.4 billion in the third quarter of 2017. That figure included the acquisition of AppDynamics during the quarter. Excluding AppDynamics, software revenue increased 51 percent.