Cisco's New Product Push: Low-Margin Servers? (CSCO)

Cisco (CSCO) is under constant pressure to diversify its business away from the “plumbing” of networking equipment. And it’s done a pretty good job: In 2004, switches and routers made up 65% of the company’s revenue — by last quarter, the two groups made up only 53% of sales.

Now Cisco — expanding into everything from video conferencing software to consumer stereo equipment in its quest for new revenue streams — is making a push into the traditionally low-margin business of enterprise-class servers.

It’s hard to see a lot of upside for Cisco here: While the company’s salesforce already has ins with enterprise IT big spenders, it’s a brutally competitive market with margins far below what Cisco is used to. (NYT: “Cisco boasts gross profit margins of close to 65 per cent, while companies selling basic servers tend toward gross margins closer to 25 per cent on those products.”)

Another danger area: If companies like IBM (IBM) and HP (HPQ), feeling Cisco is invading their turf, start directing networking business to Cisco rivals like Juniper Networks (JNPR).

But then, without new pushes like one into servers (bundled with virtualization software, a hot IT trend), how else can Cisco keep growing?

See Also:
Cisco’s Router Market Share Drops Most Since Dotcom Crash

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