Let's take a more detailed look.
Chambers' big keynote speech last night at 2014 International CES was of course more of a marketing event than something that will deliver short-term numbers. But it's important because lots of people are waiting to hear where Cisco, which built multibillion-dollar markets by becoming the premier networking provider in the creation of the Internet, will get its next growth story.
Between infomercials, Chambers painted a compelling picture of how networked devices -- especially in municipalities -- have the potential to generate a huge return on investment (ROI). The problem is that those dollars will be hard-earned, and it's not yet clear if Cisco is best positioned to sell into the Internet of Things (IoT) -- or the Internet of Everything, as Cisco calls it.
So back to the numbers. Where exactly did Chambers get the $19 trillion?
Cisco officials say the numbers come from two studies. One on the public sector, in which networked efficiencies generated from public services such as utilities, parking and other government infrastructure can generate $5 trillion. Another study says the private sector is worth $14.4 trillion. Add that together and you actually get $19.4 trillion. Maybe they just should have rounded up to $20T?
If you look at other numbers, they are also large, but more modest than $10 trillion. Gartner has a big number, too, but it's not $19 trillion, it's $1.9 trillion. That's how much the research firm says IoT will create for the economy by 2020. Gartner believes that you can calculate that by estimating there will be 30 billion new connected things and they will each result in the system being $100 smarter per device.
It's going to be hard to get a lot of people to believe the $19 trillion number.
"The $19 trillion, that's a bit over the top, even for Cisco," saidNeedham & Co. analyst Alex Henderson in a phone interview this morning."Does IoT and connectivity make sense? Sure. Does it have implicationsfor the numbers for the next two to three years? No. This is something to thinkabout in the next five to ten years."
The opportunity is no doubt quite large, probably trillions, if not $19 trillion. But the mechanics of getting the money are more complicated. Large technology -- such as Cisco, as well as other companies going after this market, like GE -- like to wrap their marketing campaigns around big concepts (such as IoT), but IoT is actually a collection of many fragmented, complicated markets in government, the automobile industry, healthcare and home entertainment.
This will be the challenge for Cisco and many other companies seeking an IoT business model. Will Cisco start selling networking gear to the automobile companies? Does it have a big play in healthcare? And why are Wall Street, investors and many analysts skeptical that Cisco can make as much -- or more -- on IoT as it made on the Internet?
Is This Cisco's Game?
As Henderson points out, to capture large pieces of these disparate markets is going to take a long time. All this, while Cisco's growth in its core markets is slowing. At its annual analyst day event in December, Cisco ratcheted down its long-term growth outlook from 3-5 percent Compound Annual Growth Rate (CAGR) from the prior 5-7 percent. That's a big move, and its shares got hammered by more than 10 percent. Investors are desperate for the Next Big Thing, which may be why Chambers is trumpeting the arrival of IoT in 2014.
In foreign markets, Cisco has recently been beset by problems with the association of its networking gear with the National Security Agency (NSA) and federal government spying issue. Sales to China and many other foreign markets have collapsed. And in next-generation networking, Cisco is being challenged by a new trend called Software Defined Networking (SDN), which allows telecom and enterprise networking architects to load open source software on commodity hardware to build their own networks, as Google and Facebook have done.
That's not to say IoT doesn't make for good marketing and some nice Info-porn. Cisco has gone all out on this front, creating a marketing site around the IoT, and piecing together large amounts of marketing collateral and data. For example, it tells us the following:
- By 2020, there will be 50 billion connected devices.
- A Dutch startup, Sparked, is using wireless sensors on cattle.
- There are already cameras and computers that are one cubic millimeter in size.
Today, Cisco held a press conference about how the public-sector opportunity -- which Chambers discussed at length last night (smart meters, smart water, smart streelights), is worth $5B.
And so on. But what does this really mean -- in the business sense? Cisco has launched an IoT division that will produce products and services in these markets. It also has helped create a conference for this very purpose, called Internet of Things World Forum. Some of the products Cisco has talked about include automobile networking, smart household appliances, LED lights and street lamps, media, security, thermostats and ATM machines. But one of the big problems here -- as you see already -- is that there are hundreds of companies already in those markets adding networking features. So is this Cisco's game as well?
Needham's Henderson says, Cisco has a "good track record" of breaking into new markets.
They are good at networking. And if you look at something like the electric grid, where they haven't been doing a good job of networking, you can see Cisco there. You need somebody like Cisco doing this. But to use a baseball analogy, we're not even in the first inning. The pitchers are still warming up in the bullpen."
Given Cisco's recent struggles on the growth front, investors want the numbers in the next three innings, not in the bottom of the ninth.
Title image by 3d Pictures (Shutterstock)