Cisco is best known for selling routers and switches, but now the networking giant is expanding into the highly-competitive business of selling computer chips.
The company said Wednesday that it’s now selling networking chips to a handful of big-name businesses including Facebook, Microsoft, and AT&T.
The move is a big gamble for Cisco. Over the past few years, tech giants like Facebook and Microsoft have been designing their own networking hardware, and outsourcing the production to overseas manufacturers. Facebook, for instance, created the non-profit Open Compute Foundation for companies to share their data center hardware designs so others could improve them and build their own servers and networking gear.
The idea was that giant tech companies could create custom networking gear that matched their specific needs as opposed to buying Cisco’s traditional routers and switches. By selling specialized networking chips, Cisco hope to appeal to tech giants that build their own hardware, but still need specialized semiconductors to do so.
“We get to open doors to customers we never had,” Cisco CEO Chuck Robbins told Fortune in an interview.
Although Cisco will sell chips, Robbins hesitated to say that his company would become a major semiconductor maker rivaling Intel and Qualcomm.
“We didn’t say, ‘Let’s go build a semiconductor business.’ This was driven because our customers asked us to do this,” Robbins said. “We don’t have a big proactive strategy to build some large-scale semiconductor business.”
Patrick Moorhead, the president of research for Moor Insights & Strategy, said Cisco’s new chip business reflects the broader trend among cloud computing providers to build custom computer chips for data center gear. If Cisco wants to do business with these cloud giants, it must sell networking components as opposed to all-in-one networking equipment.
“The biggest cloud providers aren’t going to buy their gear,” Moorhead said about Cisco’s traditional routers and switches.
Indeed, to be a chip supplier to Microsoft, Robbins said that Cisco had to ensure that its chips and networking software could function with Microsoft’s Azure cloud computing service. Microsoft built equipment for that service, which sells on-demand computing resources to organizations, using its own custom data center designs.
Designing and producing its networking chips cost Cisco over $1 billion over the past five years, Cisco executives said.
“There’s some serious science that went into that,” Robbins said, mentioning that it required designing chips that would be compatible with data center hardware from different companies.
Cisco’s new chips comes as it seeks to give its business a jolt. In November, the company forecasted weak guidance for its fiscal second quarter, saying its revenue would decline 3% to 5% year over year. At the time, Robbins told analysts the lower revenue was partly due to “challenges” with unspecified service providers, particularly in China and India.
The next day, Cisco’s shares plunged 8% to $44, and since then, its shares have stayed around that price.
Robbins conceded that “it’s been a tough market for a few years” for selling to service providers, which includes telecommunications companies. Although there’s been a lot of hype about so-called 5G technology, which would provide faster connections than 4G LTE, among other feats, service providers haven’t yet spent big money upgrading their infrastructure.
Cisco is hoping that will change, and that customers will be more inclined to buy Cisco’s new chips or the company’s new routers and switches that they power.
“They need an impetus to build the next generation backbone,” Robbins said. “You have to have a reason to upgrade.”
Still, Cisco faces many challenges as it adds chipmaking to its business lineup. It will now more directly compete with chipmaker Broadcom and even Intel, which said in June that it would buy networking chip startup Barefoot Networks for an undisclosed amount.
Robbins downplayed the competition and said it’s becoming more common in the tech industry for companies to both partner and compete against each other. He added that Cisco is a big customer of both Broadcom and Intel.
But while the tech industry is getting more accustomed to frenemies, it’s unclear how Wall Street investors will react to Cisco’s decision to enter the new market and more directly compete with companies it does business with. As of now, investors seemed indifferent with Cisco shares being relatively flat in after-hours trading on Wednesday to $44.28.
“I have to worry about what my customers want,” Robbins said. “I can’t worry about Wall Street, how they interpret this.”
Ultimately, Robbins believes that selling the new chips is a way for Cisco to stay relevant in the shifting technology landscape. He imagines that Cisco’s new chips will make it possible for other companies to build better self-driving cars or medical devices linked to fast Internet connections.
“I think the bottom line is we have to embrace every transition, ever trend that’s happening,” Robbins said. “If you sit around and deny and hope that things won’t happen, that’s when you die.”
