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Can New Players Damage Legacy Leaders?

June 20, 2018

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Amazon has denied the recent reports that Amazon Web Services (AWS) plans to produce and sell switches to businesses and compete with Cisco and others in the commercial networking industry. Both Cisco and Amazon have thus formally denied the rumors that previously hit the stock of commercial networking providers. “Cisco and AWS have a longstanding customer and partner relationship and during a recent call between Cisco CEO Chuck Robbins and AWS CEO Andy Jassy, Andy confirmed that AWS is not actively building a commercial network switch,” Cisco stated.

Even though the rumors were proved to be false, the effects of the media reports seem to have been as real as it gets, with Cisco stock dropping 3.1% in the process. Other players were also hit by the media report, as Amazon’s new product was expected to be cheaper than offerings of its competitors. Amazon’s response did calm the market, but the company might use networking hardware for self-reliance in the future while “not actively building a commercial network switch.” The fact that an Amazon spokesperson confirmed the Cisco statement but refrained from making other comments on the matter is interesting.

Teaching an old dog new tricks

Amazon is not the first giant to build networking devices. Facebook introduced the Voyager device, a new transponder platform that the company hoped would amplify network transport bandwidth and overall performance while significantly lowering costs. While the move did project Facebook into the DWDM business, it did little to disrupt the market. One argument for the minimal impact of the move is linked to the fact that ease of management tends to be more important than the mere cost of underlying equipment.

At first, Facebook’s Voyager seemed destined for success. It followed a traditional recipe in data networking that is the movement to open source software-driven platforms running on “white box” hardware. Facebook and partners had previously installed the concept in the data center as they strived for a cost-effective backhaul infrastructure. They were keenly interested in transport networks and the vendors of its legacy ecosystem, but also in wireless access networks. Google, LinkedIn, and other companies have also designed and produced networking equipment for their data centers. While Amazon confirmed that it does not intend to sell the equipment, it did not comment on the possibility of using it for its own data centers, as others players chose to do.

How to grow and evolve

Amazon has a history of breaking into new businesses and damaging legacy leaders. The world’s largest online retailer recently announced its decision to buy online pharmacy PillPack for a reported $1 billion. Following the announcement, Amazon shares rose by 2%, prompting Amazon to gain $5.2 billion in value. On the other hand, the news has also led to an accelerating decline in major pharmacy chains’ shares. CVS Health lost 8%, while Walgreen Boots Alliance fell 10% and the shares of other drug wholesalers also plummeted. Amazon’s PillPack acquisition might not have an instantaneous disruptive impact on the retail drug store and pharmacy industry, but it does facilitate new long-term developments for these industries.

Another new move for Amazon was to include Whole Foods Market in its annual Prime Day shopping event this year, pressing even more on grocers and other retailers. Amazon sold over 100 million products worldwide on Prime Day, although it did encounter some technical problems with the mobile app and its website along the way. Following the global shopping event, Amazon’s stock market value hit $900 billion for the first time, marking a new turning point and threatening to oust Apple from the top.

As Amazon expands its business to new sectors, its stock price is on the rise. Its strategy to break into new businesses has actually proved to be the key to its success. It should not come as a surprise that even the possibility of it selling its own networking switches for business customers proved to be disruptive for the commercial networking industry. Amazon preferred not to comment on whether it is creating its equipment for future self-reliance, as other players have already done. But follow-up might be advisable, as Amazon’s decisions have already caused unrest in many industries.