Reuters
Arista Networks CEO Jayshree Ullal on IPO day
Arista is down about 18% since Cisco announced the lawsuit Friday, trading near end-of-IPO-day levels. Arista went public in June. The stock was priced at $43 and soared to $60 that day.
Arista's chairman of the board of directors, Dan Scheinman, posted a blog on Monday, disputing Cisco's allegations.
Arista's EOS [technology] was developed from the ground up as a next generation network operating system for the cloud based upon the pioneering technologies invented by Arista - far from the ugly messaging pursued by Cisco on Friday
Cisco's lawsuit is just like the lawsuits (actual and threatened) brought against it in the 90's by Lucent, IBM and Nortel - an attempt by a legacy vendor that is falling behind in the marketplace to use the legal system to try and slow a competitor who is innovating and winning.
Ironically, Scheinman is the very same guy that helped defend Cisco against its competitors' lawsuits when it was a young upstart starting to chomp into their businesses.
He was hired by Cisco in 1997, just a couple of years after John Chambers was promoted to CEO. He founded Cisco's legal department, then did business development and M&A work before being given his own product line, the Cisco Eos platform. Cisco shut down Eos during Cisco's awful 2011 and Scheinman left the company.
Investors are concerned that this suit could take years to settle, similar to Juniper's lawsuit against Palo Alto Networks, which was founded by ex-Juniper employees. That suit ended with Palo Alto settling for $175 million.
According to one, Chad Kusserow, who tweeted, "This $ANET/ $CSCO lawsuit is like $PANW/ $JNPR part 2-prob ends same way ult in a settlement of some type but mucks things up ST for $ANET." He added. "$CSCO may/ may not have a real case here but strikes me as a last resort to stem mkt shr losses."
That's because, as we previously reported, this lawsuit is less about two companies competing, and more like a family fight. The folks at Cisco don't just look at Arista like a competitor such as a Juniper or HP, they treat the company like traitors because so many of Arista's leaders and engineers are former Cisco employees, including its Arista CEO, Jayshree Ullal, many of its vice presidents and top engineers, and seven of its board members.
When hearing of the lawsuit, Ullal said, "I am disappointed at Cisco's tactics. It's not the Cisco I knew."
Founded a decade ago, Arista is profitable. It reported an excellent a huge beat last month. Quarterly revenue of $155.5 million was up over 50% from the year-ago quarter. Profits hit $28.1 million, or 40 cents per diluted share, when analysts were expecting 28 cents.
But the heaviest straw was likely that Ullal started speaking publicly about Arista's biggest customer: Microsoft.
Microsoft makes up 10% of Arista's revenues, Ullal said, and it's building out its cloud computing network like crazy, which only bodes well for Arista. Microsoft is not only a huge customer, but is also a huge endorsement in the hottest growth area.
Cisco has been watching an increasing amount of
Many of these companies, like Google or Facebook, famously build their own computer network equipment. But now that Microsoft has become an Arista customer, others may follow suit.
Cisco's got a plan to combat that. It is building its own cloud, called the Intercloud, investing a $1 billion to do that.
In the meantime, it is also suing Arista, hoping to slow it down.
Cisco spokesperson, John Earnhardt, refuted Arista's chairman Scheinman's post:
Arista's argument is a red herring. It's what they want the world to focus on and ignores the most significant issues of patent violation. Using examples from decades ago, like Alcatel, Lucent and IBM, is not an accurate comparison. They all had very aggressive patent monetization programs, designed to extract money and cross-licenses. That approach and business model simply doesn't exist at Cisco.
The most important question is why Arista feels they could not innovate, like many of our competitors have done, to compete on their own.
On the question as to 'why now?' - Cisco's sale of data center products are growing faster than Arista's. Arista is losing market share. As they face the daunting task of delivering their next generation of product, our ask is that they use their own innovation rather than continue copying ours, to do so. And stop trying to use the copying from us as a basis for attracting customers.
Here's the full blog post from Arista's chairman Scheinman:
I am on the Board of Arista Networks which as you all know was sued by Cisco on Friday with claims that include something called the command line interface and additional patents. The command line interface has been the industry standard method of configuring switches for decades and is widely used. There is a separate suit about several patents, and a long blog post attempting to justify the action. You are all going to learn more details about the technology involved here over the next few months. While I cannot comment about the specifics of the lawsuit, I want to say two things clearly at the outset:
Arista's EOS was developed from the ground up as a next generation network operating system for the cloud based upon the pioneering technologies invented by Arista - far from the ugly messaging pursued by Cisco on Friday.
Cisco's lawsuit is just like the lawsuits (actual and threatened) brought against it in the 90's by Lucent, IBM and Nortel - an attempt by a legacy vendor that is falling behind in the marketplace to use the legal system to try and slow a competitor who is innovating and winning.
The networking industry is in the midst of a revitalization as the value shifts from boxes to cloud networking software (a shift which is causing apparent consternation at Cisco). Arista is winning the software battle in the cloud, so Cisco has chosen to do what others did to it previously and is attempting to use the legal system to cover for its lack of innovation in software
I was the General Counsel at Cisco in the 1990's when it was being attacked in much the same way as Arista is today. Cisco faced this same challenge from the legacy vendors in the 1990's, and the legacy vendors also wrongly used litigation to slow down innovation. I agreed with Mr. Chambers quote then and I agree with it even more now. "Symbolically it's huge," Mr. Chambers said of the suit. "It shows that some companies don't have a way to compete in this new market."
Suing the new competition did not work in 1998 and it will work no better in 2014. What makes me most sad is that the millions of dollars that will be spent on this litigation could instead be spent innovating, helping customers or, heck, donating to food banks. The litigation is not going to help innovation, customers or the larger world.
One last question to ask. Why now? Arista has been shipping the product for 6 years with the command line interface in question. Why did Cisco file this lawsuit on a Friday, without any discussions with Arista, and with no visibility from Mr. Chambers? Why now? The answer to that question speaks volumes about the real motivation going on here.