Barbarians At The Gate
zdnet.com
By Joe McGarvey
July 5, 1999 12:00 PM ET
In the lucrative land of data networking, Cisco Systems, with
double-digit annual growth and revenue surpassing $8 billion in
1998, reigns as the undisputed king. But there's mounting
evidence that all may not be well in the upper reaches of the
kingdom. Unprecedented challenges from upstarts in the router
market, coupled with an uncharacteristic move by Cisco to pull
the plug on a next-generation switch, suggest that the crown may
indeed be resting a little uneasily on the sweet spot of Cisco's
product line - high-end data networking equipment for the core of
the public network.
While no one is suggesting Cisco's empire faces significant or
immediate peril, analysts say that the sun could be setting on the
company's days of dominance in the high-end routing and
switching arena.
"I do not expect Cisco to go out of business tomorrow," says Joe
Skorupa, an analyst at Ryan Hankin Kent, which tracks the network
equipment market. "However, the company is under pressure that
it hasn't experienced in a long time."
Most of the pressure on the router front is coming from a gaggle of
start-ups on the verge of shipping products that will move packets
of data based on Internet Protocol (IP) at rates far exceeding the
abilities of Cisco's most powerful router. Even an expected
upgrade to Cisco's 2-year-old GSR 12000, which quadruples the
performance of its predecessor, falls many times short of the
proposed speed and capacity of products in the works from Avici
Systems, NetCore Systems, Pluris and Nexabit Networks, acquired
late last month by network equipment kingpin Lucent
Technologies.
And while this quartet of next-generation wannabes poses only a
potential threat to Cisco's high-end networking crown, a more
immediate challenge is being waged by Juniper Networks, which
has been shipping gear competitive with the GSR 12000 and
taking business away from Cisco since September 1998 and which
turned in a wildly successful initial public offering (IPO) in late
June.
"Juniper is taking a lot more market share than Cisco expected,"
Skorupa says, adding that Juniper's M40 Backbone Router is
deployed in the core of several major carriers, including Cable &
Wireless and UUnet Technologies, one of the world's largest
Internet service providers. "The word from several service providers
is that Juniper's product is easier to install and operate."
Frontal assaults
Part of Cisco's dilemma is its push to dominate the entire
networking landscape. Cisco has spent much of the past few years
broadening its product portfolio to do battle with established
telecom equipment suppliers Lucent and Nortel Networks. As a
result of those efforts, Cisco is now diversified enough to survive a
minor turf invasion at the high-end of the data networking market.
But industry observers say that maintaining control of the core of
the public network is crucial to Cisco's long-term goals.
"This is the core of what Cisco calls the New World network," says
David Passmore, president of market research firm NetReference.
"This space is strategic to Cisco. It is not willing to give it up."
Besides the strategic setback, Cisco could miss a big financial
payoff if its rivals loosen its grip on the core of carrier networks.
Although it is currently valued at only about $170 million, the
core switching and routing market could swell to more than $5.5
billion by 2003, according to Ryan Hankin Kent.
The sizable surge in revenue is based on the tightly intertwined
relationship between sales of backbone routers and the runaway
growth of the Internet, which is doubling in size every six months,
according to even the most conservative estimates. As traffic
expands across the backbone, service providers must constantly
replace equipment deployed at the core with bigger and faster
gear.
While this situation is good news for equipment makers, service
providers are looking for relief from frequent and costly forklift
upgrades. Even if they are able to redeploy high-end routers and
switches at the network edge, service providers are forced to
replace network gear long before it can collect dust - or a return
on investment. To break this perpetual upgrade cycle, carriers are
looking for high-end gear that can accommodate growth spurts
beyond 18 months to two years, Skorupa says.
Designed from the ground up for deployment in carrier networks,
routers from Avici, NetCore, Nexabit and Pluris are fortified with
expandable switching fabrics that enable service providers to
increase bandwidth capacity simply by adding another module to
the existing router. The Pluris Terabit Network Router, for
example, can expand from a capacity of 90 gigabits per second
to more than 180 terabits per second, says Sam Halabi, vice
president of marketing at Pluris.
In contrast, Cisco's GSR 12000 is a stand-alone device that has a
maximum switching capacity of 60 Gbps. And with the 2-year-old
product able to provide only 11 OC-48 (2.5-Gbps) connections,
the accelerated growth of data traffic has already relegated the
GSR 12000 to the role of an edge device, Cisco's rivals say.
That's a categorization that Tony Bates, director of marketing for
the optical internetworking business at Cisco, firmly rejects. "Just
because the Internet is doubling every six months doesn't mean
you need a new box with a higher magnitude of performance
every six months," he says. "This is not about building terabit
boxes. This is about building terabit networks."
According to Bates, the key to accommodating Internet growth is
to deliver technology that lets service providers distribute capacity
across the network. Leveraging Cisco's Internetwork Operating
System as a mechanism for harnessing the collective capacity of
Cisco's routers, service providers can build terabit-scale networks
with gigabit-size building blocks, Bates says. "The thing is the
scope of those networks," he adds.
Although Bates says Cisco will continue to expand the
capabilities of its core router, it will do so at a pace that meets the
demands of its customer base. In his estimation, the GSR product
line will continue to fit the bill for the foreseeable future.
But Cisco's competitors see things differently. Endorsing the
formula of constructing terabit networks with terabit-size boxes,
Nortel has a 20 percent stake in Avici, although a reseller
agreement between the two was terminated late last month to
give Avici some freedom to pursue a possible IPO.
Lucent made its move into the terabit market in late June, with its
announced purchase of Nexabit. Even the European players think
there might be some substance to this terabit router thing.
Siemens purchased Argon Networks, a high-end router start-up, in
March to be part of its new Unisphere Solutions operation.
Cisco's vulnerabilities aren't limited to the terabit router market. In
the Asynchronous Transfer Mode space, which is expected to be
another source of equipment for builders of next-generation
networks, Cisco has shown some signs of sputtering. Suffering a
major public relations setback earlier this year, Cisco pulled the
plug on its high-end ATM product, the core switch it unveiled
amid much fanfare a year earlier. Several industry observers
blame the misstep on Cisco's internal development team. "It's no
secret that the integration of StrataCom has been a miserable
failure," says a network architect of a major carrier who asked not
to be identified, referring to Cisco's $4 billion purchase of the
ATM and frame relay equipment maker in 1996.
The setback could further erode Cisco's market share in the ATM
backbone arena. According to market figures from Dataquest,
Cisco saw its share of the ATM backbone market decline slightly
last year, as Ascend Communications - now part of Lucent -
jumped to the front of the pack.
What's going on Market watchers are floating a few theories as
possible explanations for Cisco's apparent problems at the high
end of the router and switch market.
The one that holds the least stock with industry experts is that
Cisco is a victim of its own success. Similar to Microsoft and other
companies with double-digit growth rates, Cisco has suffered its
share of brain drain.
Software engineer Tony Li, who played a critical role in the
development of Cisco's routing technology, was perhaps the most
respected technical mind to depart for greener pastures. While at
Cisco, Li earned the loyalty of several service providers with his
extensive knowledge of complex routing algorithms and his ability
to quickly solve problems that cropped up in Cisco's gear. Li left
Cisco for Juniper a few years ago, where he contributed
significantly to Juniper's well-regarded routing software. He
recently left Juniper to pursue new interests.
A second theory about Cisco's apparent vulnerability is that the
recent and sudden diversity of Cisco's product line could be
pulling attention away from the company's core competency.
"They are waging battles on multiple fronts," Ryan Hankin Kent's
Skorupa says. "Cisco is simultaneously engaged in battles where it
is the biggest competitor - the IP core router market - and in
markets where it is not the leader."
Skorupa is referring to Cisco's epic struggle to compete in the
full-service business with telecommunications equipment giants
Lucent and Nortel and European powerhouses, such as Alcatel,
Ericsson and Siemens. By trying to make up ground in the voice,
telephony, cable modem, Digital Subscriber Line modem and
call-center markets simultaneously, Cisco could be falling a step
or two behind in the router segment.
But then again, Cisco is Cisco, a Silicon Valley bully famous for
locking corporate customers into proprietary strangleholds. A point
of tremendous frustration for rivals - many of which no longer exist
- it was not uncommon for Cisco-based customers in the enterprise
market to purchase Cisco hardware that was 10 times the cost and
six months behind competitive products.
But customer loyalty will not stretch as far in the highly
competitive and technically sophisticated service provider market,
Cisco's newest set of rivals say. "The carrier space is definitely
different," says Pete Chadwick, vice president of marketing at
Avici. "It remains to be seen if Cisco understands the carrier
market when its strength comes from the enterprise."
Several analysts believe that Cisco is not concerned with pushing
the envelope beyond its current high-end products because of the
impending collision between electronic equipment, such as
routers and switches, and optical networking gear.
Cisco is already well-protected should the core of the public
network go all optical, says Tom Nolle, president of research firm
Cimi. The company recently took a stake in Monterey Networks,
which makes optical equipment designed to switch wavelengths
of data across long-haul networks.
In the end, however, Cisco's best defense against losing the high
end of the router market is its deep pockets and willingness to dig
into them from time to time. "Cisco always reserves the right to
buy someone," consultant Passmore says. "They can always whip
out the old checkbook."
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