Cisco Rolling Up Sleeves With Optical Networking Plant
By Scott Moritz
Senior Writer
10/2/00 8:01 PM ET
For years, Cisco (CSCO:Nasdaq - news) has made the Internet work while mostly staying out of the messy business of manufacturing. But that's about to change.
Tuesday, the networking giant will stage the grand opening of a refurbished Digital Equipment factory in Salem, N.H. In doing so, Cisco should shed some light on its widely awaited optical networking strategy. Though the race to provide equipment for the next-generation Internet is far from over and Cisco remains a formidable foe, observers say the company's bits-and-pieces approach to optical networking has allowed rival Nortel (NT:NYSE - news) to sprint to an early lead.
Now, in opening the 674,000 square-foot plant, Cisco is making a bold shift to an in-house manufacturing strategy, allowing it to consolidate its optical efforts under one roof, say analysts. But with Nortel dwarfing Cisco in optical sales and the industry evolving rapidly, it's clear the networking giant must show progress quickly, particularly in key technologies.
Speed of Light?
New Cisco plant will handle products from optical acquisitions.
Cisco created and dominated the business of selling routers, the electronic boxes that connect computer systems. But Cisco didn't have a sliver of homegrown optical expertise when it decided to take on Lucent (LU:NYSE - news) and Nortel in optical networking, which in the last year had become perhaps the fastest-growing area of telecommunications. Subsequently, Cisco has had to acquire technologies and recruit talent in hopes of remaining a contender. And much is riding on those efforts: Despite its also-ran status in the optical arena, Cisco is still valued at more than Lucent and Nortel combined.
Slow Out of the Blocks
Cisco has spent more than $10 billion on five acquisitions to enter optical networking (see table, above). But the company has had little to point to in terms of success in the optical race. Cisco is on track to sell about $1 billion worth of optical equipment this year; nearly all that revenue will come from sales of Cerent equipment. By contrast, Nortel says it expects to sell $12 billion worth of optical gear by year-end.
Of course, Nortel was fast out of the blocks in the first leg of the optical race, with its commanding lead in optical-transport products. Cisco admits it's playing catch-up, and says the companies are in the early stage of a long race.
The next stage involves two technologies. The first, so-called metro area, or edge-of-network, equipment serves as the on/off ramp for Internet traffic. The Salem plant will help Cisco integrate some of the Qeyton wave-division multiplexing functions into Cerent equipment to develop a new generation SONET/WDM metro device, say analysts. (SONET and WDM are rival networking protocols; SONET, or synchronous optical network, is the current network standard and seen in some cases as a bandwidth hog; WDM, wave-division multiplexing, saves bandwidth by breaking light into component colors.)
Now You See It
The second technology, and perhaps even the more critical one, is optical switching. Last month, Cisco said WorldCom (WCOM:Nasdaq - news) was testing its wavelength router, which is designed to sit in the core of a network and direct traffic.
This type of intelligent switch requires a considerable amount of software programming and must cooperate well with other devices in the network. Integrating the wavelength router into the product line will be crucial to its success and probably a major part of the mission in the Salem plant.
Cisco has formidable competitors in the optical-switching arena, some of which have made considerable headway. Tellium, as TheStreet.com predicted, recently filed for an IPO after winning major contracts with Cable & Wireless (CWP:NYSE ADR - news) and Qwest (Q:NYSE - news) for its switch. Lucent has its lambda router in trials. Nortel expects to have its Xros switch available early next year.
In August, Sycamore (SCMR:Nasdaq - news) received a sales contract with 360Networks (TSIX:Nasdaq - news). Then Ciena (CIEN:Nasdaq - news) became the apparent winner of a Williams Communications (WCG:NYSE - news) switching contract, according to a glowing endorsement from Williams.
To Be Sure
Whether it's Cisco's take-no-prisoners attitude or its mammoth market cap, something is making Nortel take Cisco's entry into the market quite seriously. For instance, at a recent optical conference hosted by CIBC World Markets, Nortel's president of optical networks, Greg Mumford, named Cisco as his toughest competitor -- not Lucent.
"You can't ignore them, especially when Nortel's top guy in optical says it's his most formidable competitor," says CIBC World Markets analyst Todd Coupland, who has no rating on Cisco and a strong buy on Nortel. CIBC has no banking ties to either company.
Obviously, the comment was meant as a dig at longtime archrival Lucent. But now that Cisco is willing to get its hands dirty in manufacturing, Nortel can't rest too comfortably on top. |
