Frank, I would appreciate your comments and opinion on this article from the WSJ. It seems pretty superficial.
today's wsj.
For Cisco, It's Change or Perish
By Bret Swanson, a technology analyst at the Gilder
Technology Report.
Oh, how the mighty fall.
It wasn't so long ago that Cisco Systems was the world's largest company
and the envy of all the technology industry. It had exceeded published
earnings estimates 14 straight quarters in a row, was hiring like crazy, and
had topped $555 billion in market capitalization. These days, Cisco is slashing
15% of its workforce, missing all its numbers and wondering where more
than $400 billion of market value went.
To his credit, Cisco head John Chambers saw things
coming and was the first chief executive to smartly
call on the Federal Reserve to cut interest rates and
for Congress to cut tax rates. But unfortunately for
Cisco, Washington getting its act together won't be
enough to put the networking company on the
rebound. That's because Mr. Chambers's real
problems aren't economic. Cisco is increasingly in
the wrong business.
Heroic Processing
The company that defined the 1990s and made the
Internet possible is being squeezed from above by
fiber optics and from below by microchips. It has a core competency in
neither. Cisco's great advance was its vision for the first post-telephone
network. It developed the architecture and crucial software standards that
made the Internet work. Then it cobbled together the chips and wires and
code into high-margin boxes that few others knew how to make. But unless
Mr. Chambers can set his firm on a new path, Cisco will be remembered as
a transitional, if temporarily transformative, enterprise.
The key to understanding Cisco's prospects is to understand the history of
communications networks. Real-time communication over a distance was
first made possible by Samuel Morse's telegraph, or copper wire carrying
electromagnetic signals. As technology evolved we were soon able to send
voices, rather than just simple dashes and dots. Voice calls were switched
by operators plugging wires into a switchboard. Later, this switching function
would be overtaken by mammoth electronic boxes from Lucent and Nortel.
Still, the architecture remained the same for nearly a century: Each telegraph
or phone call received its own connection. You may have only used your
telephone 20 minutes a day, and you may have only spoken 15% of the time,
but the connection was always there. Relative to the application, we had a
lot of bandwidth to spare.
Enter the Internet. With the first online services in the early 1990s and the
introduction of the Netscape browser in 1994, the data-centric Internet
became a phenomenon. E-mails, Web browsing, and later e-commerce
threatened to overwhelm the voice-optimized telephone network. The mostly
copper telecommunications infrastructure wasn't ready.
Cisco foresaw this data explosion. And it found a way around the
narrowband copper links to offices and homes, as well as the more
capacious -- but still not big enough -- fiber-optic strands connecting our
cities. Cisco discovered that if you didn't give everyone a connection, but
instead chopped up the messages and gave the packets a destination, you
could throw the packets out into the Internet, let them take any number of
paths, and then have them reassemble at the other end. The new
Cisco-powered network was ruthlessly efficient. There were no more
circuits between users. There was no more silence. The Cisco network used
every bit of bandwidth available.
Now, bandwidth scarcity is over and Cisco's time has passed. The new
all-optical network doesn't need heroic processing of billions of bits each
second. All it must do is change the direction that light travels. The Cisco
network treats messages as bits rather than lightwaves, laboriously
processing what should simply be steered. It's as if rivers worked not by
banking the flow of the stream but by checking and sorting each H2O
molecule for its appropriate destination.
KMI reports that in 1999 and 2000 some 150 million kilometers of optical
fiber were laid world-wide. Avanex, the leading optical networking company,
can make and sort and direct thousands of colors of light, each carrying
distinct messages, down a single fiber strand. Yipes is connecting urban
business directly to fiber, and wireless start-up Soma Networks can supply
residential broadband connections that are faster than copper DSL or
broadband cable TV. Cisco and its big, central routers can't handle this
second wave of data. And right now it has no back-up strategy.
Focused for too long on routers and other electronic network modules, Cisco
doesn't now have the optical capabilities to prosper in a new world of
bandwidth abundance. Just weeks ago Cisco announced it would shut down
one of its lone optical plays, Monterey Networks. Commenting last May, we
noted in the Gilder Technology Report that there were too many real optical
companies for Cisco to simply dabble: "Cisco's $500 million investment in
Monterey is suddenly irrelevant and will never be a significant factor in the
network. . . It's Sonet hardware investment, $7 billion for Cerent, may be
even more fruitful than anticipated in the short term . . . but faces an even
shorter life expectancy." Indeed, while Cerent was a revenue star in 2000, in
2001 it has already been rendered obsolete by the continually multiplying
colors of light from Avanex, ONI, and Sorrento.
Creative Destruction
Of course we will still need electronic terminals and routers and switches at
the edges of the network. But if Cisco's failing optical strategy weren't
enough, its products are increasingly being disrupted by Moore's Law of
microchips. Broadcom, Applied Micro Circuits, EZchip and others are
integrating more and more of the functionality of Cisco boxes -- all the wires
and separate processors and software -- onto single silicon chips. If the
router becomes a chip, what does Cisco have to sell except its software and
protocols?
The destruction in the market affords Mr. Chambers a perfect opportunity to
practice some creative destruction on his own company. Namely, he needs
to remake it in the image of the new all-optical network.
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