Cisco Systems Takes On the Really Big
Boys on Routing Data
or most of the last decade, Cisco Systems Inc. has been
steamrolling competitors in data networking. Its routers
and switches dominate the Internet and corporate networks
that try to get disparate sorts of computers to talk to each other.
It holds a 70 percent market share in routers, and the company's
$79.3 billion value in the stock market is more than four times
the combined stock market value of its main rivals: the 3Com
Corporation, Bay Networks Inc. and Cabletron Systems Inc.
But lately, Cisco is on a collision course with a set of new, much
bigger competitors. Companies that have made their livelihoods
selling gear to the telephone industries are intent on moving into
Cisco's market. These companies contend that their long
experience in running dedicated-circuit voice networks gives
them an edge over Cisco, which has specialized in sending data as
packets distributed over a variety of pathways between routers,
the traffic controllers of the Internet.
The most prominent of these new rivals are Lucent Technologies,
the spinoff of the AT&T Corporation that includes Bell Labs, and
Northern Telecom of Canada, Lucent's chief competitor in the
supply of conventional switches and other equipment for
telephone networks.
Not only do they have the heft -- Lucent has three times the
annual revenue of Cisco -- but they also have the motivation.
They realize that the market for the equipment they have been
selling, which relies on setting up dedicated paths, or circuits, for
each communication, is quickly becoming doomed. In the future,
this dedicated-circuit approach, known as circuit switching, seems
destined to be replaced by more efficient and economical
packet-switching technology on which the Internet (and Cisco's
business) is based.
Packet switching, originally intended for transmitting data, was
once thought to be too crude for voice communications. But
increased communications capacity and improvements in the way
the technology can organize the packets are beginning to make it
possible to use packet switching even for "continuous flow"
information like voice conversations and even video
programming.
"We're at a technology flash point where there is no longer a
question that data is the dominant architecture and voice is a
service," said Cisco's executive vice president, Don Listwin.
To overcome Cisco's leadership in data networking, Lucent and
Northern Telecom will be counting on their ability to transfer the
characteristics of voice network technology to data networks.
They will tout the "extra level of engineering" that goes into the
more complicated networks that carry voice traffic, as David
Ramos, a Nortel vice president for marketing, likes to put it.
"There's no one silver bullet," said Bill O'Shea, president of
Lucent's data networking business. "It's years and years of
experience, building systems and watching how they operate" that
insure reliability and avoid failures.
Yet Lucent and Nortel are still very much newcomers. Only this
month will Lucent begin testing its first billion-bits-a-second
packet switch based on Internet protocols, which could become a
true competitor to Cisco's most advanced gear. Northern
Telecom, for its part, derived only $785 million of its $15.4
billion in revenue last year from data networking; it has a long
way to go to be on an equal footing with Cisco.
But then, in this transition from the old world architecture of
circuit switching to the new world of packet switching, it is not
altogether certain that Cisco plans to slug it out with Nortel and
Lucent.
Cisco's chairman, John Chambers, reportedly broke off intensive
talks with Lucent about some sort of partnership because the two
companies' product lines had begun to overlap too closely. Now,
he is said to be bent on concluding an alliance with Nortel, which
could take advantage of its strengths in sales and service in the
telephone industry.
But the impulse to form new data networking alliances is not
Cisco's alone. Last week, the data-switch maker Tellabs
announced plans to acquire the Ciena Corporation, a highflying
supplier of a new technology that vastly expands the capacity of
fiber backbones, for $7.5 billion. And a day later, another digital
switch maker, DSC Communications, agreed to be acquired for
$4.4 billion in stock by Alcatel Alsthom of France -- a
telecommunications equipment giant that wants to expand its
American presence.
So Cisco may find it harder to steamroll the competition. Last
week, when Sprint announced plans for its national network to
evolve from circuit switching to packet switching, attention
centered on the fact that the key new equipment for chopping
voice, video and other data into fixed-size packets would come
from Cisco, and not from a telecommunications vendor like
Lucent.
But Cisco's gear, when ready, will at first only be found on the
edge of this new-era network. At its core, at least for awhile, will
be data switches from the Japanese giant NEC -- and, oh yes,
from Nortel.
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