The Great Cisco Wars. Equipment makers beef up for fighting an 800-pound gorilla
americasnetwork.com
August 15, 1998
By Alan Pearce
Until recently, merger madness did not afflict the
equipment segment of the industry. On the whole, the
long-established and extremely conservative telecom
equipment manufacturers--Lucent Technologies, Motorola,
Nortel, Siemens, Alcatel, Ericsson, NEC and Fujitsu--have
steadfastly protected and served their embedded base: the
national and regional, wireline and wireless, telecommunications carriers.
But all trends change, and this one has changed abruptly, in large measure
because of the growth of the Internet, the demand for more bandwidth and
faster speeds, and the rapid migration from circuit switching to packet
switching. It is this background that explains the following developments:
Nortel, one of the largest central office (CO) switch suppliers, plonked
down $9.1 billion to buy Bay Networks, a leading data networking
company. Bay Networks is a minor competitor to Cisco Systems (but
more about that later).
Tellabs bought Ciena Corp. for $7 billion. Tellabs manufactures
bandwidth control equipment, while Ciena is a leading manufacturer of
optical networking equipment.
Alcatel acquired DSC Communications for $4.4 billion. Here, Alcatel is
anxious to gain U.S. market share (as are other offshore companies).
Lucent Technologies paid $1 billion for Yurie Systems Inc., an
asynchronous transfer mode (ATM) access equipment manufacturer.
Lucent is suffering from acquisition handicap for the next several months,
because it is forbidden from 'pooling of interests' in tax accounting for its
acquisitions. This means that, until October, Lucent only can use cash
(as opposed to the power of its stock) to engage in the merger-madness
that is compelling equipment manufacturers to consolidate.
Enter the new king
The important question is, Why is all of this happening now? The answer is two
words: Cisco Systems.
Cisco is one of the amazing success stories of the 1990s. Its market value has
gone from next to nothing to about $100 billion, closely challenging Lucent's
market value of $130 billion-plus. Cisco's success is so complete that it is
regarded as a company without serious challengers in the enterprise networking
market. Enterprise networking equipment enables large companies to
communicate within themselves and with other companies at fast speeds and
over networks that have the ability to offer bandwidth on demand.
Cisco is feared by the established telecom equipment manufacturers, because
they believe that Cisco is now ready to sell equipment to traditional telecom
carriers. So, largely out of competitive necessity, the manufacturers are getting
ready to take a run at Cisco.
As the MCI ad says, is this a great country, or what?
Cisco's success is based primarily on its Internet protocol (IP) routers, and it
has become what many believe to be the 800-pound gorilla in the data
networking arena. Cisco sets de facto standards and relegates the competition
to minor roles. Now that the market appears to be peaking (it certainly is not
growing at the rapid rates of the past and is becoming more competitive),
Cisco must look for new markets so it can sustain its staggering growth--and
keep its stockholders happy.
That's why Cisco is eyeing the public networking market and is ready to take
on the likes of Lucent, Nortel and others as the major carriers begin to deploy
packet-switched networks. Cisco is regarded as the expert in packetized
networking, even though Bell Labs developed the technology. But the old
AT&T learned at great cost that developing the technology is one thing--selling
a product that people are willing to buy is another.
The urge to merge
Lucent, Nortel and the others are wondering whether Cisco has such an
intimate understanding of data networking that they have no option but to
spend money to acquire knowledge and information so they can protect their
increasingly vulnerable embedded base. Serious product delays can mean
death in an equipment market that is in the midst of major change. So expect a
continuation of the merger trend as the leading manufacturers try an end-run in
a bid to erode Cisco's dominance.
It will be an interesting war. Cisco knows a great deal about major business
customers who have high-speed and high-bandwidth requirements. Lucent,
Nortel and their colleagues know a great deal about the major
telecommunications service providers that have circuit-switched networks that
depend on CO switches and software related to circuit switching. Now, these
major service providers want to operate their own packet-switched networks.
But who will be their preferred equipment vendor? Early indications are that it
could be a fight to several deaths.
Contributing editor Alan Pearce is president of Information
Age Economics (Washington). Send comments to
anrespond@americasnet work.com.
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