Silicon Valley: Cisco Scores
By Kevin Petrie
Staff Reporter
11/3/98 6:02 PM ET
SAN FRANCISCO -- Score one for Cisco (CSCO:Nasdaq).
Enron Communications' decision to build a
telecommunications network to send data using only
Internet-Protocol systems from Cisco with fiber-optic gear
from Ciena (CIEN:Nasdaq) is a coup for data networker
Cisco in its battle against both Lucent (LU:NYSE) and
Ascend (ASND:Nasdaq).
The contract presages a gradual shift in network architecture
away from phone systems toward the Internet.
After examining all the options, Enron nixed plans to
purchase additional layers of network technology from
Ascend, Lucent and other suppliers, according to research
vice president Stan Hanks at Enron.
"We looked at most of the Sonet equipment and the ATM
equipment on the market," Hanks says. Lucent relies on
sales of Sonet or "synchronous optical networks," an older
form of fiber-optic technology. Ascend is a key player in
ATM or "asynchronous transfer mode" switches for the
backbone of carrier networks. While many carriers to date
have balanced numerous layers of technology in their
networks, Enron has opted just to stick with the simpler
offerings from Ciena and Cisco and save money.
"We think it's a 30% to 40% impact on working capital and
60% impact on operational costs," says Hanks. "That's big."
Enron had to choose between quality and price. "There are
some things that [IP] just can't do right now, and that's
perfectly fine with us," Hanks says. For example, Enron has
no immediate plans to send voice calls over this data-based
system.
Lucent and Cisco are girding to battle in the converging
fields of telephone service -- Lucent's forte -- and the
Internet. The network of tomorrow likely will be based on
data systems rather than voice. It will take some time to
arrive there.
Enron Communications, a subsidiary of Enron
(ENE:NYSE), seems to be following in the footsteps of
energy company Williams (WMB:NYSE) by building a
telecommunications network. Enron intends to lease
capacity on its pipes to carriers, allowing them to ship
Internet traffic. Given the current unreliability of IP
technology, Enron will be unable to carry phone calls on this
system in the near future.
Enron appears to be the first company to choose strictly IP,
according to analyst Mat Steinberg with market researcher
Ryan Hankin Kent. He says Lucent is working to meet this
challenge by developing IP vertebrae for network backbones.
A spokesman for Ascend says the company is fast cooking
new offerings as well. "You can bet that at some point we're
going to have capabilities that Ciena and Cisco are offering
today," he says, adding that Ascend's current products can
succeed alongside IP.
"There's definitely a movement afoot for carriers to simplify
their networks," says a Lucent spokeswoman. But she says
it is too early to tell whether many carriers really will opt for
the bare-bones IP approach, given the numerous factors
they must weigh. The spokeswoman declined to speak
about Enron in particular.
Shares of Ciena have climbed sharply from the lows around
8 in mid-October, on speculation that the company might be
acquired. Ciena's proposed merger with Tellabs
(TLAB:Nasdaq) was canceled in September after Ciena lost
prospective business with AT&T (T:NYSE) and others. In
afternoon trading, Ciena shares were off 2 7/8 to 18 15/16 on
heavy volume, as investors sold on the news of a contract
that might have proved smaller in dollar volume than
expected. Ciena said it has shipped $23 million of product to
Enron already; other terms were not disclosed.
Cisco's stock was down 1 5/16, or 2%, to 63 3/8.
If other carriers follow Enron's lead, Cisco might gain an
early advantage in its battle to challenge Lucent.
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