This post is curtsey of Mr.Fun.LU&CSCO
Uncle Frank asked me to weigh in here on Cisco vs. Lucent.
First, a caveat, I am not particularly enamored with Mr. Moore's
Gorilla/King construct as a way to analyze company performance,
but I'll try to stay within the context...
Cisco - gorilla in large enterprise data networking equipment
market - is finding that the food supply in its natural habitat is
drying up. Large enterprise networking makes up nearly 70% of
Cisco's revenues, and more of its profits. Industry growth in this
arena has slowed dramatically in the last three years, from better
than 40% in 1995 to about 15% in 1998. Cisco has sustained better
than 30% growth from this market by taking huge amounts of
market share - its share of LAN switching increased from 36% to
49% in its FY1999, largely driven by mass conversions of
Cabletron hubs to Cisco's Catalyst 5000 line of switches. My basic
thesis: Cisco's growth in this area will slow markedly in 1999 and
beyond as prices begin to plummet, share gains become more
difficult to win, and overall spending decelerates.
So Cisco is looking to expand to markets where it is not a gorilla.
Small businesses and households is one area - fragmented market
(leader 3Com has only 25% of the market), accelerating (~25%
growth), notoriously low margin and price sensative. Cisco is
succeeding here, but puts its gross margins at risk. (BTW 3Com
also continues to build share)
The other area of expansion is the carrier market. Here Cisco does
not enjoy true Gorilla status(Except in internet routers). Cisco's
first play is in data technologies - true to its heritage as an
enterprise data networking gorilla. However, despite Cisco's rapid
growth, it finds itself behind Ascend, which has a longer list of
better carrier contracts and obviously superior technical solutions.
Adding insult to injury, Ascend is itself acquired by Lucent, a
would-be gorilla in the carrier space. IMHO the only reasons
Lucent does not have true gorilla status in carrier voice networking
are 1) protectionism in foreign markets, 2) previous ownership by
AT&T placed it in a great disadvantage selling to other carriers.
So here's the battle. It is going to be fought on Lucent's turf. Cisco
is trying to change the rules - "old world, new world" etc., but that
will only go so far. Cisco will have to play the old game of SS7,
hyper-reliability, etc.. My opinion? Cisco will do well in the long
run, but learn some rough lessons in the near term - already it has
taken its operating expenses up 300bp in girding for this major
transformation of its business focus. Lucent will do well in both
near term and long term. Acquiring Ascend was a master stroke
which will pay huge dividends. NT will also do well, particularly
in the extremely important optical arena, but maybe not quite as
well as either Lucent or Cisco. European and Asian telco suppliers
are in big trouble. Hope this helps. |
