Eric: Comment?
"To: blaireo1 who wrote (12244)
From: Glenn McDougall Monday, Aug 7, 2000 9:15 AM ET
Reply # of 12253
Cisco in uphill battle with Nortel
Fight in optical market
Simon Avery
Financial Post
SAN JOSE, Calif. - Cisco Systems Inc., the leading supplier of networking equipment that drives the Internet, says it will challenge Nortel Networks Corp. for top
spot in the emerging optical networking market within two years.
Few industries today have more momentum, or volatility, than optical networking -- the business of zapping vast amounts of data around the globe in milliseconds
by pulsing light down fibre-optic cable.
Cisco, the world's second-most valuable company after General Electric Co., finds itself in the unusual position of playing catch-up in this nascent,
multi-billion-dollar market to Canada's Nortel Networks and New Jersey-based Lucent Technologies Inc., which have both been sending voice over fibre optics for
years.
"You have to crawl, walk, run. We're in the crawl stage," Carl Russo, Cisco's group vice-president of optical networking, said during an interview here on Friday.
The whole industry is still taking baby steps in a rapidly developing market that will soon be worth US$100-billion a year, he said.
But Nortel and Lucent are already racking up impressive revenue. In 1999, the two companies' combined optical equipment sales totalled US$12.3-billion,
according to a recent report from RHK Inc., a telecommunications marketing firm.
Anna Reidy, an analyst with RHK, said Nortel is the No. 1 player in the optical networking market, claiming a 29% market share last year, followed by Lucent,
which claimed 24%. Fujitsu placed third with 14%, while Cisco barely registered a single percentage share, mixed in with the likes of lesser known firms, including
Tellabs, Ciena, Hitachi, Sycamore and Tadiran.
In the short term, there's unlikely to be a shakeup in those standings. Nortel is boasting it will ship US$10-billion worth of optical products this year. Cisco, which
will report fourth-quarter earnings tomorrow, expects to sell US$2-billion of optical networking gear next year, according to Mr. Russo.
(Analysts' consensus earnings estimate is US15¢ a share, although the so-called "whisper" number is slightly higher, at US17¢.)
Cisco, however, is preparing itself for a major assault on the market. It has acquired a portfolio of optical networking products through four major acquisitions over
the past year, costing US$10.4-billion.
Cisco executives don't seem daunted by the race that lies ahead. Mike Volpi, chief strategy officer, said optical networking is so new that it's almost a cottage
industry and the sector is a full 15 years behind the maturity of today's semi-conductor industry.
Manufacturing is still done by hand, and growth is occurring so quickly that the industry will out-pace the hyper-rate of development in the semi-conductor
segment by a factor of four, Mr. Volpi said. For years, chipmakers have set their clocks to "Moore's Law," which dictates that chip processing power will double
every 18 months.
Cisco executives clearly believe they have several advantages over competitors that will allow them to close the gap quickly.
One is the fact that Cisco is the only major equipment supplier that outsources all its optical parts. Major competitors such as Nortel, Lucent and Alcatel SA are
struggling right now to find the best way to maximize the value of their in-house components businesses.
In the last month, Nortel and Corning Inc. admitted to holding discussions about merging their components divisions in a US$100-billion deal. The talks eventually
collapsed. Meanwhile, Alcatel has said it will issue a tracking stock for its components unit.
Traditionally, as industries mature, they tend to become more horizontally integrated, a strategy Cisco has adopted since day one, Mr. Volpi said.
The company's "trump card" in the optics race will be its expertise in the Internet, he said.
Most optical networks built to date were designed for transmitting voice. The new systems are sending data and multi-media, which require multiple layers of
different communications protocol.
Reconfiguring systems so these different layers can talk to one another has always been Cisco's specialty, Mr. Volpi said.
The company sees two distinct markets to attack: long-distance networks and local networks for metropolitan areas.
The long-haul market is the most difficult for Cisco to penetrate because Nortel and Lucent have been supplying the long-distance carriers with equipment for
years. Cisco is still refining its product offerings here, trying to make carriers comfortable with the new technology. The long-haul market is the backbone of
communications today and the rollout of new equipment must be done cautiously, Mr. Russo said.
"We don't want to be on CNN. You take that kind of network down and you will be on CNN."
But in the metropolitan segment, which ultimately will require many more switches and routers than the long-haul sector, Cisco said it already has more than 300
customers and is going "head to head" with Nortel.
"It's going to take some time. But I think we can achieve number two status in the metro market in the next 12 to 24 months, if we execute right," Mr. Russo
said.
"The expectations are fierce."
Both Nortel and Lucent have run into manufacturing problems: They can't keep up with demand.
Lucent had to lower its earnings expectations because of production shortfalls, while Nortel has committed to invest US$1.9-billion over the next 18 months to
double its optical networking capabilities.
Mr. Russo said Cisco is able to meet demand today and will open a major manufacturing centre in Salem, N.H., this fall.
But things may have just got more competitive for Cisco with last week's announcement by Lucent that it will split its optical networking business into two
separate units [long-haul and metropolitan] and bring in younger executives from recently acquired startups to run them.
"I think they're going to breathe some life into Lucent's optical organization and give Cisco a run for their money," said John Armstrong, chief networking analyst
for the research firm Dataquest in San Jose.
savery@nationalpost.com " |
