'...Cisco, of late, is harvesting a crop of competitors in many aspects of its business plan...'
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Cisco's Challengers -- the Networking Giant Stands Tall on Wall Street, But Competitors New And Old Are Ready to Rumble
By Margie Semilof, CMP Media Inc
16 October 2000
As COO of Alcatel, the French telecom giant, Krish Prabhu knows a thing or two about scaling big telecommunications networks. And with large incumbent carriers spending billions of dollars on upgrades to tackle the new economy, Prabhu believes Alcatel's track record of top-notch service gives it an edge in competing against the likes of Cisco Systems.
Other networking providers like their chances, too.
Cisco, the kingfish of corporate data networks for more than a decade, now faces its biggest challenge, industry observers say. The networking company must prove its technologies can scale to the liking of carrier networks. And competitors new and old await Cisco at every turn.
Market watchers say Cisco has a tough transition ahead. Less than one-third of Cisco's revenue comes from carriers-and that market is the company's fastest-growing segment.
"Cisco is waltzing into a world of heterogeneous environments, and this is not an 'IOS [Cisco's internetwork operating system] conquers all' situation," says Peter Bernstein, president of Infonautics Consulting.
"Cisco is learning that the carrier-class market is a lot tougher than it expected," says Lisa Pierce, vice president and research leader of Giga Information Group's telecom advisory practice.
Cisco has pushed itself into the white-hot center of the exploding data communications market by leveraging an arsenal of hardware, marketing might and aggressive sales forces. The San Jose, Calif., company has cut deals with nearly every major service provider to get its data communications gear into their networks and has made frequent acquisitions to address holes in its technology lineup.
Cisco's greatest challenge is hiring and retaining skilled staff plus building vendor partnerships, says Rick Justice, senior vice president of field operations at the company.
At the same time, Cisco is being pressed to keep pace with demand in the service provider market, says Larry Lang, the company's vice president of service provider marketing.
Those challenges haven't tarnished Cisco's financial performance, however. Cisco's revenue for fiscal 2000 was $18.93 billion, up 55 percent from $12.17 billion in 1999. Earnings climbed to $2.67 billion, or 36 cents per share, from $2.02 billion, or 29 cents per share, in that period. But the question remains: Can Cisco maintain its Wall Street prowess when the move to next-generation networks-an area it dominates-is just beginning?
In the networking arena, the bulk of revenue still comes from traditional services such as voice, where Cisco has virtually no stake. About 60 percent of Cisco's income is from enterprise technologies (primarily multiprotocol routers), even though its routers and switches also pervade ISPs and other carriers. By and large, Cisco has focused on developing its IP portfolio.
Yet Cisco may be ill-prepared to deal with a key market reality: The ability of any equipment vendor to make money rests on the ability of its service provider customers to make money. To that end, the industry still hasn't figured out how to get paid for IP, says Tom Nolle, president of CIMI, a consulting firm.
Service providers earn billions, and about 90 percent of their take is from voice services. Data services, though growing quickly, don't represent even 20 percent of revenue, and Internet data services have yet to generate 1 percent of revenue, Nolle says. Since IP is just a tiny fraction of overall service provider revenue-and with the enterprise market expanding at less than 10 percent annually-Cisco will be hard-pressed to sustain its growth rates, he says.
What's more, competition is arising from companies angling for the business of large local-exchange carriers remaking their central office. Those competitors include new players such as optical start-up Sycamore Networks and stalwarts such as Nortel Networks and Lucent Technologies.
Despite a recent "brain drain" and financial stumblings, Lucent remains strong because it's supported by solid telecom carrier accounts, as is Nortel, industry analysts say. Earlier this month, Lucent inked a $1 billion deal to be the primary data, voice and access infrastructure provider for SBC Communications' national network expansion.
These companies are accompanied by other rising stars, such as terabit router maker Juniper Networks and Alcatel, which is sewing up DSL and digital loop carrier accounts with regional Bell carriers.
For Cisco's part, it is supplying optical concentration devices and some DSL equipment to SBC for Project Pronto, a separate three-year, $6 billion effort by SBC to modernize its access network. But about 70 percent of the overall network will use Alcatel gear.
Alcatel has come on strong in the United States with broadband access. Its U.S. revenue swelled to more than $6 billion last year, up from around $1 billion in 1996 and $100 million in 1991. Alcatel's core areas of interest are DSL and optical networks. Prabhu, who's also CEO of Alcatel America, says the company is well-positioned with incumbent carriers and is now zeroing in on CLECs and ISPs seeking broadband access. The winning vendors will be the ones that deliver the best service to the supply chain, he says.
"There are quality issues when you scale up, and service providers put millions on a service," Prabhu says. "If you look at that as a problem formulation, then Lucent, Nortel and Alcatel have the advantage."
While Cisco's name may loom large in the networking field, the company isn't pervasive in all segments, industry analysts say.
For instance, Cisco has only a small portion of today's $1 trillion telecom market, which is projected to climb to $1.5 trillion by 2003, reports research firm Gartner. Cisco also owns only small bites of the much larger markets for voice communications gear, mobile communications, public network equipment and cellular services, which topped $450 billion in revenue last year, according to Gartner. Also, CIMI estimates that Cisco generates less than $1 billion of the $35 billion market for access provider modernization.
Cisco's strongest plays lay in networking communications equipment, which was a $39 billion market last year and is expected to grow to $52 billion by 2003, and in remote LAN and Internet access, an $11 billion market in 1999 that's projected to reach $18 billion by 2003, says Gartner.
In the global service provider network market last year, Cisco led in total ATM and frame-relay switching gear, mainly because of its acquisition of Stratacom, reports Vertical Systems Group. Cisco had about 22.5 percent of the market vs. Lucent's 20.7 percent and Nortel's 15.4 percent.
Of total service provider revenue in 1999, Lucent had a far greater reach, with 36.5 percent of the market, Vertical Systems Group reports. Cisco held 20.6 percent of the market, and Newbridge, which Alcatel acquired last year, had 17.8 percent. The market includes multiservice switches sold to carriers and ISPs to support frame-relay services. Cisco's strong showing in service provider networks reflects an aggregation of many small fragments, says Rosemary Cochran, principal at Vertical Systems Group.
Yet service providers are in a bind because as they rebuild their networks they must deal with numerous start-ups, which may lack a solid management strategy, and with large vendors such as Nortel and Lucent, which have failed to present a clear vision, observers say.
Cisco's power is that it articulates a vision, says one consultant who works closely with Cisco but requested anonymity. "The vision may be all over the map, but at least they have one. That's more than you can say for Lucent and Nortel, and that's why Wall Street loves Cisco," the consultant says.
Many business customers, though, aren't convinced that IP services can offer the performance they're used to getting from leased lines. Most agree that IP eventually will eat up other services, but they say quality of service on IP networks is still in its infancy and the public remains willing to pay for the guaranteed performance it gets from traditional carriers.
The quality-of-service problems surrounding IP are overrated, says Cisco's Lang. "The real issue is to develop a complete set of features," he says.
Cisco critics say the company has never been known for its technical innovations but instead for its ability to buy companies with successful technology. As a result, Cisco has enhanced products and rolled out new generations of products slowly, opening the doors for companies such as Juniper and creating opportunities for companies such as Shasta Networks (acquired by Nortel), SpringTide Networks (acquired Lucent) and Redback Networks to nab market share in broadband access, says Eric Hinden, an analyst at Suntrust Equitable Securities.
"[Cisco] has not defended its turf," he says. "But as long as Cisco's valuation remains high, it can just keep buying companies."
But Cisco faces technical and cultural hurdles, observers say. It's uncertain if the company will know how to bring a connection-oriented focus to its lineup of acquired technologies. And while it knows the enterprise, service providers are a different breed. For the telecom giants, the network isn't a cost center-it's the business. So best-effort IP networks will be going up against the most fault-tolerant networks in the world, boasting 99.999 uptime.
Perhaps the biggest test for Cisco-and for all networking providers-will be integrating all of the networking technologies and making them work for the end user, says Infonautics' Bernstein. "There are ASPs, ISPs, traditional carriers and enterprises, all with their own unique needs and strategies," he says. "Cisco is a new entrant just like some of the others and will have to prove [itself] in service and support, just like the rest."
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