Cisco strives to reach more difficult pickings
The Californian networking equipment maker is pinning its hopes on selling to large US regional carriers that have so far been reluctant to work with it, says Scott Morrison
Published: February 18 2002 19:45 | Last Updated: February 18 2002 21:06
Cisco Systems is surprisingly upbeat for a company struggling to cope with depressed sales amid a downturn in technology spending. The networking equipment maker claims it can lift revenue growth to 30 per cent a year - even though its revenues fell by almost that amount in its latest quarter.
The US company's chances of reversing its recent fortunes will depend in part on whether it can crack a market where, to date, it has made little impact.
For while Cisco is trying to solidify its lead in the routers and switches that corporations use to operate their internal networks, it is also bent on winning accounts with incumbent telecommunications carriers, which have so far been reluctant to work with it.
The Santa Clara, California-based company's record in the telecommunications sector has been mixed. Cisco, which briefly became the world's most valuable company at the height of the technology boom, was gaining ground in the telecoms market in the late 1990s.
It provided data networking equipment for global service providers such as AT&T and MCI WorldCom but mostly it focused on building networks for dozens of long-distance companies and competitive local exchange carriers, known as Clecs.
"Cisco went for the low-hanging fruit. The Clecs were more willing to try new technologies. They were also more susceptible to vendor financing [offers from Cisco]," says Nikos Theo-dosopoulos, analyst at UBS Warburg.
The shortcomings of that strategy became apparent when many of Cisco's alternative carrier customers, such as 360 Networks and Global Crossing, imploded after capital markets suddenly recognised that their debt levels were far too high.
Now Cisco is having to turn its attention to a different segment of the market - large US regional carriers such as SBC, Bell South and Verizon. Cisco estimates that these incumbent local exchange carriers, known as Ilecs, will account for as much as 50 per cent of all US telecoms investment, which analysts expect to amount to $72bn (£50bn) in 2002, down 26 per cent from 2001. Ilecs are also stable, big-name customers, the kind Cisco badly needs to bolster its credibility on Wall Street.
But they also represent a market in which Cisco has poor penetration and which is dominated by other equipment-makers such as Lucent Technologies and Nortel Networks.
Cracking the carrier market is a challenge that has been handed to Bill Nuti, appointed last August to oversee Cisco's carrier business unit. Mr Nuti, a long-time Cisco employee, says his priority is to inject "service provider DNA" into the company.
He says Cisco must adapt to provide the technology, reliability and service culture that carriers demand from their suppliers.
Mr Nuti is quick to play down the company's small presence in the Ilec market, preferring to talk about the carriers as a promising growth opportunity.
Cisco watchers say they have heard all this before. The company's efforts to crack the Ilec market over the past six years have largely failed, in no small measure because of the perception that Cisco was too arrogant. Operational staff within the carriers were annoyed by the brash self-assurance of a new networking company trying to tell them how networks ought to be built.
Cisco has long pushed Internet Protocol (IP) technology as the standard for data networks, while the Ilecs had widely adopted an incompatible standard known as ATM, the first generation of data networking. "We were a company with a strategy focused on next-generation technology. That manifested itself in Cisco being perceived as arrogant as far as Ilecs were concerned," Mr Nuti says.
Cisco's arrogance was all the more galling to carriers, given widespread doubts about the reliability of the equipment-maker's products. Carriers typically demand that their networks be operational 99.999 per cent of the time, a level of reliability Cisco has found hard to achieve.
Mr Nuti accepts that some Cisco equipment is not yet "carrier class" but argues that most of it does meet those standards, in spite of perceptions to the contrary. Overturning those presumptions will be one of his most important challenges.
Some Ilecs report progress on this front. Bill Smith, president of operations engineering at Bell South, says Cisco appears to be learning how to supply products that meet carriers' requirements, particularly in terms of reliability and scalability.
For all the challenges, Cisco has a significant opportunity. IP technology is widely seen as the future standard for converged voice and data networking, even though carriers may not adopt it as quickly as Cisco would like. Moreover, Cisco's rivals in the carrier market are struggling through painful downsizing in reaction to the dramatic decline in carrier capital spending.
But if Cisco is to succeed among Ilecs, it must develop products the carriers want, rather than persuade them to invest in equipment that was not designed with them in mind.
Cisco claims that it has learnt this lesson and that much of its network equipment now supports both the IP and ATM standards.
It also hopes to penetrate the Ilec market with a strong portfolio of equipment to build metro-area optical networks. These enable carriers to provide huge amounts of bandwidth at relatively low prices and are forecast to be the next focus of telecoms investment.
But observers such as Joe Baylock, an analyst at research firm Gartner, say there is no indication that Cisco's portfolio is superior to rival offerings. Moreover, analysts say carriers appear reluctant to scrap their current technology, which remains more reliable for critical applications.
In the longer term, Cisco must also develop voice-over internet protocol (VoIP) products, which enable carriers to transmit data and voice traffic over a single network. With big carriers aware of the need to converge voice and data, the battle for share in this market will be essential for Cisco, Lucent, Nortel and others.
Nortel, which has signed a handful of these contracts with Sprint and Qwest, appears to be the leader in this market, while Cisco is seen to have a stronger VoIP portfolio for corporate customers. UBS's Mr Theodosopoulos and others suggest that Cisco may turn to acquisitions to bolster its VoIP carrier product line.
The speed at which corporations turn to carriers to handle their networking needs will also be critical for Cisco. Networking groups such as Cisco and Nortel say corporations are becoming overwhelmed by the increasingly complex nature of networking operations and services. As a result, they are beginning to outsource these functions to carriers, which in turn are looking for new revenue streams to offset the commoditisation of voice and data traffic.
Cisco can help its cause by pushing carriers and enterprises to accelerate this trend, which has been slow to develop. "They have to educate, advocate and pressure," says Ken Leon, analyst at ABN Amro.
Cisco's challenge will be to exploit its strong lead in enterprise data networking by proving it can provide the equipment that allows Ilecs to offer their customers services such as secure virtual private networks, storage networking and IP telephony.
But analysts have few illusions about the speed at which Cisco can crack the Ilecs. Mr Baylock does not see a "magic bullet" - a proprietary technology that will enable Cisco to leap ahead of more entrenched rivals in the carrier market. "They are going to do better [with Ilecs] over the next five years but they are not going to deliver a knock-out punch in this market," he says.
Cisco may see 30 per cent growth again - but such challenges mean it could come later rather than sooner. |
