September 1998
By Nick Lippis, Strategic Networks
Lippis on Internetworking
Lucent vs. Cisco: The Coming
Showdown
At this point in its hyperactive media blitz and acquisition
program, Lucent has grabbed some serious brand recognition.
Even technophobes who can't tell a central office switch from
a sailboat probably recognize the vendor's bright red O-its
take on the Nike "swoosh." Corporate networkers can expect
to see a lot more of that lopsided logo in coming months, as
the telecom titan goes head to head with Cisco Systems Inc.
(San Jose, Calif.). What's at stake is nothing less than the
$200 billion retooling effort that will build tomorrow's new
public network.
With its $8 billion in annual revenues, Cisco isn't exactly a bit
player. But its deep pockets look a little less bottomless when
compared with the $30 billion boasted by Lucent
Technologies Inc. (Murray Hill, N.J.).
Net managers making planning and purchasing decisions need
to think hard about these two huge companies, the
technologies they offer, the acquisition strategies they pursue,
and most important, the divergent visions they represent.
The Scorecard
Given Lucent's 15 percent to 20 percent annual growth rate,
it's not likely to lose its revenue edge anytime soon. But its
biggest asset may be its customer base, which includes the
world's largest service providers and corporate voice
customers. This gives Lucent a key channel to deliver
integrated voice and data services, which may become a core
competency as convergence continues.
What's more, Lucent enjoys access to top-level execs at
customer accounts, giving it the ability to sell across and up the
organizations it reaches.
Lucent also has shown that it can sell the products of the
internetworking companies it acquires. And it backs up its
sales muscle with a spotless reputation for service and
support. Finally, it owns AT&T Bell Laboratories (Holmdel,
N.J.), which means it can build what it can't buy.
Despite its revenue disadvantage, Cisco isn't exactly a
98-pound weakling. It's one of the best-managed firms in the
IT industry. It fully understands the fundamental changes
occurring in the service and networking industries. Its breadth
of vision is matched by a broad product line and tight
customer service. And its ability to successfully acquire and
integrate companies is a key strategic asset.
Partnering is another Cisco strength, especially with New Age
carriers like Level 3 Communications Inc. (Omaha, Neb.) and
Qwest Communications Corp. (Denver)-not to mention
Sprint Corp. (Kansas City, Mo.) and US West Co. (Denver).
The faster these guys grab share from their circuit-switched
competitors, the faster the old-line carriers will be pushed into
Cisco's packet-based camp.
Further, Cisco, unlike Lucent, has no revenue reliance on an
installed base of circuit-switched customers. So it doesn't face
the difficult transition that Lucent's management must now
negotiate. Finally, Cisco is a huge winner in e-commerce. It
pulls in billions of dollars in business from its Web site, linking
order processing directly to its manufacturing and eliminat-ing
layers of costly bureaucracy.
The real difference between Lucent and Cisco comes down to
core business and culture. Cisco is virtually synonymous with
packet switching. The new networking market is headed right
for its space. Its primary management challenge is to execute.
Lucent is rooted in circuit switching. The market is shifting
away from what its management team knows well. The next
two years will be the big test.
One strategy Lucent is sure to continue is buying
packet-based solutions to shore up its product lines. Word on
the street is that Lucent is about to gobble up a huge
internetworking player like Ascend Communications Inc.
(Alameda, Calif.), Cabletron Systems Inc. (Rochester, N.H.),
or 3Com Corp. (Santa Clara, Calif.). It may even go for more
than one. To date, Lucent's shopping has all been done with
cash. Starting in October, it will be able to pool interest and
use its stock for acquisitions. That could be very attractive,
since Lucent is currently trading at 2.1 times its projected
earnings, a high PE (price-earnings) ratio even by today's
inflated standards.
But if Lucent is going to buy big it also has to win big. If large
purchases go sour, disappointing revenues could put pressures
on margins, and Lucent will be put in the unpleasant position of
having to sell more or cut costs. And if revenues and margins
erode, Wall Street will be on Lucent like white on rice. That
could squelch its stock, making employee stock options
worthless, and that translates into poor morale and major
defections. Cisco, of course, would be the first to hire Lucent's
best and brightest, while stealing market share and customers.
Cisco, which trades at 1.5 times projected earnings, also has a
high PE, though not nearly as high as Lucent's. In other words,
Cisco is the more reasonably valued of the two. Equally
important, Cisco is investing in nearly every next-generation
technology, from broadband set-top devices to gigabit routers
and optical internetworking gear.
But if Cisco is going to crack the telecom services market, it
must educate an entire industry about building large-scale
packet networks. It also relies heavily on internetworking
revenues to support its stock price and high productivity ratio
($670,000 in revenue per employee, compared to Lucent's
$250,000). Only about 25 percent or 30 percent of revenue
comes from carriers and service providers-approximately
$2.5 billion. That's exactly where it competes head-on with
Lucent. Cisco has been here before, but last time the situation
was reversed. When Cisco and 3Com squared off for the
high-end enterprise market, $1 billion 3Com was spread too
thin to compete. Now its Cisco's turn to play in the big
leagues.
Nick Lippis is president of Strategic Networks (Rockland,
Mass.). He can be reached on the Internet at
lippis@snci.com.
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