Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Technology Stocks : Cisco Systems, Inc. (CSCO) -- Ignore unavailable to you. Want to Upgrade?

To: StockMan who wrote (17608)	10/2/1998 12:20:00 PM
From: Rif Kamil, M.D	Respond to of 77399

Cisco vs. Lucent :Who will dominate telecoms infrastructure, reinvented telephone-equipment firms such as Lucent and Nortel, or a data-networking giant like Cisco? From the curent issue of "The Economist" October 02 1998 Sorry about the lack of word-wrap... RICH McGINN, chief executive of Lucent Technologies, is going shopping. With a stockmarket value of some $100 billion and a multiple of 40 times forward earnings behind him, he can afford to buy just about anything that tickles his fancy. With good reason, Mr McGinn is coy about what that might be. Stockmarkets are jittery, and Alcatel and Nortel Networks, two competitors, have both recently warned investors about sliding sales. Although Lucent's share price has suffered, the firm is concentrated in North America, and insists that it will escape the worst of turmoil in Asia and regulatory uncertainty in Europe. Few doubt that the giant communications equipment maker is about to splash out. This week Lucent celebrated the second anniversary of its full independence from AT&T. The significance of the date is that, under American financial regulations Lucent is now able to use its massive equity for tax-efficient "pooled-interest" acquisitions. Despite scepticism in some quarters about the value of pooling Mr McGinn relishes the extra flexibility that it will give him. Lucent's deeds in the coming months could well shape the world communications-equipment market for years to come. Lucent estimates that the market will be worth $650 billion by 2001. Driven by globalisation, liberalisation, mobility and the explosion of the Internet, it is also a market being turned on its head by the convergence of voice and data. Traditional firms such as Lucent, Nortel and Alcatel, for all their knowledge of what it takes to build reliable circuit-switched networks, are having to learn entirely new data-networking technologies. At the same time, the company that dominates the corporate-data world, Cisco Systems, is determined to break their lock on the business of telephone companies. If Lucent has a chance of emerging on top, it is thanks to the unbundling of AT&T. The firm is today selling billions of dollars-worth of equipment to established telephone companies, such as Sprint and MCI WorldCom, which a few years ago would have ignored it simply because of its parentage. Even more surprising, according to Carly Fiorina, who is responsible for sales to service providers, half of Lucent's carrier business is coming from challengers, such as Qwest, which are building new networks from scratch. This is known in the industry as selling guns to both sides. Bell Labs, also part of the AT&T legacy, has undergone its own revolution. No longer hampered by AT&T's conservative business agenda, its innovation is now harnessed to providing Lucent with the technological firepower to compete across the communications market. In 12 months, 80 new products have come to market and patents are being registered at the rate of 3.5 each working day. Despite the frenzy of new product launches bought with an R&D budget of nearly $4 billion, there are gaps that urgently need filling. Lucent supplies virtually no data networks to large companies—the markets Cisco bestrides. That is serious in itself. Whereas Lucent's traditional business is growing by less than 10% a year, demand for data networks and the software that underpins them is growing by more than 25% a year. How to make a packet What makes this even worse is that the dominant technology of the data market—packet-switching based on the standards, or protocol, of the Internet (IP)—will provide the architecture of the "next-generation" networks for telephone companies. As Don Listwin of Cisco puts it: "People talk about the convergence of voice, data and video, but the reality is that it is all becoming data. The game is moving towards data structure, where Lucent has no core competence." Dan Stanzione, chief operating officer of Lucent and the man responsible for running Bell Labs, admits that the company missed the data-networking wave when it was part of AT&T. He argues, however, that Lucent is now putting this right. In the past 18 months, it has introduced more than 30 new data-networking products including "PacketStar", an IP switch that competes directly against Cisco's latest high-tech "1200" router. Small tactical acquisitions of such firms as Livingston, Prominet and Yurie have also plugged holes and brought in developers from data networking. Mr Stanzione also takes a dig at Cisco. "Old world" voice networks are not the only vulnerable technology, he says. There are also old world data networks—principally those running on Cisco equipment. As firms demand near-100% reliability from their wide-area networks and carriers choose packet-switching technology, IP will evolve dramatically. If so, reaching the market late may be a positive advantage. ("Poppycock," retorts Cisco's Mr Listwin.) Despite Mr Stanzione's confidence in Lucent's home-grown technology—and, no doubt, a little sand-bagging—the firm will probably buy a big data-networking company soon. Among the most likely candidates are Ascend, Newbridge and 3Com, all of which could supply established customers as well as technology. The injection of a little Silicon Valley culture and pace probably would not go amiss either. That was precisely the thinking behind the $7 billion bid for Bay Networks that was completed a few weeks ago by Lucent's other main North American rival, Nortel. The acquisition gives the Canadian firm the unique ability to supply the gamut of communications technologies—IP, frame-relay, Asynchronous Transfer Mode (ATM), circuit-switching, broadband and narrowband wireless, and high-speed optical networking. But Bay also brings something else, according to Nortel's boss, John Roth: 15,000 people "with market-hardened packet-networking experience". Bay's head, Dave House, a veteran of Intel, is already installed as Mr Roth's deputy at Nortel. He thinks that Lucent may find it hard to integrate the technologies and skills of the firms it buys. The attitude at Bell Labs, he says, is "we invented fire and light." That said, investors remain sceptical about Nortel's ability to make a success of Bay. Despite their rivalry, both Lucent and Nortel believe that, with their roots and culture, they are best positioned to bring to unstable data networks and the Internet "carrier-class reliability"—by which they mean the security, the ability to operate on very different scales, and the manageability of today's voice networks. They argue that expertise with "old world" networks and an understanding of how large and complex networks fit together are crucial to making the transition to the "new world" of IP. Who will be the winner? Customers will spread orders around so as to prevent the domination of any one company. That should help pragmatic Nortel. But the real struggle will be between Lucent and Cisco. Fearsome though it is, Cisco is now up against a firm with technical and financial resources at least as great as its own. The main dangers for Lucent are of an unwise acquisition or the sacrifice of vital "time-to-market", because it is too much in love with its own technology. Cisco will punish any fumbles.