Top Stories: Finding New Riches to
Mine
By Kevin Petrie
Staff Reporter
11/23/98 3:56 PM ET
Cisco (CSCO:Nasdaq) will have no trouble pleasing Wall
Street if it can sign more deals like its recent agreement
with Enron (ENE:NYSE).
Analysts adore the company's management for its
eagle-eyed focus on dominating the complex plumbing that
makes the Internet work. TSC's Cisco ax, J. P. Morgan's
Bill Rabin, thinks Cisco is about the safest play you can ask
for in the communications equipment sector.
That is because Cisco is determined to win. Already, the
San Jose, Calif.-based company dominates the supply of
routers and switches that the corporate world needs to
connect to the Internet. The next step is to sell to telecom
carriers. Here, rivals Lucent (LU:NYSE) and Northern
Telecom (NT:NYSE) are not willing to cede ground. Cisco's
solution: If traditional carriers are being slow to buy Cisco's
equipment, Cisco will retool the new carriers and rewrite the
rules.
In late 1997, Enron, a giant Texas energy company with
nearly $30 billion in annual revenues, was looking to break
new ground by extending its fiber-optic network between key
western cities. Enron had seen Williams Companies
(WMB:NYSE), a large U.S. transporter of natural gas, build
a fiber-optics network and sell it to what later became a MCI
WorldCom (WCOM:Nasdaq) subsidiary for $2.5 billion in
1995. Williams has since built a new fiber-optic network that
ships calls, data and video for phone companies and Internet
providers.
Through various subsidiaries, Enron spoke for some 25,000
miles of natural-gas pipelines in the U.S. Laying additional
fiber-optic equipment to create a voice and data network was
a relatively straightforward venture.
From Portland, Ore., the base for Enron Communications,
Jim Crowder, an Enron vice president, began the lengthy
task of finding the right equipment supplier to build the
company's communications pipeline. To focus on its
strengths, Crowder early on decided on a series of modest
goals: carry communications traffic for carriers rather than
end customers and stick to data traffic rather than voice.
Crowder started with network suppliers that included Cisco's
archrivals Ascend (ASND:Nasdaq) and Lucent. Carriers
typically have layered technologies such Synchronous
Optical Networks, or SONET; Asynchronous Transfer Mode,
or ATM; Internet Protocol, or IP; and frame relay, on one
another. Telecom carriers, who use a number of different
suppliers, are gravitating toward Internet Protocol to handle
the explosive growth of data. (Ascend and Lucent declined
to speak about Enron; both Cisco and Enron opted to speak
strictly about one another.)
Cisco is clear-shot winner in Internet Protocol products. So
the company went on a full-court press to win over Crowder
and other Enron executives with advantages of IP
technology. How serious was Cisco? The company even
wheeled out chief executive John Chambers, an
acknowledged master in the art of sales, to make the pitch.
And Cisco issued a challenge to Enron: Take a bet on the
future and base the whole network on IP, which is fast
becoming the lingua franca of computers across the globe.
Cisco kept promoting the gospel of IP, where it holds a
competitive advantage, even though most experts agree that
IP represents a risky technological leap.
"Cisco challenged us and said, 'You need to think about it a
little further than you have,'" recalls Crowder. That meant
constructing an all-IP architecture -- something that few if
any carriers have deployed to date. Both Qwest
(QWST:Nasdaq) and Level 3 (LVLT:Nasdaq) have
trumpeted such plans, but for now they rely on more
established technology. (Smaller supplier Ciena also has a
hand in the Enron deal, adding equipment that will pack
extra lightwaves on the optical-fiber network.)
Pledging to a pure-IP system today makes crackles and
outages in data messages more likely. It is a risk. Larry
Lang, Cisco's vice president and point man on the Enron
deal, had early misgivings about Enron. "I was a little
concerned that as a utility they wouldn't be up to making
this step."
So how the heck did he win Enron's soul?
We "begged really hard," Lang jokes. We "told them we'd be
their best friends, which is actually kind of true." Cisco also
made Enron a partner, introducing its executives to potential
customers and promising to share with Enron the burden of
execution.
Lang cagily quantifies the contract, announced Nov. 3, in the
"millions of dollars" -- likely a tiny portion of Cisco's $2.6
billion in quarterly sales. But with Enron, Cisco proved its
knack for creating new business. And that ability helps
explain how Cisco has defied the challenges of slowed
spending domestically and turbulent markets overseas. It
might even bode well for Cisco's ability to compete with
Ascend, an Internet rival, or phone-gear giants like Lucent in
the converging industries of phone services and the Internet.
The Enron deal "definitely plays to Cisco's advantage,
because they're much weaker than Ascend in ATM," says
analyst Ajay Diwan with Goldman Sachs, which is not an
underwriter for either company. Diwan rates both Cisco and
Ascend a buy. ATM switches are used for fast transfers of
data.
"Frequently [Cisco's] technology, particularly voice
technology, is not as good [as rivals]," says one marketing
manager at a competitor of Cisco. "But they have the sheer
market presence" to win deals, he says.
Enron is not the only company to have felt the intensity of
Cisco's determination to succeed. Executive vice president
Carmello Tillona of Videotron, a cable company in Canada,
notes with a touch of exaggeration that Cisco's "only
mandate in life is to be the provider of IP." To construct its
telephone system, this fall, Videotron selected Cisco ahead
of other suppliers.
As for Enron, Cisco executives, true to their word, informally
introduced Enron to numerous carriers that buy equipment
from Cisco -- they could become prospective clients for
Enron. Lang says this "high-tech dating service" went over
well, although he insists Cisco isn't trying to act as a broker.
"The dollars are nice," Lang says. But more important, "it
helps us learn and invent what's going to be necessary."
This is research and development at work, as Cisco is still
devising parts of the solution.
The tale of the Enron deal highlights a ringing theme in
Cisco's analyst conference early November: Cisco prides
itself on convincing prospective customers to invest in new
technologies they hadn't previously considered. Cisco is
willing the industry to expand. Says Cisco senior director
Mark Farino: "The whole market is predicated on how fast
we can grow."
If the carriers will not come to Cisco, then Cisco will help
create new carriers. Either way, expect Cisco to keep
growing. |
