1/99 CIMI Netwatcher on LU/ASND vs. CSCO [interesting analysis]
cimicorp.com
January 1999 Volume 17.1
Netwatcher (ISSN 0890-5800) is a monthly publication of CIMI Corporation. Subscription information is
available here . Copyright © 1999, CIMI Corporation. All rights reserved. No publication or reproduction of this
document is permitted without the express written consent of CIMI Corporation.
In the Know
For anyone but the extremely uninformed, the acquisition of Ascend by Lucent was no surprise. Rumors on
this topic have abounded for a year, and the move was clearly logical, and favored by strong constituencies on
both sides.
What is less obvious is what Lucent will make of the new products it acquires. Since its approach to the
combined product set will set the form of its competition with Cisco, which in turn will be the basis for
competition in the data carrier space overall, it's worth looking at the issues and possibilities.
The Before
Prior to the Ascend acquisition, Lucent was the king of the traditional service provider market in the US by a
considerable margin. They also have a big chunk of the premises voice market (PBXs, key telephones, etc.). But
while they had LAN products, a router, ATM gear (acquired with Yuri and some internally developed), and
nifty multimedia stuff, they were not really competitive with Cisco in the data space.
Cisco, a sixth or so Lucent's size in revenues, had pretty much the opposite situation. Cisco is the dominant
player in the enterprise data WAN product market space, which is the only element of the data market that has
been sustaining significant sales and margins at the same time. Cisco's problem is that it has little penetration
in the service provider space. The routers it sells there are resold to enterprises. It has some recent ATM
switch success there, but not enough to create tens of billions in revenues. It has no market share in voice.
From these brief descriptions, it should be clear that the two giants have not really been boxing, or even
sparring, but rather throwing punches at a 90-degree angle to each other. Cisco threw a weak jab with Summa
Four. Lucent parried with a soft PacketStar router. Nobody laid a glove on anyone else. Instead, both firms
have been following what might be called a political course.
Cisco's Chambers recommends throwing out all those antiquated PBXs. He touts IP voice as the way of the
future. He presents the telephony world as only slightly more modern than the late Triassic period.
Lucent kisses the IP voice baby. Lucent endorses IP on the premises, and integrated messaging. Lucent
meanwhile buys a big ACD competitor, and continues to rake in Class 5 switch dollars to earn record levels of
bucks. IP is great, TDM is great, voice is something most of us have, and money is something we can all
respect.
Cisco is winning the war of words, because the media loves revolution and Cisco is promising that. Lucent is
winning the war of dollars, and that's where true victories are gained. But could PR victory in a market lacking
in insight translate to real gains for Cisco? Could it be that enough headlines on IP convergence might
eventually lead even reasoning buyers (who, heaven love them, are certainly an oppressed minority if ever
there was one) to IP, all truth and knowledge notwithstanding?
That's the question, and that's the thing that the Ascend/Lucent deal will tell us.
The Present
With the acquisition of Ascend, Lucent is committed to selling ATM switching products, and specifically
ATM switching products with a mission to do IP-over-ATM, to service providers. That means that Lucent is
creating a beachhead in the data space in the IP/ATM area.
That's the same area that Cisco has been staking out as its way to jump out of being a provider of routers to
carriers (as an enterprise channel) to being a provider of switches to carriers to install in their own network.
Cisco knows that the big facility-based players have all the money, and that these guys won't invest in pure
connectionless architecture in the near term, no matter what the market says.
What we have here is super-power number one, who's been eating up little countries starting with the tip of
Africa, and super-power two, who has been chomping west from the Bering Straits toward Land's End, coming
together about Switzerland. They may have started off at right angles, but they've converged on a common
market.
Now they have to fight for real.
The AT&T VPN announcement at ComNet was the first sign of the battle to come. Cisco made a very
IP-plus-ATM story out of the deal, rightfully so since it includes MGXs and MPLS. But it's clear that Cisco is
making the most out of the positioning to establish their credentials in a market where Ascend has gotten most
of the press and most of the RBOC customers.
Cisco needs to sell a ton of ATM and IP products to the RBOCs as they build out their infrastructures to
prepare for national, multi-service, competition. Why? Because that build-out will involve a minimum of $150
billion over the next decade. Any year's worth of it is more than Cisco's current revenue stream.
Lucent needs to be sure that Cisco doesn't sell much of anything in this space. Why? Because the dollar value
of it alone would push Cisco uncomfortably close as a competitor. Because it would give Cisco an incumbency
with the RBOCs that might be exploitable to impact the real core of Lucent's profits, the telephone equipment
space. Chambers can call for IP PBXs or IP COs all he wants, but the only way he'll really cut into Lucent's pie
is by fielding a legitimate telephony product from a position of strength and respect. A win in the IP/ATM
space with the RBOCs could give Cisco that position.
Lucent's Mandate
OK, Lucent, you bought Ascend. What do you do with it? The answer, in short, is to do what Ascend was
being pretty successful doing at the product conception and market conception level, but better than what
Ascend was doing at the sales level.
Ascend has a strong incumbent position with virtually all of the RBOC kingpin players. Their ATM gear is
installed and earning revenue. This equipment can be quickly put into IP-over-ATM service and address a
market that would be ideal for the RBOCs to use as a jumping-off place into competition with the IXCs—the
VPN market. Ascend didn't have a lot of the ancillary gear, including premises access. Ascend didn't have the
image of solidity. Ascend didn't have sales account control even though they were incumbent. Lucent has all
those things.
What Lucent doesn't have at the moment is a real position in the whole IP/ATM debate. Lucent has fielded a
router (PacketStar), and it has MPLS capability. Lucent has purchased Yuri, one of the most vocal supporters
of the CSI initiative for IP-over-ATM based on MPOA. Lucent has now acquired Ascend, whose IP Navigator
is based on MPLS principles, and is or will be MPLS-interoperable. In effect, Lucent has a foot in all the camps.
Can Lucent simply adopt the Ascend position? In some ways that would make the most sense for them.
Ascend's equipment is incumbent, after all. Ascend's solution is already delivered and publicized, and an
alternative strategy would clearly leave Cisco romping happy and free for some time while Lucent put the
pieces into place.
Ascend's approach is also a good one. While one could argue how scalable IP Navigator is (and Cisco will
certainly do that), the truth is that it's more scalable than most VPN opportunities would require. The critics of
Ascend start with the assumption that VPNs are a subset of the Internet, and that IP Navigator can't support
the Internet. The first is false, so the truth of the second is irrelevant.
But despite the value of IP Navigator, it is probably true that the concept needs some expansion. There are a
number of models for MPLS or virtual circuit-based VPNs emerging (see Strategies in this issue—if you're a
subscriber and not reading this on the Internet) and IP Navigator doesn't support them all. It seems likely that
Cisco will.
A second option for Lucent would be to try to pull Ascend into its own positioning for IP. The problem with
that approach is that nobody (except perhaps within Lucent) knows what that positioning is. The CSI stuff
seems to be dying a deserved death as an alternative to MPLS, but Lucent ironically seems to contain more CSI
holdouts than Newbridge, who invented the concept to start with, and who has already positioned it as a
supplementary approach to MPLS (which, if CSI is anything at all, is true).
A non-religious IP/ATM position might make some sense market-wise, but it's hard to see how the company
would retain PR control and control technical scope with such a position. The key would be for Lucent to
announce a really far-reaching and compelling architecture for the whole 21st-century networking shebang, and
make a killer IP/ATM strategy a part of it. In this strategy, they could position both PacketStar and CSI as
supplementing the IP Navigator base approach, and the result could be something that would not only be a
killer concept, but more readily understood by users.
We think this is the approach that would serve Lucent best.
The Competitive Landscape
A face-off between Lucent and Cisco is a kind of super-power nuclear exchange, but just as in real wars, it's
often the peripheral players who pay the greatest price.
Nortel is hit by the deal at its weakest point and perhaps weakest time. This fall, Bay's House is expected to
depart, the man who finally succeeded at unifying and motivating Bay's fragmented product groups. Nortel has
yet to create a vision of a unified company, their allegations notwithstanding. Whether they can do so now,
and implement the vision if they do, is a question.
They need to do something, because the Cisco/Lucent struggle will focus buyers on the very things that
Nortel has failed to come to grips with so far. Is the future ATM, IP, MPLS, SONET, DWDM, or what? Nortel,
more even than Lucent, has covered all the bases. In this PR-driven market, taking all possible stands is taking
no stand at all.
Newbridge is even harder hit. A side-by-side competitor with Ascend in most of the former's RBOC accounts,
Newbridge has survived its seemingly complete loss of market vision in the last year only because Ascend's
sales and marketing efforts to the RBOCs haven't set records either. With Lucent taking over, and recognizing
that the RBOC accounts are where they must confront Cisco if they are to make the Ascend buy pay off,
Newbridge is camping in Switzerland (to continue our prior analogy) when the warring armies converge there.
Newbridge does seem to have an IP/ATM vision in a marriage of CSI and MPLS, but they appear to have lost
the ability to promote that vision effectively at either the marketing or sales level. That problem could be
corrected more easily than a real product confusion or product lapse, but the company has been paralyzed in
the market positioning sense since late 1997, so it's hard to see why they would break out now—or how they
would do so.
Even if they do break out of the IP/ATM doldrums, they face a problem with breadth of product line. Just as
Cisco must inevitably confront Lucent in the Class 5 space, so must Newbridge if they want to stay
competitive. They have no products there, so it would mean an acquisition. This isn't the most favorable time
for one, of course.
A final problem is the Newbridge/Siemens/3Com alliance. Clearly that alliance could bring Newbridge
everything they need in a product sense. Clearly Newbridge's Lutz sees that; his speeches have been almost
fawningly supporting of Siemens in particular. Clearly Siemens isn't all that impressed. 3Com's perverse
pressure on the concept of an IP-based PSTN, which plays against the strengths of either of its partners and
into Cisco's hands, puts pressure on the alliance overall, making it more likely the whole thing will tank.
But how about the main event? In our view, the real question for the next couple of years, at least, is not who
does the best IP/ATM but whether Cisco can successfully attack the Class 5 and PBX market. Lucent needs to
keep Cisco from establishing a foothold in the RBOCs using MPLS, but that foothold couldn't threaten Lucent
as long as Cisco continues to rant about IP telephony as its only voice strategy. Long before they could make
any headway, Cisco's enterprise business would drop off, and they'd fall into Cabletron-like stasis. [I like it...]
This isn't to say that the Ascend deal won't be significant. By moving into that space, Lucent can cut Cisco off
from what would be a significant near-term revenue stream and hasten the time when Cisco's dependence on
enterprise WAN IP will compromise its revenues. That will shrink the window in which Cisco can prepare an
effective telephony position.
It's also true that if Lucent blows this deal, they may hand Cisco the keys to the kingdom. A prompt and
rational telephony strategy could well grow out of Cisco's new IP-ATM vigor, and if ATM positioning ends up
hurting Lucent because they hit a pop fly with Ascend instead of a home run (so to speak), Cisco could claim a
big chunk of the RBOC build-out, and overtake Lucent in revenues.
OK, armies. Have at it!
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