Lucent, Cisco vie for No. 1 in new telco-data market
By Duncan Martell
PALO ALTO, Calif., March 26 (Reuters) - John Chambers, the hard-charging head of computer networking company Cisco Systems Inc., is facing his most formidable rival yet, but dismisses Lucent Technologies Inc., as a "100-year-old start-up."
The fast-talking West Virginia native who heads a company that crossed the $100 billion threshold in market value faster than any other in U.S. history, can't afford to mince words.
At stake in the battle between Cisco and Lucent is nothing less than the future of communications as traditional telephone networks switch to the digital networks now used by the Internet and companies to connect far-flung operations.
With its $20 billion January deal to buy fast-rising data networking company Ascend Communications Inc., Lucent leapfrogged other networking and telcommunications equipment companies such as 3Com Corp. and Nortel Networks to land squarely as the No. 1 rival to Cisco.
Now, analysts and money managers say, the race is on between Lucent and Cisco with smaller players such as Nortel, Alcatel and Siemens taking up the rear in what will be a lucrative, multibillion dollar market. Currently, more than 80 percent of Internet traffic moves across Cisco equipment.
"Lucent could easily end up surpassing Cisco," said Richard Slinn, a money manager at San Franciso-based Levensohn Capital Management, which invests in technology companies.
"People do say Cisco will be a lock, but I wouldn't necessarily give them the benefit of the doubt because Lucent not only has the technological expertise, they're also willing to partner with best-of-breed companies."
CULTURE CLASH
It's more than just a culture clash between "the Net-heads of the West Coast and the Bell-heads of the East Coast," in the words of Gerard Klauer Mattison & Co. analyst Michael Cristinziano. The battle is as much about what strategy and business model customers like MCI Worldcom, AT&T Corp., Sprint Corp. and others will find most attractive.
Mory Ejabat, chairman of Alameda, Calif.-based Ascend, which had 1998 revenues of $1.48 billion vs. $30.1 billion for Lucent, said customers want a one-stop superstore that would sell them the gear they needed, install it and service it.
"Carriers want a one-stop shop," Ejabat said in a recent interview in his office that looks across the bay to San Francisco. "Lucent has a hell of a service organization, and we decided, 'Why not put the companies together?' "
Ejabat's view, shared by Susan Barbier, head of marketing for Lucent's data networking business, bets that being a soup-to-nuts provider -- known as vertical integration -- of gear that transmits voice, data and video over one network is what customers want.
"Lucent is the whole ball of wax, from the semiconductor to the van that carries the router to your business and installs it," said Duane Eatherly, a money manager at BancOne Investment Advisors, which has assets of about $120 billion.
"But is that an advantage or a disadvantage?" Eatherly asks. "The answer to that question tells you who can best exploit this inflection point; right now, there's an opportunity for leadership change."
BETTER AT LESS
San Jose, Calif.-based Cisco, with revenues of $8.46 billion in its 1998 fiscal year, is betting the opposite: That it can be far nimbler in responding to customers if it gets the semiconductors and other building blocks of its routers and switches from suppliers. Indeed, Cisco outsources 70 percent of its manufacturing, a so-called horizontal model.
"That way, they have to be expert at fewer things and they can be more focused," Eatherly said.
Cisco is already the largest maker of data networking gear, having squashed rivals such as Bay Networks, now owned by Nortel, Cabletron Systems Inc. and Fore Networks Inc.
For its part, Cisco asserts that it already has what it needs to dominate in what Chambers is fond of calling the "new world" of data and voice communications.
"It'd be snapping a ball and chain to our leg to vertically integrate like Lucent has," said Larry Lang, head of marketing for Cisco's service provider line of business.
Lang points to the lessons learned from soup-to-nuts computer companies such as Burroughs, Sperry, and Digital Equipment Corp., now owned by Compaq Computer Corp.
Those companies were once powerhouses but suffered as their customers became more diverse. They ended up clumsy and unable to respond to customers' quickly changing needs, Lang said.
Above all the hype, one thing is clear: While voice, data and video will all someday run on one network, that won't happen until Cisco, Lucent and others provide the reliability that marks the current circuit-based telephone network.
Digital networks such as the Internet shunt data back in forth in packets using a technology called IP, or Internet protocol, which are then reassembled at their destination.
"If telephone networks had the failure rate that Cisco routers and hubs (and those of other data networking makers) had, you'd never get a call made," said money manager Slinn.
Ejabat, who came to the United States in 1970 from his native Iran at the age of 20, agreed.
"Right now, there's no way I'm going to make a 911 call through an IP switch," he said. "There's just a lot of work still to be done."
15:38 03-28-99
|
