Cisco’s New World

There is something about Cisco, says “Fortune”.
Sure there is. Cisco is a company born out of the disruption that took place in
the architecture of the ARPANET (the Internet’s primary network) which was
previously based on point-to-point connection between mainframes and dumb
terminals using telephone lines and modems. It was the change from this scenario
to one where network traffic was sent in packets, that saw the birth of the
router and Cisco. Since then, Cisco has come out of an initial phase of
management-founders rift and a phase of mediocre existence to now lead the IP’s
march to become the pervasive standard of all communications–data, voice, and
video. In the process, it has left behind a pack of ex-competitors in the
datacom industry to take its place in the sun as “the challenger” to
some big oldies in the telecom infrastructure arena.

Financially, Cisco has performed like no other Internet
company! It has grown from $1.2 billion in 1995 to $18.9 billion in fiscal 2000,
an eighteen fold increase in the last five fiscals. With a market capitalization
of over $250 billion, making it the fastest growing company in the history of
technology industry, Cisco is the darling of Wall Street, despite worries on its
outlook in markets like routers, where competition is gaining marketshare, and
optical networking, in which the market leaders are likely to face a slowdown in
infrastructure investment by telcos. Analysts still give Cisco a “Strong
Buy–Aggressive” rating!

As one of the Internet’s first few children, Cisco has its
beliefs firmly based on the Internet’s pervasive quality. It has its own ways
of changing the communications infrastructure, enterprise, and the way we live.
This company is a real big dreamer–and a good one at realizing its dreams.

Changing the Communications Infrastructure

Like it or not, the Internet has proved that mere
connectivity is not what will be earning the service providers their profits.
They will have to provide value-added services to make money. On the other hand,
deregulation has encouraged many new players to enter the communications
services market. And to add to the incumbents’ worries, cheaper technology
acquisition costs and greater flexibility have quickly given the new greenfield
operators a level playing field. These developments are driving both the new
entrants and existing service providers to invest on infrastructure that are
quite different from the existing telecommunication network.

The infrastructure that will be required for future
communications services has to take into account that huge volumes of not only
voice, but also data and video would travel through it. And, it has to be really
fast in transporting these signals to make virtual reality a reality. The
infrastructure has to be intelligent enough to be able to provide customized
value-adds in addition to a range of useful services to customers. And finally,
the customer should be comfortable using it.

Such an infrastructure involves huge investments. According
to the Multimedia Telecommunications Association (MMTA), capital spending on
telecom equipment for the US market touched $135 billion in 1999, growing at a
rate of 11.5 percent. It also estimates that the rest of the world will spend
$345 billion on telecom equipment by 2003. And this is just the start of a
predictably long transitory phase.

The Cisco Opportunity

"As with mainframes in the computer world, there’s no reason service providers would rip out their circuit switches. But
circuit-switched phone networks are not growing"

Larry Lang, VP service provider market, Cisco Systems

Cisco sees the Internet as not just remaining a network of
web servers but developing into the “Network of Networks”, which will
make IP the medium through which all communications, including data, voice, and
video will flow. And yes, Cisco does not see much of a future for present
circuit-switched communication technologies. As the company think tanks see it,
when disruption takes place in the existing telecom world, a new set of winners
will emerge and Cisco will certainly be one of them.

This disruption, it believes, is happening in all three
elements of the telecommunications network. Cisco sees a major role to play in
each one of them. And it is this role, which will bring in the sales that will
keep Cisco growing at present rates or even higher, even if there is no big
growth in its other lines of business. The service provider line of business
already brings in approximately 40 percent of its revenues. This is expected to
significantly increase to over 50 percent in a few years.

Transmission Systems

Time Division Multiplexing (TDM) has no role to play in the
new scenario–is Cisco’s firm belief. These switches limit the bandwidth
capacity of the transport network by processing information slowly. Though
Synchronous Optical Network (SONET)/Synchronous Digital Hierarchy (SDH) switches
help ease the transition of electric signals into optical pules, they are still
based on TDM switching–being able to transmit on just one channel through the
fibre. Historically, the core of the network involved ATM switches and SONET/SDH
as the two essential elements. With data communications getting involved the
router got added as another element. Dense Wave Division Multiplexing (DWDM),
which has the capability to practically carry 9.9 Gbps per channel (64 channels
of OC-192/STM64 carrying 633 Gbps) came as the fourth element.

Cisco thinks this is too many. It ultimately wants to remove
the ATM switches and SONET/SDH equipment that come in between an IP
router/switch and the DWDM system, making the system, at least theoretically,
much simpler.

Competitors don’t agree to this. SONET/SDH vendors, who are
major players in DWDM, see a role for the former which not only provides
performance monitoring but also adds a redundancy yet too be matched by the IP-DWDM
combo (which is being aggressively tested by Cisco, in association with DWDM
startup Ciena). Companies who have been selling circuit-switch based equipment
are yet to come to full terms with IP. Many like Lucent, Alcatel, and Ericsson
feel their circuit switches can safely co-exist. They concede that more than
voice circuits, their equipment today switches data packets but don’t see a
direct co-relation of this trend with the business of the carriers. They claim
that more than 70 percent of the carrier’s revenue still come from switching
voice circuits. This Cisco preaches is not an issue, as voice communications can
also be broken into IP packets and sent over the network just like a data
packet. IP vendors led by Cisco are working on a feature called tag switching or
Multi-Protocol Label Switching (MPLS), which will add the much needed QoS
features in IP, or so they claim.

In between the extreme points of views, are a host of other
competitors who would prefer sitting on the fence and reaping the rewards. On
the router side is Juniper Networks, which has won tech. laurels for its fast
routers, with no problems in having strategic partnerships with telecom majors
like Ericsson, Alcatel and Nortel, for reselling its products in the global
market. Tellabs is deriving good business out of its digital cross-connects,
which manage connections between two or more heterogeneous transmission
systems.

Switching and Access Systems

"Cisco is becoming increasingly a consultant for how an Internet-based strategy can be deployed in a company"

Gary Jackson, VP Asia, Cisco Systems

The telephone systems’ intelligence lies in the switch.
Though, data communications have added elements like remote access servers, DSL
Access Multiplexers (DSLAM) and CMTS to this component of the network, it is the
good old circuit-switched telecom switch that takes a bulk of the traffic
hitting the network. What Cisco is saying is that the central office switch
solution in use today is inflexible and proprietary, forcing service providers
to source all the hardware, software and applications from a single vendor. This
“big iron”–as it calls it, must give way to open programmable
switching products that are based on open call model and standard API and
supports cost-effective and rapid development of core transport and enhanced
services like calling cards. These products would have applications residing on
a host computer that controls the switch through a command and report
relationship. It is this segregation of the application from the call control
and platform elements that is fundamental to Cisco’s strategy. But all said
and done, the postscript from Cisco is that open programmable switching
platforms can work adjacent to older proprietary switches, providing core
transport for IP traffic or serve as a mixed environment gateway/node for
packet-based networks.

Today, while there is a consensus on an ultimate cross over
to packet switching, many telecom equipment vendors don’t see circuit switches
disappearing in the near future. Also, vendors don’t agree with Cisco that IP
will necessarily be the single standard, they see a bigger role for the other
packet (actually cell-based) technology–ATM–in the short and long term.

Also, circuit switch majors like Lucent, Nortel, Ericsson,
Siemens and Alcatel haven’t approached the open API development concept on one
voice. While some like Lucent have willingly crossed over to the open API camp,
others have stuck to adding the new applications to their “big iron”
on their own. And again, in this space there is a breed of companies like Sonus
Networks, Unisphere and Nortel that have developed a new class of purpose-built
gateways supporting IP, ATM, and TDM-based traffic.

The Forecast

Of late, there have been some wake-up calls from stock
analysts that the capex of telecom service providers might flatten out or even
decline in the year 2001, which immediately had a southward effect on major
telecom vendors’ stocks. Not even Juniper and Cisco were spared. Experts,
however, feel that recent announcements of capex reduction by major service
providers could be routine, considering the volatility of telecom capex. They
also point out that the services which today’s carriers want to sell to
businesses–Virtual Private Networks (VPNs), guaranteed high-bandwidth and
Application Services–cannot be deployed over the old voice networks. Service
providers run the risk of falling behind competition, if they do not invest in a
new network. The total telecom spending for this year, estimated at around $300
billion, is expected to grow at a rate of about 18 percent–touching $350
billion next year.

According to RHK Inc., $23.6 billion is expected to be spent
on optical networking. In this market, Cisco holds just 3 percent marketshare,
while Nortel (45 percent) and Lucent (25 percent) together hold 70 percent of
the market. Bulk of the revenues for Nortel and Lucent come from selling SONET/SDH
equipment, ATM/TDM-bases multiservices, WAN switches and long-haul DWDM
equipment. It is in the metro-DWDM and SDH/SONET markets that Cisco has mainly
placed its hopes. Analysts believe the SONET/SDH market is entering a time of
change. It is this trend that Cisco would want to encash with its line of
gigabit switches–IP as well as multi-service–and optical routers.

In the core switching and routing market, Cisco is much
better placed. According to Cahners In-Stat Group, the ATM switch market is
expected to touch $4 billion in 2000. Lucent has a marketshare of 40.2 percent,
Nortel 20.7 percent, while Cisco came third with 17.1 percent. Here again, Cisco
sees its share increasing as ATM gets replaced by IP. But, In-Stat analysts feel
that it will be at least 18 months before alternative technologies threaten to
displace ATM switch sales.

Actually, it is in the familiar territory of routers that
Cisco is feeling the pressure–from a company that allegedly took away its
cream of engineers working on routing. Juniper has been hitting headlines more
than occasionally with its “faster than Cisco” routers and it has,
unlike many start-ups, figures to prove its impressive aggression in the core
router space. In an estimated $11 billion overall router market for 2000,
Juniper’s performance is expected to increase its marketshare to about 4
percent. This leaves Cisco with the worry of hitting below the 80 percent
marketshare in 2001, something that has not happened for a long time.

While Cisco core routers may be hit by Juniper’s terrabit
routers, in the edge router scene, Cisco is expected to hold on to its 80
percent plus marketshare for at least a year, as Juniper is only starting to
address the market.

It is in the telecommunications switching and access space
that Cisco has to really market hard to make an impact. Though data
communications equipment is being deployed by ISPs and carriers, they have
accomplished just a few cases of replacing a circuit switch. In the datacom
access market, Cisco’s performance has been quite excellent. It has a race for
leadership with Lucent in the dial access server/concentrator market. In the
other developing access markets like DSLAM, cable and broadband aggregration, it
is in the top 3 positions. However, the access space is a small market at
approximately $8 billion for the year 2000. The access market contributed only
$2.8 billion to its $18.9 billion revenue for fiscal 2000, i.e. about 25 percent
marketshare.

Contrast this to $48 billion that telephone companies are
expected to spend on circuit switches according to JP Morgan, and one sees a
huge gap. Telephone companies are expected to spend seven times less than that
on data internetworking devices.

No marks for guessing–this is the space where Cisco has
sets its eyes. With packet technologies, it hopes to make its access equipment
redundant and reliable enough to handle millions of calls every day. Then its
equipment would have made the good books of the QoS-fussy telecom engineers,
thereby enabling it to replace today’s circuit switches. Until then, it has to
be satisfied with its share of the packet access market put at $15 billion by
2004.

Changing the Enterprise

"E-business and business are one and the same"

Pete Solvik, CIO and head Internet Business Solutions Group (IBSG), Cisco Systems

Significant changes are needed in today’s enterprise
networks, to move on to a common infrastructure for voice and data
communication, one that can provide various services–irrespective of the kind
of information that will pass through it. One, the networks have to be very
fast; two, central equipment should be able to handle both voice and data
communications; three, the network has to be really robust and redundant now
that valuable information is residing on it; and four, the network must have
some sort of security mechanism to restrict unauthorized access of critical
information.

With e-commerce getting implemented in all business
communities around the world, companies cannot afford to not have an Internet
strategy. While service providers spend huge amounts of time and money on
finding out what their subscribers would want, for enterprises the challenge is
a bit different. It is finding out which information/communication services
would result in not just cost saving, but useful usage of the infrastructure for
company benefits.

First, these changes require some understanding by the
enterprises. Most enterprises would be from various industries other than IT or
communications and hence would require some handholding in deploying networking
technologies. Second, a host of LAN and WAN equipment would be required. And
third, maintenance of the already installed equipment would be needed. The
Enterprise networking equipment market comprising Ethernet switches, ATM
switches and routers is an estimated $18 billion market. This is expected to
touch $40 billion by 2004.

The Cisco Opportunity

The Cisco solution for the enterprise is modeled upon the
company itself–an $18.9 billion company, which has grown 18.9 times in the
last five years. A company which has created over $250 billion of marketcap in
the same period, to now be among the top three. And a company whose web site
transacts $17 billion worth business. A true leader among Internet generation
companies.

Cisco eschews companies to make an Internet ecosystem–to
serve Internet-connected customers. Like itself, it believes companies can make
use of the Internet for creating competitive advantages, apart from reducing
operational cost. Also, it sees new trends like virtual close–allowing company
to close its books within one day–and virtual manufacturing to equal, if not
surpass, the impact of e-commerce.

In a period where the technology life cycles have got much
shorter, Cisco says companies must plan around open standards so that it
minimizes duplication across functions, and creates a scalable robust
architecture for the enterprise to ensure future re-usability. By establishing
standards at all three levels of infrastructure–foundation technologies,
enabling technologies, and information repositories–applications can be easily
deployed quickly and economically. Says Pete Solvik, CIO, Cisco Systems,
“Our architecture is not a tactical architecture, but a strategic,
enterprise-wide framework that doesn’t change each time Cisco deploys a new
application. The architecture is iterative and grows as projects are executed
rather than all at once.”

According to Cisco, the flexibility and economy required by
the networks can be achieved on IP technologies. It sees IP playing the main
role to bridge the gap that exists between voice and data applications in an
enterprise network. And when convergence happens, Cisco would be ready with its
Architecture for Voice, Video, and Integrated Data (AVVID) solution that
consists of business applications along with a network platform of routers,
switches, servers, and security products.

Cisco also has an IP contact center solution for call center
and CRM applications of an enterprise. Cisco now represents a fair amount of
software and application expertise among its ranks. It has acquired several
software companies and put up software development centers (the largest after
the US center is in Bangalore, India) to add the crucial software and
application components to its enterprise solutions portfolio.

In the data communication space, the competition views the
enterprise opportunity almost from the same perspective as Cisco, though many
like to differ on issues like switching versus routing. Cabletron Systems, a
major proponent of switch routing, believes switches can do the routing part as
well, thus reducing one element, in effect, from a LAN which was getting
complicated due to several new access technologies mushrooming up at the edge of
the LAN. New Layer 4-7 switch players like Alteon believe the current data
communication architecture in the LAN space is quite dumb. Alteon says switches
made by the incumbents are hardly intelligent enough to differentiate between
packets and not fast enough to handle applications like application service
provision and data centers.

It is on the voice side that Cisco’s views get vociferous,
challenging responses from competition. Companies like Lucent, Nortel, and
Siemens hardly see a drop in sales of voice communication products due to Cisco’s
IP phones and EPABXes. In fact, Lucent’s now sister-company Avaya and Nortel
say Cisco cannot now complain that the products in this space are proprietary.
The customer premise voice systems have been opened up a long time ago, and
there is already a host of application services vendors applying logic into
their technologies — to develop new voice services. This market is one that is
growing rapidly.

The Forecast

Cisco is expected to benefit a lot due to the equity that its
brand has come to be associated with in the enterprise data market. With its
Internet business model, analysts believe it will continue to make an impact on
the data networks of the top Fortune 500 companies and other leading names in
individual countries.

In a $12 billion market for 1999, Cisco is clearly ahead of
its competitors in the LAN packet switch market. However, on the high-end
Gigabit switch market, Cisco is starting to feel some pressure from competitors
like Extreme, Nortel, and Cabletron, whose marketshares increased in the last
fiscal. Here Cisco might still feel safe as it has also seen an increase in
marketshare and it is more likely that the competitors have grown, capturing a
large space left by 3Com’s exit from this market. It is in the Layer 4-7
switch market that Cisco has tensions. According to analysts, the entrants in
this market like Alteon, F5 Networks, Foundry, and ArrowPoint are offering
innovative technologies and products that are becoming components of the LAN
infrastructures of service providers. Though, Cisco is the incumbent in this
market with its existing products, its sales here are not growing as fast as the
competitors.

Though it will see tough competition in the low-end switch
segments due to a host of small competitors which are fighting this space on
dirt-cheap prices. This, however, is likely to be more than compensated by its
high value switch and router sales. Because it commands such high ASVs in the
market, Cisco can look forward to top the enterprise switch and router markets
for the time being, though it need not necessarily sell the largest volumes. On
the enterprise router scene, Cisco is clearly far ahead of any competitor. Here,
Nortel is still its main competitor though Juniper recently made an entry with
its edge router.

Though on the enterprise data networking equipment market,
Cisco might be in a very firm position, it is not so when it comes to the
enterprise voice market. Cisco’s IP solutions for voice are only starting and
have not yet made a major impact on telephone solutions of companies like
Lucent, Nortel, and Siemens, which together, according to Philips Infotech
research group, dominated about 30 percent of the total $79 billion enterprise
voice market in the year 1998. The trend is likely to have not significantly
changed as Lucent and Nortel saw steady growth in their enterprise divisions in
1999. And this year, in a smart move, Lucent has spun off its enterprise
division into a new company called Avaya, which will be no mean player in this
market. On the software and application front, Cisco encounters, in addition to
the incumbent voice market leaders, competion from a host of unique players like
Quintus, Kana, and Oracle whose core competency, unlike Cisco, has been on
software.

So, if Cisco has to expand its sales in the enterprise
market, it needs to have the voice and data networks converging fast. Cisco is
best in a converged world. And hence, the focus on AVVID and VoIP.

Nareshchandra Laishram

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