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

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

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

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