Cisco’s New World

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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

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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