From Computer Business Review, a sister publication.
There are two ways of looking at Cisco Systems Inc, the world’s largest supplier of networking equipment. The first is to bracket the company with Microsoft Corp and Intel Corp as part of the powerful ‘WintelCo’ triopoly. This would sum up not only how fast the company is growing (with sales of $4,100m in its last fiscal year, up 83%), but also how influential it – and its core networking technologies – have become. The router, after all, is the dominant building block of the Internet and the fashionable corporate intranet. Cisco provides three out of five of all routers, and some four out of five of all those connected to the internet. A second and apparently increasingly popular view is that Cisco has reached its zenith. This argument has it that Cisco is above all else a router company, one which thrives in a complex, multiprotocol world, and that as the new, simplified switched network architectures take hold, Cisco will increasingly be seen as, perform as, and behave as, a ‘legacy’ supplier. How are Cisco’s prospects assessed? Certainly, the financial community has not made up its mind. After several years of fast ascent, Cisco’s shares lost a third of their value between January and April. But since then, several investment houses have issued ‘Buy’ notices on Cisco’s stock. This is not surprising. In its latest third quarter, Cisco’s sales rose by 52% up to $1.66bn with profits up by 54% to $378m.
By Andrew Lawrence
Those who have turned bearish on Cisco support their arguments with a small but growing body of evidence. First, there are flattening router sales, the core of its business. Cisco’s router sales grew just 2% in its second quarter, a disappointing figure in the context of continuing fast growth of the internet and of corporate intranets. Executives at rival companies such as David House at Bay Networks Inc point to the big strategic worry for Cisco: Many networks today are filled with our rival’s (Cisco’s) equipment. But those networks are melting down because of traffic loads….increasingly the [enterprise network] backbone will be handled by routing switches. In other words, routers, which involve processor intensive on-the-fly route calculations, are no longer seen as powerful enough or cheap enough. But the problem is not just in the backbone LAN – where routers unravel and forward on the packets for all kinds of local traffic. Big telecommunications companies, such as Internet supplier UUNet Technologies Inc, are concentrating much of their basic network investment at the switch level, where companies such as Fore Systems Inc and the recently merged Ascend Communications Inc and Cascade Communications Corp are considered to have the performance edge over Cisco’s Stratacom in ATM switching. Part of Cisco’s strategy to offer more performance and control came last year in the form of its ‘tag switching’ announcement. This is a method of labeling packets in a router or switch so that they may bypass the routing function. But rivals and many independent analysts believe that ‘tag switching’ is too complex, is proprietary, and is designed to preserve the role of the router. Other approaches may prove more popular, both within the LAN and beyond. In the eyes of some rivals, tag switching has confirmed their view that Cisco is not ready or willing to make the corporate transition away from routers. In Cisco’s view, ‘you always go somewhere through a router’, said one rival, Martyn Taylor of Madge Networks NV. In addition, Cisco itself has seemed unsure of where to push tag switching, and where to promote alternative, switch based approaches (Cisco also supports the use of big routers running ‘native IP’ and, in the LAN, ATM switches supporting IP). It is unclear what Cisco’s strategy is. It has not been made clear to the market, says Chris Blenkhorn, a consultant with IBM Corp Network Systems, citing the overlapping technologies of Lightstream and Stratacom, two Cisco acquisitions. In spite of all this sniping, Cisco remains defiant and confident, and chief executive John Chambers is forecasting several strong years ahead. The company has set out to be an across the board supplier of networking technology, and hence is able to support several different technologies and initiatives at once, he argues. There are a lot of difficult questions and a lot of different answers. Customers decide
We let our customers decide, says John Chambers, chief executive of Cisco. For example, it has a leadership position in Ethernet switching (Kalpana and Crescendo), in fast (gigabit) Ethernet switches (Granite) and has a strong position in supplying switches for the telecoms industry (Stratacom). And analysts are still forecasting that its ‘tag switching’ technology may yet prove the winner in the wide area internetworking market, the best of a number of inelegant alternatives. But that is not to say that its use of acquisitions as a form of research and development has not had its price in terms of focus. Ipsilon’s IP switching has given Cisco a scare; in high end routers, Cisco appears to be losing the raw power race to rival Bay; in big ATM switches, rivals Fore and Cascade are winning business. In the development and use of IP integrated circuits, it has fallen behind, probably temporarily. However no-one can match Cisco for its comprehensive, and increasingly integrated product line, tied together through increasingly powerful management software, notably its IOS internetwork operating system. This all points to some difficult times for Cisco – if only in relative terms, with slower growth and some ferocious battles for big customers. The increasing use of switched-based products is likely to drive down prices, which is good for the customers, but not for its large profit margins, which may in turn reduce its share price and its ability to make huge acquisitions. In addition, it is certain to lose some market share and dominance as the new technologies begin to take a hold.