It’s the darling of the network industry, a powerhouse that has risen from near-invisibility a decade ago to become a challenger for the top spot in the world market. Cisco is a name that means IP to most buyers, and because of that, it’s a company that many believe simply can’t lose in the forthcoming decade of IP dominance.
In truth, however, Cisco is engaged in a delicate balancing act, juggling its strengths and weaknesses against market timing and competitive pressure. This year, some of the primary strategies that Cisco hopes will ensure its dominance in the 21 st century have emerged. The plans comprise what can be called Cisco’s millennium strategy-although the company doesn’t use that term. The big question is how well this strategy will succeed, and what will happen to Cisco if it doesn’t.
If there is one truth about 21 st century networking, it’s that the new millennium will be the dawn of public data service dominance. Today, U.S. carriers earn only one-fifth of their profits from data. By the end of the next decade, they’ll earn 80 per cent of profit from public data services. More data, more data equipment, so that ought to be good for Cisco, right?
Not necessarily. Cisco is the leader in the enterprise data market, not in the service provider market. If public networking wins, then private networking loses. Major competitors such as Lucent and Nortel Networks lead Cisco in the carrier infrastructure market because of their voice switching and transmission products. If the companies earn respectable positions in the new data market, the loss of enterprise network revenue over time could hurt Cisco.
That’s where Cisco’s three-pronged millennium strategy comes in.
The first prong is to gain as large a share of the current private data network market as possible. This market’s growth will plateau as public services take over, so only by obtaining nearly all of it can Cisco be sure to keep profits growing.
Cisco’s acquisition of IBM’s network business is the cornerstone of this prong. SNA still represents slightly more than half of all business data traffic. If all SNA traffic were converted to private IP traffic, Cisco would earn more than US$40 billion in new sales. IBM didn’t sell SNA itself, but Cisco’s purchase of other IBM network assets gives it a shot at converting big SNA accounts to IP without any competitive interference. Cisco’s announcement of SNA Switching Services is a clear first step in promoting the IP migration.
That leads to the second prong of Cisco’s millennium strategy: to encourage users to migrate voice back onto private networks using voice over IP instead of old-fashioned T-1 multiplexing. A good part of Cisco’s Advanced Voice, Video and Integrated Data architecture is directed at enterprise IP voice. My research shows that a move to privatize voice using IP technology could increase current enterprise network traffic by nearly 70 per cent. This could earn Cisco another US$80 billion or so.
Still, even large users are outsourcing their private networks, and Cisco has to face the fact that the communications equipment market will eventually be dominated by service provider purchases. Hence the third prong of Cisco’s millennium strategy: to worm its way into the service provider networks through as many other routes as possible.
This is where Cisco’s acquisition of Cerent comes in. Cisco has great hopes for Cerent’s combination of SONET and packet/cell optical networking as a substitute for plain old SONET. Every service provider, local exchange carrier and interexchange carrier will need to modernize its SONET infrastructure to accommodate data, and Cerent could give Cisco a foot in the door that could then be augmented with other Cisco products. Since Lucent and Nortel sell SONET gear to carriers, Cisco’s Cerent play would also cut the profits of its main competitors.
Neat, but will all of this work? It will depend on the pace of data revenue growth. Unless public data service revenue grows quickly, carrier spending will be dominated by traditional voice infrastructure buying, an area in which Cisco has elected not to play. If that happens, the erosion in enterprise data sales and profits will hit Cisco by 2003 or so, and its growth spiral will cease.
Cisco can’t afford that. A couple of crummy quarters would shake the confidence of investors and maybe of buyers, as well. That possibility makes Cisco’s millennium strategy perhaps the most important company initiative in its history. Cisco, as we know it, is on the line.
Nolle is president of CIMI Corp., a technology assessment firm in Voorhees, New Jersey.
