Cisco must crack new markets to meet challenge of targeted growth

Cisco Systems is surprisingly upbeat for a company struggling to cope with depressed sales amid a downturn in technology spending. The networking equipment maker claims it can lift revenue growth to 30 per cent a year, even though its revenues fell by almost that amount in its latest quarter.

The US company's chances of reversing its recent fortunes will depend in part on whether it can crack a market where, to date, it has made little impact.

While Cisco is trying to solidify its lead in the routers and switches that corporations use to operate their internal networks, it is also bent on winning accounts with incumbent telecommunications carriers, which have so far been reluctant to work with it.

The Santa Clara, California-based company's record in the telecommunications sector has been mixed. Cisco, which briefly became the world's most valuable company at the height of the technology boom, was gaining ground in the telecoms market in the late-1990s.

It provided data-networking equipment for global service providers such as AT&T and MCI WorldCom but mostly focused on building networks for dozens of long-distance companies and competitive local exchange carriers, known as Clecs.

The shortcomings of that strategy became apparent when many of Cisco's alternative carrier customers, such as 360 Networks and Global Crossing, imploded, after capital markets suddenly recognised that their debt levels were far too high.

Now Cisco is having to turn its attention to a different segment of the market - large US regional carriers such as SBC, Bell South and Verizon. Cisco estimates that these incumbent local-exchange carriers, known as Ilecs, will account for as much as 50 per cent of all US telecoms investment, which analysts expect to amount to $72 billion (€82 billion) in 2002, down 26 per cent from 2001. Ilecs are also stable, big-name customers, the kind Cisco badly needs to bolster its credibility on Wall Street.

But they also represent a market in which Cisco has poor penetration and which is dominated by other equipment-makers such as Lucent Technologies and Nortel Networks.

Cracking the carrier market is a challenge that has been handed to Mr Bill Nuti, appointed last August to oversee Cisco's carrier business unit. Mr Nuti says Cisco must adapt to provide the technology, reliability and service culture that carriers demand from their suppliers.

Cisco-watchers say they have heard all this before. The company's efforts to crack the Ilec market over the past six years have largely failed because of the perception that Cisco was too arrogant.

Cisco has long pushed internet protocol (IP) technology as the standard for data networks, while the Ilecs had widely adopted an incompatible standard known as ATM, the first generation of data-networking.

"We were a company with a strategy focused on next-generation technology. That manifested itself in Cisco being perceived as arrogant as far as Ilecs were concerned," Mr Nuti says.

Cisco's arrogance was all the more galling to carriers, given widespread doubts about the reliability of its products.

Mr Nuti accepts that some Cisco equipment is not yet "carrier class" but argues that most of it does meet those standards, in spite of perceptions to the contrary. Overturning those presumptions will be one of his most important challenges.

For all the challenges, Cisco has a significant opportunity. IP technology is widely seen as the future standard for converged voice- and data-networking, although carriers may not adopt it as quickly as Cisco would like. Moreover, Cisco's rivals in the carrier market are struggling through painful downsizing in reaction to the dramatic decline in carrier capital spending.

But if Cisco is to succeed among Ilecs, it must develop products the carriers want, rather than persuade them to invest in equipment that was not designed with them in mind. The company claims it has learned this lesson and much of its network equipment supports both IP and ATM standards.

It also hopes to penetrate the Ilec market with a strong portfolio of equipment to build metro-area optical networks - forecast to be the next focus of telecoms investment.

But observers such as Mr Joe Baylock, analyst at research firm Gartner, say there is no indication that Cisco's portfolio is superior to rival offerings. Moreover, analysts say carriers appear reluctant to scrap their current technology, which remains more reliable for critical applications.

In the longer term, Cisco must also develop voice-over-internet protocol (VoIP) products, which enable carriers to transmit data and voice traffic over a single network, and battle for share in this market with Lucent, Nortel and others.

The speed at which corporations turn to carriers to handle their networking needs will also be critical for Cisco.

Cisco's challenge will be to exploit its strong lead in enterprise-data networking by proving it can provide the equipment that allows Ilecs to offer their customers services such as secure virtual private networks, storage networking and IP telephony.

The company may see 30 per cent growth again but such challenges mean it could come later rather than sooner.