InformationWeek
Defining The Business Value Of Technology
February 28, 2000
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Profits have risen for 41 straight quarters, and at least 25 acquisitions are expected this year. Will this company ever hit a wall?
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ailure is not an option for Cisco Systems. The Type-A personalities on its sprawling San Jose, Calif., campus make that clear as they energetically flash badges bearing the company's fiscal year 2000 initiatives and longer-term goals. The objectives: Play a leading role in the delivery of integrated data, voice, and video networks; gain leadership in Internet capabilities; increase market share in all segments; and raise the bar on the company's self-described "frenetic" approach to customer satisfaction. Everyone--from support staff to president and CEO John Chambers--wears the badges throughout the workday."You win or lose as a team," says Chambers, whose passion for group efforts extends to team sports--even in tennis, he says, he only plays doubles. There are 26,000 players on Team Cisco, and the group has been batting 1.000--profits have risen steadily, quarter over quarter, for 41 consecutive quarters. The badges remind everyone not only of the company's dominance in business and service-provider data networks, but of the need to be alert to upcoming challenges as Cisco tries to hit its next home run. Cisco wants to deliver converged networks to its business customers and become a key provider of integrated Internet infrastructure to service providers, including the major telecom carriers. Little wonder--service providers are expected to buy $500 billion worth of equipment and services from infrastructure suppliers by 2005, according to the CIMI Group.
Part of winning, says Chambers, is understanding that it's about survival--even for a company with a $485 billion market capitalization. That mentality has paid off. Concern that startup Juniper Networks Inc. would beat Cisco to market with the first high-end multigigabit IP router for the backbone of service providers' data networks "lit a fire underneath us," says Chambers. Cisco got there first in 1997 with its Gigabit Switch Router 12000 for the IP switched core of the Internet. It now also offers a terabit-class GSR router, and leads the market with an 85% share, according to the Dell'Oro Group.
The survivalist attitude keeps driving Cisco as it engages companies in E-business projects and other initiatives that require enhanced networking features, such as voice-over-IP, as the LAN router and switch markets become increasingly commoditized. Even though Cisco's high-end Layer 3 switches cost about twice as much per port as competing hardware, port prices in general have fallen 50% over the past two years. Vendors such as Cisco must sell value-added products that go beyond moving traffic fast, says David Passmore, research director for the Burton Group.
Cisco is making strides in that direction, in part by acquiring companies such as Class Data Systems for its policy-based networking, Global Internet Software for its firewall, and, most recently, Altiga Networks for its virtual private networking technology. "Cisco may cost 20% more than others, but customers are going for the whole value proposition," says Tom Nolle, a CIMI Group analyst.
Bruce Thompson, senior VP of financial products and services at Coral Energy LLC in Houston, agrees. The wholly owned subsidiary of Shell Oil has long run a large part of its network infrastructure on Cisco routers and switches, and now runs its E-business operations on Cisco equipment as well. "We're looking for a total package," says Thompson, and that factor generally takes precedence over lower prices. Value goes beyond network speeds and feeds for Coral. Because Cisco worked closely on Coral's E-business projects, says Thompson, "They know a lot about this company, and they know what I need--sometimes sooner than I know myself."
Staying one step ahead of customer needs has led to financial rewards: Cisco has consistently exceeded Wall Street expectations for more than two years, and in its most recent second quarter, revenue soared 53% to $4.35 billion, up from $2.85 billion in the same period a year ago. Its market capitalization is second only to Microsoft's, and Cisco is planning its ninth stock split since going public in 1990.
The vendor's enterprise business accounted for about 45% of sales and $6 billion in revenue in 1999, a growth rate of about 30% from the previous year. "My favorite market is the enterprise," says Chambers. "I love the time with the customers, and that line of business is a very strong group."
Cisco, which took IBM out of the LAN switch market when it acquired IBM's network business last year, dwarfs competitors such as Cabletron, Foundry Networks, Extreme Networks, Nortel Networks, and 3Com, with 80% of the enterprise data network market. Its Catalyst 6000 Layer 2/3 switch has been the fastest-growing switch in its category. Just last week, Cisco said it would enhance the 6000 series with wide area network and metropolitan area network features. Combined with the switches' quality-of-service features, that will let companies prioritize and protect applications across a WAN. But the enterprise group isn't growing as fast as Cisco's other major lines of business, which include service provider and small and midsize business groups (see sidebar story, Moving Down The Line: Cisco Targets Smaller Businesses).
Nevertheless, the enterprise market is expected to grow at least 15% annually over the next couple of years as companies upgrade IP networks to support voice, video, and data convergence, says Tam Dell'Oro, founder of the Dell'Oro Group. And the smarter, better-managed networks Cisco has been helping to create by building intelligence into its hardware will pave the way for its push into building converged LANs. Cisco says that "dumb" commodity switches will falter when voice, video, and other time-sensitive traffic are introduced into the network mix--as they will be for a growing number of E-business and customer-service efforts.
This year, Cisco will debut features that improve its products' quality of service and security, says Peter Alexander, Cisco's VP of enterprise marketing. Its Internetwork Operating System (IOS), the crown jewel of its intelligent network services platform, is the delivery vehicle for many of these capabilities, and the technology behind the company's Architecture for Voice, Video, Voice and Integrated Data initiative, launched last year.
2000 will be "a watershed year for IP telephony for LANs," Alexander says. "Even PBX companies will grant you that IP telephony will happen." Cisco has about 3,000 IP telephones on its own network, and more than 600 of its customers are testing IP telephony. That may be a drop in the bucket compared to its slate of tens of thousands of customers, and in fact voice-over-IP was at the bottom of the priority list in an InformationWeek Research survey of 300 IT executives in December. But that may change: Frost & Sullivan forecasts that businesses will spend more than $23 billion on IP telephony equipment by 2006, up from just over $70 million last year.
Texas Instruments has been testing Cisco equipment as part of its IP telephony project since May. It has deployed 500 Cisco IP phones in its Plano, Texas, facility and 20 in overseas branches, and five Cisco IP gateways, for less than $300,000. By supporting distance learning, Net meetings, and unified messaging features, "IP telephony is going to enable our people to do business anywhere and communicate faster," says network engineer Bernie Rodriguez.
Observers say there are risks in carrying voice traffic over IP networks. For example, the Windows NT servers that run many telephony apps aren't as reliable as PBX systems. Rodriguez says Texas Instruments handles that by running two NT servers; failover capabilities eliminate interruptions in voice service. Another potential problem is scalability. While businesses may have little trouble with small deployments, that changes as they scale up to thousands of phones. Texas Instruments has 10,000 employees, for instance, and wants to deploy voice over IP throughout the company. "Fifty to 200 subscribers is one thing, but 10,000 to 20,000 is another," says John Morency, executive director at Sage Research. "I don't think any vendor has nailed this down yet."
Texas Instruments has an interest in seeing the technology succeed; it's working with Cisco to develop chipsets for IP telephony equipment. Still, it's proceeding cautiously. The company has dismantled voice mail on its old PBX system but hasn't removed the system itself. It's waiting for a new release of server software and handset hardware, due from Cisco this summer, to address some of these issues before getting other divisions on board. Meanwhile, Lucent Technologies and Nortel are preparing enterprise voice-over-IP products that Morency says will offer a more gradual migration path than Cisco does.
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Illustration by David McLimans
Photo of Chambers by Gary Parker
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