Cisco's future hangs on its millennium strategy

 By Thomas Nolle
 Network World, 10/18/99

 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 21st 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 21st 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% 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 $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%. This
 could earn Cisco another $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.