Cisco's prime position in IP networking

Technology bets the company made several years ago may help it stay on top as the telecom equipment market consolidates.

Early investment in new technologies and markets has put Cisco Systems in an enviable position as the rest of the telecommunications equipment market consolidates.

Earlier this week, wireless phone maker Nokia and telecommunications equipment maker Siemens announced plans to form a joint venture to combine the product lines they sell to phone companies. The new entity, called Nokia Siemens Networks, will have assets totaling more than $30 billion.

The new partnership comes on the heels of other big moves by the companies' peers. Back in April, Alcatel and Lucent Technologies announced they planned to merge their equipment companies, creating one of the largest suppliers of wireless and wireline telephone equipment in the world. And in October 2005, Ericsson, Nokia's chief rival, bought most of Marconi of the United Kingdom.

The recent equipment-company pairings, which follow an equally tumultuous consolidation in the carrier market, has many on Wall Street and in the industry wondering who might be next. Some say Nortel Networks and Motorola are likely looking to bulk up.

But what about networking giant Cisco? A relative newcomer to the telecommunications equipment market, Cisco is arguably better positioned than any of the traditional telecom suppliers in the industry to reap big rewards in the next several years as phone companies upgrade their networks to deliver more Internet Protocol-based services, such as IPTV, according to at least one analyst.

"We are in the right spot at the right time," John Chambers, CEO of Cisco said during a press conference this week at a customer event in Las Vegas. "The industry will continue to consolidate. And if you have the right architecture it's a key competitive advantage. We look like we have made the right investments."

The IP key
Big phone companies around the world are already in the process of migrating their voice traffic onto their IP data networks. And soon many, such as AT&T, BT and Deutsche Telekom, will add video onto their IP networks, creating huge demand for IP equipment and network solutions.

Cisco dominates the IP equipment market, primarily by selling IP routers and Ethernet switches to large companies. Its hottest-selling product, the Catalyst 6500 switch, has generated $8 billion in sales in the last two years and $20 billion in the last six years.

In recent years, the company also has increased sales to phone companies as well as cable operators. In its third fiscal quarter, the company showed revenue growth in the service provider market in the upper teens compared with the same period the previous year.

"Cisco is the IP expert," said Michael Howard, a principal analyst at Infonetics Research. "And if all the service provider networks are going IP, then it is sitting in a very good spot. All the new behemoths will have to play catch-up to Cisco in IP."

Cisco's relative strength in the IP sector is no accident. Over the past five years, while other large companies, such as Nortel Networks and Lucent, have struggled with accounting scandals and slumping growth, Cisco has been busy acquiring companies, including a few key investments, that have helped it lay the groundwork for its future.

In 2003, it bought home router company Linksys as a way to enter the home networking market. It then bought a small company called Kiss Technology in July 2005 as an entry into the consumer electronics business. And in November, it made its most ambitious move to date with the acquisition of set-top box maker Scientific-Atlanta, a deal that not only put it deeper into the home entertainment market but secured its position among cable operators, according to Cisco.

Betting on trends
Cisco has also concentrated its efforts in specific new markets and on a business segment it calls Advanced Technologies, which includes digital video, digital-home technology, security, optical networking, storage area networking, wireless, hosted small business and IP telephony. Cisco deems a new technology an advanced technology when it believes the market will generate $1 billion in annual revenue within five to seven years.

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