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2HRS2GO: Not just the economy hurting Cisco

    COMMENTARY-- I never cared for Bill Clinton's most famous campaign sound bite.

    "It's the economy, stupid" helped Clinton become the 42nd president of the United States, and has turned into a staple of financial headlines.

    That it becomes popular to the point of clich? would seem to be another sign of a mean and petty society. How else could an insult ("You are obviously too stupid too understand what I know") elect a chief executive? It's the ultimate triumph of Don Rickles, though Rickles at least has humorous intent.

    Most of the thousands being laid off by Cisco Systems (Nasdaq: CSCO) probably find little that is funny in their current situation. Cisco, like everyone else in the technology industry, relies on the same rationale for its cost-cutting actions: the economy.

    And like Bill Clinton, Cisco assumes you are too stupid to know better.

    Make no mistake. The economic slowdown is real and it hurts a lot. Cisco can't be blamed for bad dot-com business models or telecom equipment cutbacks.

    Unfortunately for Cisco's employees and shareholders, you can and should fault the company for letting this happen: Juniper wins monster router test.

    "Juniper's dominating performance explains its marketing success," declares Light Reading, an optical networking information Web site and the outfit that commissioned the study, whose results were released this morning.

    Everyone blames the telecom equipment slump for battering Cisco's results. What everyone, or at least CSCO shareholders, forgets is that Cisco has also lost its technology edge. Actually, it lost it quite a while ago, but when the Internet bull rush was going on, the company could mask it by piggybacking on the rapid growth of the overall market.

    I've said before that superior technology by itself doesn't always guarantee success. In some fields, it hardly matters at all.

    But technology does make a difference when it comes to large enterprise hardware, where cost is usually no object and quality is everything.

    So rivals like Juniper Networks (Nasdaq: JNPR), whose core routers compete directly with the heart of Cisco's product line for communications service providers, continue to gain share. The latest fourth-quarter survey from The Dell'Oro Group indicates Cisco held 65 percent of the market for wide area network routers, down from 78 percent a year earlier. Juniper's share has more than doubled over the same period, to 34 percent from 15 percent.

    Some analysts, such as Paul Johnson of Robertson Stephens, have been pointing to cracks in Cisco's armor for years. "I'm not convinced the IP leader will be Cisco in five years," Johnson told me in August of 1999. "Cisco has been an excellent company, but it's lost its technology lead."

    Johnson took aim at Cisco again today, downgrading the stock to "market performer" and describing it harshly in a report: "It is clearer than ever to us that the current Cisco appears to be merely a shadow of its former self."

    Not surprisingly, he sees further market share losses for Cisco.

    Whether or not you agree with Johnson's somewhat dramatic description, the company clearly has some ground to make up. Its routers simply aren't as good as Juniper's in many situations.

    You never want to count Cisco out. The company remains the clear market leader in its core business, and Light Reading points out that Cisco's offerings don't trail Juniper's by much. In fact, Cisco's router topped Juniper's in four out of 16 tests, and tied in five others.

    "Cisco's new offering is just a memory upgrade and a couple of features away from being a serious threat to Juniper's M160," said David Newman, president of Network Test, which conducted the study for Light Reading.

    But Cisco should not have fallen behind in the first place, not with the enormous resources and Microsoft-like market share it enjoyed. Company executives love to talk about how paranoid they are, but in hindsight, Cisco seems to have been patting itself on the back for the last several quarters.

    It's a remarkably strange response when you're yielding ground to Juniper in your core business, while failing to gain leadership over Nortel Networks (NYSE: NT) in other cutting edge fields.

    Cisco CEO John Chambers did an outstanding job building Cisco into a giant. But, like most top technology executives, he hasn't had to pull off a comeback. That's a different ballgame. "I have never led a retreat," noted the Prussian military commander Helmuth Von Moltke, in explaining why he was not a great general despite winning every major battle in his career.

    The worst part is that Juniper has not been a secret. It was a hot company before it ever went public, but Cisco simply has been slow to respond. While the company ran around with its well-documented acquisition strategy, it never bought something that could exceed rivals' performance in cutting edge routers.

    Now the company is paying for it. The one positive thing about an economic malaise is that it lays bare the difference between solid companies and underperformers. Right now, Cisco falls in the latter category. 22GO

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