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THE DAY AHEAD: Debunking the Lucent vs. Cisco war

Lucent Technologies Inc. (NYSE: LU) and Cisco Systems Inc. (Nasdaq: CSCO) gave Wall Street a lot to watch this week in their so-called networking war. But how much of a fight is this?

Once you peel away the jazzy headlines it appears that Cisco and Lucent are headed toward a comfortable duopoly. And investors in either company (comparison chart) will be sitting pretty in five to 10 years.



Lucent vs. Cisco: Happy duopoly?



But first look at the moves that led to the flashy headlines. On Monday, Cisco announced a $1 billion investment in accounting firm KPMG's Internet consulting arm. The deal gives Cisco an army of integrators and consultants. On Tuesday, Lucent (financials) paid $3.7 billion for International Network Services hours before Cisco reported another stellar quarter. The INS purchase gives Lucent a services and integration boost as it encroaches on Cisco's data networking turf.

So what's the big deal? Cisco owns about 7 percent of INS.

But Cisco (financials) was reportedly talking to buy INS earlier in the year, but ended the discussion because it didn't want to enter the network integration business. Cisco is fat and happy making the hardware. The solution for Cisco was to have ties to an integrator by investing in KPMG but avoid the headaches of owning a services firm directly.

Lucent is a different bird. "Lucent does a lot of integration work so the INS acquisition makes sense," said Michael Cristinziano, an analyst at Gerard Klauer Mattison. "For Cisco INS could have been a drag."

Scrap the war metaphors. The bottom line is this: The INS deal is good for Lucent, but doesn't necessarily hurt Cisco. The companies have two different approaches -- Cisco will partner for services and Lucent will buy services.

And for all the talk about the data and telecommunications collision, Cisco and Lucent have managed to stay out of each other's way for now. During its fourth quarter conference call, Cisco cited key telecommunications contract wins. Lucent cited data contract wins in its latest earnings. However, Cisco is still known for its IP-based networking gear and Lucent is known for its optical, wireless, and voice equipment.

Networks are also becoming a multi-vendor affair and Lucent and Cisco will often share customers and have equipment that fits together.

The end game? There isn't one. The networking market, growing at 30 percent to 50 percent, is large enough to support both players. Don't be surprised if Cisco and Lucent split the telco/networking market 35-35. We'll leave the other 30 percent to companies such as Nortel Networks (NYSE: NT).

"I tell investors all the time to not worry about the battle between Lucent and Cisco," said Cristinziano. "In five to 10 years both will be number one and two. The only question is which one will be number one and which one will number two."