SAN JOSE, California--New office buildings for Cisco Systems are rising out of dusty and vacant lots here, unimpeded by the flux surrounding the industry--a testament to the networking giant's position as king in sales of data communications equipment.
While others in the market have stumbled, Cisco has chugged along, apparently oblivious to disruption. But a series of recent mergers in the networking and telecommunications industry have blurred the lines between voice and data-driven networks, offering a new challenge to Cisco's supremacy.
Critics say the company's decision to drive into markets dominated by telecommunications equipment providers like Lucent Technologies is foolhardy, while company executives and some analysts believe that the current evolution of networks plays right into Cisco's hand.
The company built itself into a multibillion-dollar powerhouse through sales of routing devices which serve as the "backbone," or interconnection points, for various parts of the Net. In response to a trend in the industry, Cisco also offers a bevy of cheaper switching devices. Going forward, however, it will be the equipment that offers service providers the ability to roll out a variety of services that will give data communications players the highest margins and reap for them the biggest profits.
Overburdened circuit switches deployed for voice communications increasingly will be replaced by more versatile devices that can treat voice and video as just another form of "packetized" data over a high-bandwidth connection--an emerging shift often called "convergence." The recent proposed merger of Northern Telecom and Bay Networks underscores this evolution, along with a slew of other recent deals.
"Cisco really now has competition to be paranoid about," said Jeremy Duke, analyst with market watcher In-Stat.
These moves seem to be of little concern to Cisco, despite the recent admission by the company's chief executive officer that the firm misplayed attempts to partner with companies like Lucent, which now will become its rivals.
"I take issue with the term 'convergence,'" said Larry Lang, vice president of marketing for Cisco's service provider organization. "It's more of a conversion than a convergence. Really, it isn't us going into new markets, but the market coming to us.
Whatever it's called, this confluence has left Cisco in the path of larger firms such as Lucent and Nortel. A recent lawsuit by Lucent against Cisco--largely viewed as a pesky ploy to delay the data giant's product efforts--reinforces the high stakes in the networking market these days.
"What Lucent and Nortel see is their traditional application--that is, voice calls--moving into the new world and they're not equipped for this new world," Lang noted with rising confidence. "For Lucent, they just resorted to lawsuits, which isn't going to get them any closer to being a new world player at all."
Nevertheless, Lucent has made inroads in the data market, announcing new equipment recently that could challenge Cisco at the lucrative high end and opening its wallet for several niche data players.
Some of Cisco's more traditional data-based competitors are ready to watch their larger rival duke it out with telecommunications equipment firms. 3Com, the second largest data player, essentially has drawn a line at the high-end public networking equipment segment and said they will partner, rather than compete in this area.
"There's going to be a very,very bloody war. We are not going to be a direct participant in that war," Eric Benhamou, chairman and chief executive officer at 3Com said recently. "Cisco has painted themselves into a corner. They have to play a solo strategy. It's going to be a very violent clash."
Others echo Cisco's sentiment that it is simply a case of the trends moving in its direction: "I think Cisco's very happy--sitting pretty right now," said Maribel Lopez, analyst with Forrester Research, in a recent interview.
Cisco, meanwhile, maintains it has not ruled out future partnership opportunities with the likes of Lucent and Nortel. "These two particular conversations did not go very well, mostly due to unrealistic expectations," Lang said. "We are always open to partnering with people who bring good things to the table."
What is clear is that Cisco has entered turf where they are no longer the 800-pound gorilla of the industry, a fact that could be an asset or a crutch. As networks converge to support a variety of data across a single high-speed connection, barriers and walls between markets will fall at a rapid pace.
How each player in this market reacts to these changes will largely determine their success or failure going forward. As Lang noted: "It's all about execution in the end."