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Cisco looks to hook smaller customers

Seeking to shore up declining revenue in its traditional markets, networking giant Cisco Systems says it's putting new emphasis on small and midsized businesses as customers.

Seeking to shore up declining revenue in its traditional markets, networking giant Cisco Systems says it is putting new emphasis on small and medium-sized businesses as customers.

The move may be counterintuitive for a company known best for creating the industrial-strength data routers that drive telecommunications networks. But the telecommunications market has yet to see signs of revival, and the huge companies to which Cisco sells corporate networking gear are seeing only anemic growth.

By contrast, the company believes, small and medium-sized companies are still catching up to the networking wave that swept their larger counterparts up in the late 1990s. Already making up a quarter of Cisco's revenue, or about $3.6 billion in 2001, the market looks even more attractive today.

"There is growth in spending for networking in this market," said Kevin Outcalt, senior director of marketing for Cisco's Worldwide Commercial Market Segment. "What we're seeing is that (these) customers are catching up to the application curve that (larger companies) went through a few years ago."

The move is just one part of Cisco's response to an industry downturn that has lasted far longer, and cut far more deeply, than the one-time highflier had expected. The company's ebullient CEO, John Chambers, was notorious for projecting unceasing, skyrocketing growth rates even as the market started to crash, and has only recently traded in that optimism for a darker outlook.

The networking giant is hardly looking to small business to replace the collapse of the once-strong telecommunications sector. But in its quest to slow its own financial bleeding, it is looking to make up ground wherever it can.

The company cites projections by New York-based research and consulting firm AMI-Partners that say small and medium-sized businesses in the United States, defined as organizations with fewer than 1,000 employees, will spend more than $223 billion on information technology and communications in 2002.

Only a tiny fraction of that figure is spent on gear or services that Cisco can provide. But the company also cites research showing a third of the companies it considers likely customers believe that Cisco is their "primary network vendor" but do not buy all their gear from the company. That's an immediate opportunity to add to its 38 percent market share in those areas, Outcalt said.

The drive appears to be more about marketing, support and distribution than about changing product lines. The company already has a well-developed set of products for relatively small-business customers, ranging from VoIP (voice over Internet Protocol) systems to high-end local network routers.

However, Cisco has not previously spent considerable time developing distribution channels to move these products beyond large companies or in developing support services for smaller customers and resellers.

Helping customers help themselves
As a part of its new push, the company is developing a set of Web-based services that help potential customers assess their own network needs, or help other companies selling Cisco gear design a package of networking products for their own customers.

The company is also pushing hard into the managed services market, looking to help link Net service providers and their own customers with networking gear that will help support e-commerce sites or Web-based applications such as customer relationship management tools or sales databases.

Analysts say this is an important push, even if it won't necessarily bring tremendous amounts of revenue today. The growth of Net services means that business customers will increasingly need networking equipment on their own premises, and it will behoove Cisco--or any of its competitors--to have its own equipment on both sides of the connections.

"When the market is out of recovery, I don't think service providers will want to do business with network providers that aren't on the customer premises," said Kneko Burney, an In-Stat/MDR analyst.

Despite the financial body blows that have kept Cisco reeling over past quarters, the company is in better shape to push into this market than many of its competitors, Burney added. While 3Com is strong in smaller markets, it is in worse financial shape and has suffered from bad publicity over the past year, she noted.

"I think Cisco is in good position to gain share here," Burney said. "Given the state of the market, it's a good move for them."