IBM concedes networking defeat

Systems giant Big Blue will now rely on Cisco Systems, the dominant provider of data networking equipment, to provide for its customers' networking needs--underscoring the changing nature of the booming industry.

The partnership signals a new era between the two industry titans. Today's deal offers further evidence that firms that focus on a variety of technology markets have been forced to concede victory to specialists like Cisco. Also, companies are finding that vast resources are necessary to either acquire or develop technologies demanded by new voice and data networks--something that IBM, with its numerous offerings, couldn't provide.

"Fundamentally a decision has been made that [Cisco and IBM] will no longer compete in the marketplace," said Selby Wellman, senior vice president of Cisco's interworks business division, referring to the acquisition of IBM's switching and routing intellectual property.

As a result of the deal, IBM will essentially shut down operations in its networking division--yet retain some of its older technologies--while Cisco will walk away with key services capabilities, not to mention a new revenue stream from IBM's large customer base. The services win is significant, as the market has has proven to be a new battleground between Cisco and competitors Lucent Technologies and Nortel Networks, which have developed and acquired internal services capabilities.

As part of a wide-ranging agreement between IBM and Cisco, Big Blue will sell about 200 patents to the networking company for an undisclosed sum. Those patents are largely focused on routing and switching technologies developed by IBM. The move is indicative of market trends--Cisco has excelled in the routing and switching markets, while IBM, even with its own offerings, has gradually been relegated to a niche position.

The pact could result in $3 billion to $7 billion in incremental revenue over the next two to three years for Cisco, according to sources close to the deal. "There is a multibillion-dollar opportunity for Cisco here," according to IBM executives.

At your service
Network services has rapidly become a hot commodity in the industry, highlighted by Lucent's $3.7 billion purchase of International Network Services earlier this month. That was followed by Cisco's $1 billion infusion in integrator KPMG that same week.

Tapping IBM's army of services personnel further buttresses Cisco's overall strategy. Rather than bring thousands of specialists in-house, Cisco has chosen to partner with the likes of Big Blue, KPMG, and others--like Hewlett-Packard--to fulfill its services needs while remaining focused on its high-growth equipment businesses. IBM boasts nearly 130,000 services employees, which can now be used as conduits for sales of Cisco's equipment.

Cisco executives reason that with the fast pace of the Internet, companies need to place their bets in particular areas and rely on the competencies of others to fill the gaps. "No one company can keep up with this warp speed by themselves," Wellman said.

Data networking rival 3Com also jumped into the consulting game today, announcing a new services practice tailored for specific technologies, such as deploying its Palm line of devices across a corporation.

Stick with what you know
IBM becomes the second systems player to de-emphasize its networking business this year. Compaq Computer now largely relies on equipment from Cabletron systems to fulfill its networking needs after an aborted foray into the market.

Only HP is left as a player of any consequence among the large computer giants. HP also has a significant partnership with Cisco.

Closer ties with Cisco also means that IBM--which relied on relationships with other suppliers like 3Com and Xylan, now part of Alcatel--will no longer be a large original equipment manufacturer, or OEM, customer.