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Networking giants change tactics

Networking companies have all tweaked strategies and cut back to survive the slowdown, but there's one thing they aren't slashing: research and development budgets.

LAS VEGAS--Networking-industry executives have all tweaked their business strategies and made cutbacks to survive the tumbling economy, but there's one area they refuse to slash: their research and development budgets.

Like others in the technology sector, networking executives say they must stay aggressive with technology innovation because they fear they will lose customers in the future if their products are not up to snuff. Although spending is down now, networking companies want to be ready when their customers regain their appetite for faster and better networking hardware that speeds Internet and private data traffic from one area to another.

"The economy will eventually come back," Foundry Networks Chief Executive Bobby Johnson said in an interview. "We want to build as much new technology as possible and be ready when customers are ready to buy again."

Out of about $5 billion in quarterly revenue, Cisco Systems last quarter spent $970 million on research and development. Extreme Networks, which raked in $112 million in revenue last quarter, spent $16.5 million on research and development. Foundry, which earned $82.5 million in revenue last quarter, spent $7.9 million in new technology research.

Company executives interviewed at the Networld+Interop networking-industry trade show this week said they have employed different strategies to ride out the rocky economic climate. With sales and profits declining, most are struggling and in the throes of reorganizations that include layoffs. Some companies, like Extreme, have refocused their sales efforts from North America to countries where the economy is better. Others, like Foundry, have cut back on advertising and marketing efforts so they can hire more engineers to develop new technologies.

Alcatel's unit that sells networking equipment to businesses moved employees from its data business to the faster-growing business of Internet-based phone systems, according to executives. The company recently entered the Net-based voice equipment market.

A pit stop
"We're optimizing. It's like a pit stop in a race. You change your oil and make sure tires are good, " said Thomas Wilburn, senior vice president of Alcatel's North American Enterprise business.

Cisco has even changed some of its product strategy. After halting work on four products it recently acquired, the networking giant has been focusing its research and development budget on longer-range projects, said James Richardson, senior vice president of Cisco's enterprise line of business, which caters to corporate customers.

"We still spend billions on R&D, but we have reprioritized the things we are going to bring to market in the next 60, 90, or 120 days," Richardson said. "We've reassigned (a percentage) of engineers from products focusing on the next six months to products for the next 12 to 18 months."

Because of the tepid economy, Cisco will come out with fewer updates to its existing networking hardware for corporations, he said. For example, the company will release fewer variations of the same product that might offer a better price, a better speed or better capacity to handle more people on a network.

"We have to get very selective with what we do," Richardson said.

Juniper Networks' executives say they are meeting with their telecommunications service provider customers more than ever, talking with them about how Juniper can create new technology that can help them generate more revenue.

Like their rivals, Juniper executives say they will continue to come out with new products. "We have to invest in the future and make sure we don't sit still. Otherwise, other companies will get ahead of us," said Carl Showalter, Juniper's vice president of marketing.

What about now?
Although the companies are building for the future, executives say they are not giving up on the present. Alcatel and Foundry executives say they've seen an uptick in revenue, with April sales much improved over January sales, although it's too soon to tell if the upswing will be sustained over the summer.

Networking executives believe they can steal market share from one another during the economy downturn. Customers are still spending, just not as much as before.

Cisco's Richardson said he believes the company can capture more customers now because Cisco has such a huge product portfolio that customers can turn to the company for all their networking requirements. Its rivals can only offer a piece of the overall networking puzzle, he said. Rather than buying equipment from different companies and trying to tie it together, customers can spend less by buying Cisco's products because all its products work together, he added.

But Cisco's rivals say the opposite.

"Customers are now more open to other strategic options," said Extreme Networks Chief Executive Gordon Stitt. "Six months ago, customers saw Cisco as golden. They had this glow about them, and it's been shattered. They are no longer invincible."