Cisco inks $280 million deal with upstart

The networking equipment giant signs the largest contract for its optical-based technology since it went on a recent high-priced acquisition binge.

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Cisco Systems signed the largest contract for its optical-based technology since it went on a recent high-priced acquisition binge, pledging today to supply upstart Cogent Communications with up to $280 million worth of equipment.

The contract to build Cogent's network is significant for Cisco. The company has spent nearly $10 billion in stock over the past year to gather the various technologies necessary to provide telecommunications companies with equipment for fiber-optic networks.

Optical networks are currently all the rage in the communications industry. As hardware prices fall and demand for high-capacity networks increases, network equipment firms are jumping at the opportunity to manage the growing amount of data and voice traffic.

Analysts estimate the optical networking market will reach $15 billion by 2003 in North America alone.

Cogent is constructing a long-distance fiber-optic network that will extend 12,300 miles and will link to 51 metropolitan networks in cities like New York, Miami and Los Angeles. The company is focused exclusively on providing Net access for businesses, offering high-speed connections at a discount compared with current rates for business connections like T1 lines.

Cogent plans to utilize Cisco's internally developed high-end routing equipment, along with gear from the company's Cerent and Pirelli acquisitions. Start-up Chromatis Networks will also provide technology for the upstart's metropolitan links.

Dave Schaeffer, Cogent's chief executive, said Cisco beat offers from six companies for its business, including competitors such as Nortel Networks, Siemens and Lucent Technologies.

"They've bet $10 billion on optical networking," Schaeffer said. "They've made a significant corporate commitment that they're going to make this work."

Classically, the likes of veterans Nortel, Lucent and Siemens have provided communications carriers with fiber-optic equipment. But with the explosion of network traffic caused by Internet use and rapidly falling phone rates, data networking companies like Cisco--as well as a number of start-ups--are thinking big, choosing to adapt their strategies to cut a wider swath across the industry.

Cogent has committed to purchasing $200 million in equipment according to Schaeffer, with the expectation that the contract could result in $280 million in sales. He said one-third of the $280 million in technology has already been bought, with the rest due to be purchased over the next three years as Cogent builds its network.

Cisco's first optical salvo was fired in August of last year, when it plucked Cerent and Monterrey Networks in a stock deal valued at the time at $7.4 billion.

The company's last purchase, filling an important hole by providing high-capacity optical technology, was the December acquisition of European giant Pirelli's optical systems business for $2.15 billion in stock.

Shares of Cisco today fell $1.31, or 1 percent, to close at $136.13.