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Cisco slowly builds cable equipment empire

Late in 1996, the company's engineers met for 15 minutes with executives to encourage a move toward high-speed technologies, and now the session seems to be paying off.

It all started with a 15-minute session in late 1996 with Cisco Systems chief executive John Chambers and the company's brain trust.

A small group of technologists within Cisco convinced the company's high-level executives that betting on the growth of cable networks and high-speed technologies was a smart move. Now that 15 minutes appears to be paying off.

The company announced a three-year deal this week with Comcast Cable Communications to supply the company with routing equipment and high-speed, or "broadband," technology for its next-generation cable systems and related Internet-based network. Cisco also counts AT&T, Time Warner, MediaOne, Cox Communications and Cablevision Systems, among others, as its customers.

Separately, Cisco this week invested $100 million in interactive-TV software company Liberate Technologies, a former satellite company of Oracle.

The moves highlight the genesis of a fast-growing business and a broader strategy at work within Cisco.

The company is focused on two fronts. For one, it is providing equipment that can serve up speedy connections to the Net using cable networks, therefore feeding the company's bread-and-butter business of supplying heavy-duty Internet equipment. Secondly, it is gaining a better foothold at network end points, where people who use devices such as interactive televisions or Net appliances log onto the Net.

Cisco has made inroads using small cable-routing devices and a breed of back-end, or "head end," cable systems based on a standard called "DOCSIS." That use of the Data Over Cable Service Interface Specification technology helped Cisco leapfrog the likes of Motorola, Nortel Networks and 3Com. Cisco gained AT&T's cable unit as a customer, replacing 3Com's equipment--which did not support DOCSIS--with its own.

3Com and others are regaining steam after losing market share, but Cisco appears to have filled the breach at a critical moment in the network plans of cable companies, garnering new business it can sell to once again.

"They've been successful in their strategy. They just steamrolled over (competitors)," said Michael Harris, president of industry researcher Kinetic Strategies. "It was more competitive incompetence than any Cisco brilliance."

After a little more than two years of operation, Cisco projects annual sales of its cable equipment, comprised of back-end equipment and cable-routing devices for consumers, to be around $1 billion, according to sources familiar with the company's cable business.

"Cisco's a big, bad competitor. They have a market (value) that's bigger than all of their customers," Kevin Keefe, director or marketing and business development for Motorola's broadband communications sector, said in a recent interview. "Cisco's going to be a dominant player (in the cable equipment market), either through their own innovation or acquisition. So it's driven us to drive our own innovation hard."

Cisco also is gaining steam in the digital subscriber line (DSL) market, an alternative high-speed technology to cable that uses regular phone lines. Though competitors Copper Mountain Networks and Alcatel are entrenched as leaders in the business and consumer DSL equipment markets, respectively, Cisco has gained significant market share after several strategic fits and starts.

Cisco's moves in the cable market, as exemplified by this week's consumer-oriented Liberate deal and back-end Comcast equipment contract, feed the notion that it intends to have an all-encompassing role in the construction of networks for the Internet--a long way from its roots as a supplier of routing devices to corporations. This new role could bolster its effect on consumers who use the Net.

"In the broadband space, we're really beginning to feel the impact of devices other than the personal computer," said Paul Bosco, a vice president of marketing within Cisco's service provider line of business. "We're heading into a period where the economics will support aggressive investment in broadband services to the consumer."

The evolution of the company's cable strategy and its overall performance in the cable equipment market also provide useful insights into the inner workings of one of the most highly valued companies in the world. What technologists within Cisco's cable lab had to explain to Cisco's inner circle of executives was a business rationale, rather than the technological breakthroughs, for the executives to respond favorably, according to Cisco engineers.

Cisco had already made attempts to enter the cable market, but these initial forays were scuttled by internal priorities.

At the late 1996 meeting, the Cisco engineers laid out their belief that cable could be a lucrative conduit to gain Net access and deliver voice calls to millions of consumers, offering opportunities to forward-thinking cable companies.

"Our message was that we had a track record of successful projects, we had a great team, we had great faith in the market because we knew the customers intimately, and we were only three months or so away from a prototype demo," Jim Forster, an engineer at Cisco and employee No. 30, said in a recent interview.

At the close of the meeting, Chambers had one question, according to Carson Chen, a vice president within the company's cable business unit: "So how much revenue can you promise me?"

By the fall of 1997, the team of engineers was demonstrating equipment to customers.