By Jim Duffy
Network World, 4/20/98

Cisco Systems, Inc. is the undisputed king of data networking, far outdistancing rivals 3Com Corp., Bay Networks, Inc. and Cabletron Systems, Inc. in revenue, profit, product breadth, influence and installed base.

Cisco is present in virtually every aspect of an enterprise and WAN. Cisco's switches and hubs connect desktops into LAN segments that are grouped into subnetworks by Cisco routers. The routers then connect these enterprise subnets to the WAN, which is populated by more Cisco routers and StrataCom switches for access to the Internet or public or private data network services such as frame relay and ATM.

Now Cisco is extending its success in data networking into the world of voice and is doing so with circuit emulation and voice-over-IP extensions to its broad product portfolio.

If Cisco made LAN interface cards, PBXs and central office switches, it would be a true end-to-end supplier of integrated voice/data and video networks. Cisco is partnering with specialists in these areas to fill out what it cannot already offer.

Challenges ahead

Though Cisco faces some significant challenges in the years ahead, analysts say none are likely to knock Cisco off its perch. "Cisco is still the king,'' says Scott Heritage, vice president of equity research at UBS Securities, in New York. "They have their problems here and there, but the fact is, no one has a more complete end-to-end solution than Cisco does. Hands down.''

"Our challenge and our opportunity continues to be the preferred end-to-end networking supplies," says Jayshree Ullal, vice president of enterprise networking. Some of the challenges Cisco faces going forward are in balancing its installed base of Cisco 7X00 routers and Catalyst 5X00s with innovations in Gigabit Ethernet switching and wire-speed, gigabit routing for the enterprise. Cisco is being leapfrogged by start-ups and established competitors in both of these product areas.

The slow growth of Cisco's 7X00 routers is a drag on the company's overall growth, but routers still account for 45% of Cisco's total revenue, according to UBS. Unfortunately, that technology is experiencing single-digit year-over-year growth and becoming a legacy product line.

On the other hand, Cisco's WAN switching and remote access businesses are strong. WAN-switch bookings this year were $165 million in Cisco's second fiscal quarter - which UBS believes is a record for Cisco - and remote access revenue was $135 million, a 50% increase over last year.

But as Cisco extends its presence into more nooks and crannies of the enterprise and WAN, the company takes on a new cadre of competitors. And just as Cisco is expanding into new territory, these competitors are looking to branch out into areas where Cisco has traditionally been a leader.

At the low end, the new competitors include PC stalwarts Compaq Computer Corp. and Intel Corp. Compaq and Intel are getting into network hardware in a big way, including routers and switches - Cisco's bread and butter.

But again, the damage to Cisco should be slight because it sells mainly through direct channels, in which face-to-face customer interaction is key to winning the deal. "What the customer is really getting is the handholding, the service and support and the relationship, which basically you don't get from commodity PC vendors,'' says David Passmore, president of NetReference, a consultancy in Sterling, Va.

Microsoft Corp., meanwhile, is metamorphosing Windows NT into more of a network operating system. Microsoft has added routing to Windows NT through its Steelhead project and will be integrating directory services - which are key for user- and policy-based network access - and remote access hooks into NT 5.0.

Microsoft is actually working with Cisco on the Directory Enabled Networking initiative. But the collaboration should not conceal the impending competition as Cisco's direct competitors begin to offer NT-based network gear.

From the high end, Cisco is seeing the traditional WAN equipment vendors, Lucent Technologies, Inc. and Nortel, encroaching on its data turf at the same time that Cisco is building up its voice prowess. These companies are aligning with or acquiring data network vendors in an effort to gear up for advances such as voice over IP and Internet telephony.

Lucent recently bought Gigabit Ethernet start-up Prominet Corp. and remote access router vendor Livingston Systems, Inc. And Nortel recently formed an Enterprise Networks Data unit that combines the company's packet and fast-packet switches with the remote access concentrators obtained from its acquisition of Micom, Inc.

Both Lucent and Nortel have investments in router start-up Juniper Networks, Inc. and are reselling frame relay access devices. "We see that Lucent and Nortel could be competitors or could potentially be partners," Ullal says. "Clearly, at this point there are two different approaches: one from the voice side, one from the data side."

But voice is looking to ride on the data network, not vice versa. So the onus is on Lucent and Nortel to go out and hunt for data expertise, while Cisco merely adds voice to its data arsenal as if voice were another protocol, analysts say.