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Managing Editor

Putting money where its mouth is

Dec 11, 20023 mins
Cisco SystemsWi-Fi

Cisco to spend more than $10 billion on service providers in the next five years

If there is any doubt about Cisco’s commitment to the service provider market, it should be dispelled after last week’s analyst conference.

If there is any doubt about Cisco’s commitment to the service provider market, it should be dispelled after last week’s analyst conference.

Cisco will invest more than $10 billion into this market over the next five years, Charlie Giancarlo, Cisco senior vice president and general manager of product development told analysts last week. At an average of $2 billion per year, that’s more than half of Cisco’s $3.3 billion annual R&D budget – excluding, of course, service provider sales and marketing expenses that are likely included in that $2 billion.

Still, it’s a lot of coin for a company that saw its percentage of revenue from service providers drop from 40% to 20% or less over the past three years. It’s more than what Lucent and Nortel, two companies that focus almost exclusively on the service provider market, spend annually at the high-end – 18% of revenue – of their R&D budgets.

The service provider market is crucial for Cisco. The technology underpinnings of new services and service revenue play to Cisco’s strength – packets. Giancarlo says that what little capex there is during the capex crunch is going toward infrastructure that can deliver revenue from new services, rather than existing infrastructure and services.

He says that service providers are facing a new revenue model – from that based on time and distance to one based on bandwidth and service. “It’s a very fundamental shift in the way they make money,” he says.

It may require a fundamental shift in the way Cisco develops products, too. Granted, Cisco will sell a lot of IP packet routers and switches to service providers for data – but how much will they rely on Cisco for voice even if new voice service will be packet-based?

And what about Cisco’s almost 20-year-old, enterprise-borne IOS software? How reliable and rock solid is it for the service provider environment, especially for voice? At what point will service providers rely on IOS as the transport and service granularity intelligence behind the majority of their voice traffic? Will they ever?

Service providers may be challenged right now in pinpointing new sources of revenue. And their compass may continually point to Cisco. But Cisco is equally challenged in producing carrier-class product. Ten billion dollars over five years may seem like an impressive sum with which to underscore its commitment to the service provider market; but an even more impressive sum will be Cisco’s return on that investment.

“Cisco’s future in communications equipment for service providers is the most uncertain, but most critical part of Cisco’s strategy,” says Bill Lesieur, director of Technology Business Research in Hampton, N.H.  “Cisco is faced with the uphill challenge of growing its current 3% share of service provider capital spending into a top leadership position, which would need to be 15% to 20% share.”

Managing Editor

Jim Duffy has been covering technology for over 28 years, 23 at Network World. He covers enterprise networking infrastructure, including routers and switches. He also writes The Cisco Connection blog and can be reached on Twitter @Jim_Duffy and at

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