The Business Case

The percentage of revenue from Cisco’s service provider line of business has been halved over the past four years, from 40% in 1999-2000 to 20% now. Most of that is attributable to the downturn in the telecom market, where service provider capital spending is now less than half of what it was in the 1999-2000 timeframe.

But Cisco also stumbled in marketing to service providers by preaching instead of listening to what they needed. Cisco is now attempting to re-engage them through interaction with operational personnel within the carriers.

“We count on the service providers to account for a very significant portion of our revenue within four or five years, as high as 40%,” says Roland Acra, Cisco senior vice president and service provider CTO. “What we learned is that these guys have a lot of incumbency, a lot of inertia they need to work through. I think a lot of the improved relations we have with them have to do with us realizing the way forward was to help them through the [circuit-to-packet] transition, and build the tools and the infrastructure, as well as help them with services and [to] go to market.”

The improved relations have paid off. SBC is purchasing Cisco’s 12000 series Internet Routers for a nationwide OC-192 IP backbone network that is intended to transport Internet-based services such as Dedicated Internet Access and SBC-Yahoo DSL.

Cisco is also now the preferred provider for specific SBC managed service products, including IP telephony, IP VPNs, security, storage networking, hosting and wireless LANs.

“Cisco has changed and they are listening,” says Mike Reddout, SBC vice president of emerging channels. “We are now more involved up front in crafting the technical needs of the marketplace vs. force fitting something that has already been developed.”

Sprint may be another advocate. The IXC has upgraded its SprintLink IP network to support a Cisco technology called Layer 2 Tunneling Protocol Version 3. The technology lets a carrier encapsulate Layer 2 traffic, such as frame relay, for transport over a Layer 3 network.

Sprint is also deploying Cisco’s ONS 15454 SONET multiservice platform in 17 metropolitan areas to connect its central office switch sites in each metropolitan area, and its Sprint PCS switches to its landline network. This dense wavelength division multiplexer-over-SONET architecture will eliminate local mileage charges for many customers, the carrier has said.

Due to its dominance in the enterprise, Cisco is also bringing carriers together with its enterprise customers in order to stimulate demand for carrier services based on Cisco equipment.

“We are becoming more and more relevant to [carriers], and becoming the category leader in both the operating expense aspect as well as the revenue generation aspect,” says Sameer Padhye, Cisco vice president of service provider marketing.

Despite the recent efforts and progress, Cisco still has a long way to go in order to buck up that revenue contribution from service providers to 40%, analysts say. Only 3% of carrier capital expenditures come to Cisco, a figure that does not inspire awe considering that there are only a handful of major suppliers to carriers, according to Joe McGarvey, senior analyst for carrier infrastructure at Current Analysis.

“Cisco is far from a giant in the telecommunications space,” McGarvey stated in a recent report. “Cisco has not been able to capture a larger percentage of service provider spending.”

And though Cisco has made some progress in gaining the confidence of carriers after its initial missteps, this will be an ongoing challenge for the company rather than a one-time event.

“They had to basically apologize for their behavior,” says Bill Lesieur, director of Technology Business Research in Hampton, N.H. “And they still have an enterprise-oriented organization. How can they build similar relationships with service providers worldwide that Alcatel, Lucent and Nortel have now? That’s the biggest challenge outside of the U.S.”

Cisco’s strategy for strengthening relations with carriers worldwide and increasing its share of carrier spending revolves around the deconstruction of barriers to circuit-to-packet infrastructure transformation. They include capital and operational costs, including the development of operational support systems and provisioning scripts for IP/packet networks; and identifying profitable applications and services for these networks.

Once these barriers are broken down, Cisco’s total available market should increase, as well as its share of carrier capital expenditures, Acra says.

“This is the dominant logic in our strategy,” he says.

Next week: The Technology Case