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The Cisco miracle: Can it last?
After winning game, set and match in routing and switching,
Cisco is trying to establish a similar level of dominance in new segments. Its
traditional stronghold is under siege from competitors who have hooked up with
low-cost players to give Cisco a run for its money. Can the company guarantee
that it will continue to maintain the same level of profitability and growth
asks Rahul Neel Mani
 Cisco’s
rise has coincided with that of IP networking, at one point the company was
almost synonymous with the rise of IP. Cisco has expanded into almost every
area of corporate networking and as it branches out, the company has transformed
its business horizon from one of developing and selling point products to one
where it takes a more holistic and converged approach. Cisco has completed nearly
70 acquisitions, over the past five years. From being an acquisition machine,
the company is remoulding itself to a model where it develops products internally.
While routing and switching are largely under its sway, Cisco
has just got into several new segments such as storage, security, wireless and
IP Telephony. Says Ranajoy Punja, Vice President, Marketing, Cisco Systems,
India and SAARC, “Over the next few years, we expect to grow in the service
provider market – specifically in the Metro Ethernet, Wireless and value-added
services space.” Combined together these new segments have a global potential
of over $40 billion by 2006.
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Cisco has invested in creating solutions, products
and support services that help customers maximise their RoI, says Ranajoy
Punja |
The problem is that even Cisco’s routers and switches
business that accounts for the bulk of its top line, is under siege. Competitors
such as 3Com and D-Link have formed alliances to attack Cisco at the low-end
of the market.
Routers and switches remain the backbone of Cisco’s business. That’s
under siege from competitors who have teamed up with Chinese players to give
Cisco a run for its money at the low-end. 3Com’s alliance with Huawei
and Dax’s with Maipu are all signs of changes a-coming. The company is
actually losing market share in markets that it claims it doesn’t want
to address any more, i.e. the unmanaged switching market.
Companies such as D-Link and 3Com are gathering momentum both in terms of reliability,
manageability and lower TCO. Geoff Johnson, VP-Research, Enterprise Networking,
Gartner- Asia Pacific says, “Despite Cisco’s revenue being stable,
its market share by volume is dropping. This is principally because of enterprises
buying alternative solutions.”
By virtue of its early leadership in routers and proprietary technology, Cisco
established legacy networks, which gave it liquid cash to acquire companies
with diverse technologies. Competitors claim that the company’s products
need several upgrades to be compatible and in the long run these can prove to
be expensive. “Cisco is now being challenged by individual companies in
several product segments like D-Link in Wireless, Foundry in Layer 4-7 switching,”
says P Vyas, Director, Sales, D-Link India. Vijay Yadav, Country Manager 3Com
India says, “In the early days of routing, Cisco was the clear leader.
But in subsequent phases, niche players took over. Foundry and Extreme are bigger
names in Ethernet, Juniper is challenging Cisco in routing.”
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Despite Cisco’s revenues being stable, its market
share by volume is dropping. This is principally because of enterprises
buying alternative solutions, says GEOFF JOHNSON |
Cisco will not leave the enterprise routing and switching
space, in fact, it will try to make-up for lost ground in the service provider
market. The IDC numbers, both for India and the worldwide figures, reveal that
Cisco is still the leader in the LAN and WAN switching market with the nearest
competitor not even close. In terms of Layer 2 fixed-configuration products,
Cisco leads according to Gartner but 3Com is hot on it’s heels followed
by D-Link Systems. On the other hand, in the high-end enterprise backbone market,
which is defined as Layer 3 modular LAN gear, Cisco has pushed the competition
back. Where vendors like Enterasys, Nortel and Extreme Networks had a two-digit
market share a few years back, now all of them are confined to single digits.
Cisco is a clear second in Web switches or load balancing, where Nortel leads
the market. Foundry Networks leads in the emerging 10G arena, it has a tie-up
with D-Link in India.
While other companies are gaining leadership in some point products, no player
can touch Cisco in the overall LAN and WAN market. That said, Huawei and Dell
pose a threat to Cisco in the low end of the market. Huawei is selling through
3Com. While Dell’s unconventional entry into layer 2-3 switching hasn’t
happened yet in India, the company will use its extensive Web and channel network
once it enters this market in India. “With the Foundry-D-Link alliance,
leading System Integrators find it easy to configure world-class solutions to
a customer’s requirement rather than pushing the solution based on a specific
vendor,” says Vyas. Yadav strongly feels that 60-70 percent CTOs/CIOs
have adopted a dual vendor strategy. He adds, “The routing industry has
been run like a ‘ration shop’ for many years. The technology was
available but it was sold to customer in bits and pieces and companies were
forced to upgrade.”
Cisco, however, remains confident that no other networking company can depose
it. It’s view is that it operated solely in the enterprise, commercial
and service provider space in the past and that the Linksys acquisition gives
it a strong entry into the SOHO and home network market. Cisco has appointed
two national distributors for Linksys – Tech Pacific India and Ingram
Micro India. They will, in turn, set up a chain of Linksys Focus Partners (LFP)
in every city to drive business. Cisco will also leverage its 1,500 active reseller
base in over 100 cities.
There’s the good news…
Cisco has bagged wins in VoIP, security and wireless. It’s Architecture
for Voice, Video and Integrated Data (AVVID) that faced initial criticism due
to reliability issues has made a splash in the market. The good news continues
in security and wireless where Cisco, despite being a late entrant, has climbed
to the top of the heap in both market segments.
Prem Jain, Sr. VP & GM, Access and Routing Business Group,
Cisco Systems Inc., says “Solutions that can offer LAN and WAN connectivity
and other features such as security, manageability and the ability to provide
voice, video and data on one single platform [have gained acceptability].”
On the other hand, Cisco’s security and wireless product portfolios have
also climbed to the top in their respective markets. IDC Worldwide has said
that Cisco has over 38 percent of the market for VPN/Firewall appliances and
well over 40 percent of the network IDS gear (2003) segment.
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VIJAY YADAV feels that 60-70 percent of CTOs/CIOs
have adopted a dual vendor strategy |
Cisco’s new love –SOHO and home networks
Cisco expects accelerated growth in the SME market across 100 Indian cities
and the adoption of SOHO (Small Office Home Office) and home networks as a consequence
of the rising number of home, mobile and tele-workers. It believes that its
ongoing investment in R&D to create new platforms and solutions will ensure
that it wins in emerging product categories.
The competition can’t be wished away, however, D-Link is the leader in
wireless and a strong contender in broadband and IP telephony. “Our extended
reach and value for money solutions will let us compete with Cisco,” says
Vyas.
Cisco’s Linksys acquisition gives it a range of solutions that address
the SOHO market. The Linksys line complements Cisco’s existing solution
sets for the enterprise and service provider markets.
And the bad...
Despite that, the company has its work cut out for it. “In
the next five years there will be two types of vendors competing with Cisco
– First, those having low cost end-to-end solutions and second, those
having niche networking gear and sustained support,” says Yadav.
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| Note: The overall market size is $26.7 million |
That’s just in traditional markets. If you look at new
markets, things are far from rosy for Cisco in some areas. Take storage switching
where Brocade rules the roost. Here Cisco is trying to establish a beachhead.
Its last push in the storage market came with the MDS 9000 Fibre Channel SAN
Switch, which the company would be selling through EMC, Hitachi, HP and even
IBM. But even today Cisco has 7 percent of the worldwide storage switch market.
Jain accepts that the company is losing market share in some areas but those
are markets that Cisco doesn’t want to address any more – the unmanaged
switching market. Even in VoIP, Nortel Networks has got its act together and
it is going head-to-head with Cisco.
Keep on pushin’
With its core markets of routers and switches being absolutely flat, how can
the company guarantee that it can maintain the same level of profits quarter
on quarter?
Cisco is betting on long-term platforms to which it can continually
add value. The Catalyst 6500 switch is the best example of this strategy of
selling a large chassis that will never be swapped out and is constantly upgraded
with new features. This line garnered a whopping $3.3 billion in fiscal 2002
– that was around 40 percent of Cisco’s switch product revenue and
a total of well over $12 billion over the lifetime of the product. The same
is true of its VoIP, security and wireless strategies. “Cisco is responding
to customer demand and it is focusing upon creating common software and hardware
architectures for secure appliances and routers,” says Jain.
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(Source: IDC India; March
2004)
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| Note: The over all market size is $67.7 million |
Cisco is said to spend nearly 40 percent of its R&D budget
on new growth markets such as storage, security, VoIP and wireless that happen
to represent just 15 percent of its global business today.
In addition to that, Cisco is also concentrating on key areas of security such
as manageability and deployment. In IP telephony, it has amassed considerable
mind-share, which will convert into pure revenue when this technology gains
mass adoption. Having shipped close to two million IP phones by mid 2003, the
company is working to fine-tune additional capabilities such as IP-based video
conferencing.
The other vendors aren’t sitting still. 3Com is upping the ante with its
IP security strategy. “The 3Com Security Switch 6200 will integrate security
features into new and existing networking devices and IP switching gear,”
says Yadav. Late last year, Cisco introduced the ‘Cisco Network Admission
Control’ programme (CNAC) to adapt its routers and then its switches to
automatically block Windows-based desktops from accessing the network if they
don’t have the latest operating system or anti-virus updates and patches.
This security policy enforcement – although already implemented in different
ways in products from Checkpoint, Enterasys, and Nortel – will let IT
managers of end-to-end Cisco networks build security into every part of their
networking infrastructure.
Enterprise routing/switching – The new battleground
With its growing interest in new areas, will Cisco make routers and switches
a non-priority business? Gartner doesn’t think so. Although the company
has not been able to repeat its business success at the sky-high levels of 2000
(during the dot com boom), its recovery has been promising.
The competition does not have the breadth of offerings that
Cisco has. It’s a case of what Margaret Thatcher called TINA (There is
no alternative). Cisco offers a safe choice, and whether it comes with a price
or not, most corporations, big or small, perceive the value of an end-to-end
Cisco network to be more important than any loss of pricing leverage or single-vendor
dependence.
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| Note: The overall market size is $39.7 million |
Cisco might be losing market share in conventional routing
and switching but it has registered early gains in the rising markets such as
VoIP, wireless, storage and security.
As per Cisco’s vision - the company will focus on IP telephony, wireless,
security, storage and optical networking (apart from its traditional router
and switch markets). Of these IP telephony, wireless and security remain its
top three priorities. But these are the top focus for most networking players
including the likes of 3Com, Nortel, Lucent and Avaya.
Cisco’s biggest advantage is the fact that it spends more on R&D than
any other networking vendor does. That’s how the number of products coming
out of Cisco stable outnumbers that of any of its competitors. Will the Cisco
miracle last? For the near-term, definitely. But if it stumbles in executing
its strategy in new market segments, its competitors will have a shot at becoming
the next Cisco.
| Security |
The VPN and firewall market will be worth $5.3 billion
by 2005, Cisco leads with 39 percent, three times its nearest competitor.
(Source: Synergy Research). The major drivers here include corporate fear
of fraud and hack attacks, terrorism, and moving to a 'network of networks'
approach. Cisco's challenge is to overcome the difficulties in effectively
deploying enterprise security.
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| IP Telephony |
In a market projected to reach $6 billion by 2006,
(Source: Synergy Research), Cisco has the number one position today, (Source:
Dell'Oro). This market segment is driven by service providers looking to
add IP telephony to their networks as a way of providing value-added services.
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| Storage Networking |
Gartner estimates that the SAN Switch market is going
to be worth $2.4 billion by 2006. Cisco bought Andiamo last year to gain
entry into this rapidly growing market. Since SANs are proprietary, sharing
data is difficult. By introducing IP networking technology into SANs, Cisco
can connect SANs to create cost-effective storage networks. |
| Wireless and Mobility |
By 2006, the wireless LAN market will
be worth $4 billion (Source: Synergy Research). It notes that Cisco leads
the enterprise WLAN market with a 34.5 percent revenue share. Tele working,
rapid implementation in small offices and wiring of public spaces are the
key drivers here. |
rahul@expresscomputeronline.com
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