What's telling about the LA Times business article at
http://www.latimes.com/HOME/BUSINESS/CUTTING/lat_cisco1214.htm
included below, is how much the LA Times has slanted the piece in the
effort to convince businesspeople that Cisco has a fighting chance here.
This is a masterpiece in spin. The article really underplays the fact
that this is very much an uphill battle for Cisco, especially now that
the telecoms have wisened up.
I guess when Lucent and Nortel declared war on Cisco's core businesses
earlier this year, they pretty much expected that Cisco would counter by
going after *their* core busnesses. This should be another interesting
one to watch play out in the next few years...
One thing I wanted to point out is that sometimes John Chambers sounds
like Rohit extolling the virtues of munchkins:
> "Phone companies that don't understand that voice will be free will be
> in deep trouble," Chambers warns.
Rohit usually takes it one step further when he's pitching munchkins and
says that as long as you don't run a bit deficit, ALL data/voice/video
transmissions and receptions will be free. Now that I think about it,
no wonder everyone looks at us like we're nuts. On the other hand,
Rohit's gonna be a *great* CEO someday...
On to the article...
> Charting a Course to Technology's New World
>
> Cisco Systems chief stakes firm's claim on an Internet-based future for
> telecommunications.
>
> LA Times Business Section, Monday, December 14, 1998
> By LESLIE HELM, leslie.helm@latimes.com
>
> SAN JOSE--When John Chambers had an audience with Chinese President
> Jiang Zemin recently, the chief executive of Cisco Systems Inc. spent
> much of his 90-minute meeting explaining why China should skip "old
> world" telephone technology and invest instead in "new world" Internet
> technology to build out the country's telecommunications infrastructure.
>
> "They were taking notes," Chambers recalls. "They really get it."
>
> The sales pitch was vintage Chambers. A consummate evangelist for the
> revolutionary power of the Internet, Chambers has built Cisco into the
> dominant provider of routers and other equipment used to direct messages
> across the Internet. It is a company held in awe among the geeks who
> build computer networks.
>
> But Cisco company hardly shows up on the radar screen of the
> $700-billion global telecommunications market, where multinationals such
> as Canada's Nortel Networks (formerly Northern Telecom), France's
> Alcatel and America's Lucent Technologies are the heavyweight suppliers.
>
> So Chambers borrowed a martial arts tactic from jujitsu to neutralize
> his larger opponents: By declaring his rivals "old world," Chambers
> instantly makes their power and size seem more of a liability than an
> advantage. Cisco, as the leader of the "new world" of Internet-based
> technology capable of efficiently handling voice, data and video, is
> then nicely positioned as a market leader before it has made a major
> sale.
>
> The real story is far more complex. Nor is it clear that the Chinese
> will follow Chambers' advice.
>
> But Chambers' pitch isn't all smoke and mirrors, either. The company's
> reputation as an Internet leader is increasingly important as the
> industry moves toward Internet protocol, or IP, the Internet-based
> standard that has become ubiquitous as a result of the explosive growth
> of the World Wide Web.
>
> Chambers has acquired cutting-edge technology for delivering voice over
> its data networks and has made some important forays into the enemy
> camp. Cisco recently announced an important partnership with Bellcore,
> the former research and engineering arm of the Baby Bell phone
> companies.
>
> Additionally, Cisco has had significant early wins in the battle to win
> the hearts of telephone service providers.
>
> The company will be the primary supplier, for example, for a massive new
> optical fiber network that Portland, Ore.-based power company Enron will
> begin rolling out at the end of this year with a new Portland-Los
> Angeles link.
>
> Englewood, Colo.-based ICG Netcom will use Cisco equipment to build out
> an Internet-based network to offer long-distance telephone, Internet
> access and other services.
>
> And Videotron of Canada has announced plans to offer phone, cable TV and
> Internet service to its cable customers for $39 a month, via a network
> built with Cisco equipment.
>
> Chambers is trying to push traditional telephone companies to accelerate
> their move toward IP-based networks by warning them that the new
> generation of Internet-based communications networks will decimate their
> revenue from phone service by providing voice as a free add-on to
> Internet and other services.
>
> "Phone companies that don't understand that voice will be free will be
> in deep trouble," Chambers warns.
>
> It's a brash move to criticize your biggest customers while throwing
> down the gauntlet before rivals such as Lucent that are three times your
> size. That's particularly true since Cisco itself admits that the gear
> used to operate the Internet is not yet ready to reliably handle the
> huge phone traffic managed by the traditional telecommunications system.
>
> The battle shaping up is not just between traditional phone companies
> and new Internet-based firms, but between two fundamentally different
> ways of handling the transfer of information.
>
> The traditional switched public phone network provides an end-to-end
> connection that stays open until one side hangs up the phone. The
> system offers clear and reliable connections for voice but is
> inefficient for data. When a computer is connected to the Internet, for
> example, the line remains open, tying up the phone system, even when no
> data are being transmitted.
>
> Internet-based networks, by contrast, are more efficient because they
> send data in packets that find their way to their destination using the
> least-congested routes.
>
> Most industry experts believe Internet-based networks will eventually
> come out on top. That's because Internet protocol has become so
> ubiquitous that most new-development money is going into IP networks.
>
> As the data carried on the public telephone network increase--already
> more than half the information carried on public phone networks consists
> of such data as fax, computer information and credit card
> authorizations--phone companies are being compelled to boost their
> investments in IP networks to carry the load.
>
> And most analysts believe it is only a matter of time before technology
> is developed that enables IP networks to reliably carry voice as well.
>
> AT&T Corp.'s recent decision to acquire cable giant Tele-Communications
> Inc. and use cable modems to reach residential customers suggests that
> AT&T plans to make a heavy investment in an Internet-based
> infrastructure, says Avi Chaki, a senior analyst at New York-based
> Jupiter Communications.
>
> But even if telephone companies do embrace Internet-based technology,
> they have strong ties with traditional equipment companies that Cisco
> will find hard to break.
>
> "It's going to be a brutal market," says Chaki. Cisco's "competitors are
> big, and [Cisco] will have a hard time making inroads into that market."
>
> Lucent Technologies, the former telecommunications equipment arm of
> AT&T, has acquired 10 companies in the last few years in an effort to
> take Cisco on with its own Internet-based offerings.
>
> Bill O'Shea, president of Lucent's data networking systems division,
> argues that telephone companies will continue to demand the reliability
> and support from IP-based networks that they have become accustomed to
> getting from traditional telephone equipment providers.
>
> "It's the depth of the intellectual property, the accumulation of
> knowledge about network reliability that's important," O'Shea says,
> pointing to Lucent's 24,000 scientists and engineers and its long
> history in the phone business. "Cisco has challenges they don't
> completely appreciate."
>
> Cisco also faces challenges from Nortel Networks, which closed a deal in
> August to buy Cisco rival Bay Networks for $7 billion, giving the
> company a far broader portfolio of products than Cisco.
>
> "We are the first company that can do it all," says David House,
> president of Nortel. "We don't have to buy a lot of innovative
> technology companies with 20 or 30 people and integrate them. We have
> all the expertise."
>
> Phone companies themselves still see Cisco primarily as a provider of
> data network equipment rather than as a telephone equipment provider.
>
> "We've made a big investment in Cisco to build our IP networks," says
> Eric Bozich, vice president of Internet services for US West. "But if
> Cisco thinks they are going to replace Nortel or Lucent soon, well,
> that's not the space they are in."
>
> But those who have followed Cisco's rise aren't betting against the
> company. Cisco's sales have climbed 650% to $8.5 billion in the year
> ended July 25, up from $1.3 billion in 1994.
>
> And with a strategy of rapid-fire acquisitions--28 so far--Cisco
> has managed to stay on the cutting edge.
>
> When the market for switches used to handle local area networks, or
> LANs--usually corporate networks in discrete locations or
> campuses--began to boom in 1993, Cisco acquired four companies in that
> business for $860 million. Those companies are generating sales of $3.5
> billion today.
>
> Now the company is using acquisitions to build a technology base in
> voice, picking up six companies in the last two years. "We've brought in
> a lot of voice expertise," says Chambers. "We've become voice-smart."
>
> Where it doesn't make sense to buy, Cisco is building partnerships.
>
> To match Lucent's extensive knowledge about how telephone networks work,
> Cisco recently signed a partnership with Morristown, N.J.-based
> Bellcore, the former research and engineering arm of the Baby Bells.
>
> "We provide them with the telephony experience," says Michael Farabelli,
> vice president of marketing at Bellcore. "We come from the same family
> [as Lucent] and we have a lot of the same capabilities."
>
> At the other extreme, Cisco has licensed its software to consumer
> electronics giants such as Japan's Sony Corp. for use in cable modems
> that provide high-speed Internet access to the home. The goal: to offer
> customers a complete network made up entirely of equipment from either
> Cisco or one of its partners. Such a network, Chambers says, would make
> it far easier for Cisco to diagnose problems in a network.
>
> Chambers' push into the telephone market signals a new phase for the
> company that was founded in 1984 by a Stanford University couple.
>
> For years, Cisco's primary customer was the information manager of the
> large corporation. Now, as the Internet becomes a core part of the
> company's strategy and Internet access becomes commonplace in American
> homes, Chambers is intent on building a stronger public image. Just as
> consumers have come to look for the "Intel Inside" logo when buying a
> PC, Chambers wants consumers to look for "Cisco Inside."
>
> "We want to be the company that drives the Internet revolution,"
> Chambers says.
>
> He hopes to build credibility in large part by using Cisco's own
> technology to remake the company. Already Chambers has turned Cisco into
> a laboratory for how corporations can use the Internet to boost
> productivity. Cisco gets 69% of its orders from customers over the Net,
> and about half those orders go directly to subcontractors that
> manufacture, test and deliver the equipment without a Cisco employee
> ever lifting a hand.
>
> Such tactics may not help win over the traditional phone providers, but
> if Cisco can win more orders from new operators such as Enron and big
> infrastructure investors such as China, Chambers will have come a long
> way.
----
adam@cs.caltech.edu
Sometimes I lie awake at night, and I ask, "Where have I gone wrong?"
Then a voice says to me, "This is going to take more than one night..."
-- Charlie Brown