Cisco facing up to challenges

Interesting times are ahead for Cisco

Service provider alignment

The service provider arena is a different story. Service providers are transitioning their legacy circuit-switching gear to IP packet switches and routers, which plays right into Cisco's strengths.

Indeed, Cisco's CRS-1 core IP router is gaining significant momentum in the market. Cisco has shipped 900 of the systems since its launch in 2004 and has won back some core market share lost to Juniper over the same time period.

But Juniper just announced its next-generation core router -- the T1600 -- which will ship in the fourth quarter. Juniper is looking for the T1600 to upgrade current users of the company's five-year-old T640, and regain market share momentum from Cisco.

In service provider edge routing, Cisco faces pressure from Juniper, Alcatel Lucent, Redback Networks and others pitching service edge routers -- systems that are service- or subscriber-aware. Service routing helps "flatten" a network topology, Dzubeck asserts, which threatens Cisco's approach of hierarchical routing.

Cisco still owns the lion's share of the edge router market, but after four straight quarters of growth in 2006 it saw that share slip from 58.6 percent in the fourth quarter of 2006 to 51.4 percent in the first quarter of 2007, according to Dell'Oro.

Service provider customers are consolidating, Cisco's Lloyd says, resulting in fewer customers that are demanding a more customized approach to their requirements. Competitors are also consolidating, creating larger companies but ones with more baggage, Lloyd says.

"We don't have the same footprint of legacy technologies in that space, and we have a balance across our business which has enabled us to do very well," he says. "Our position has probably never been stronger in service provider."

As for margin pressure from lower-priced competitors like Huawei, Lloyd views that as more of a regional issue. Most of it is occurring in emerging markets, in areas where Cisco does not have a presence, and in niche applications, such as wireless access and optical transport, Lloyd says.

Cisco's $6.9 billion acquisition of cable set-top box giant Scientific-Atlanta (SFA) is also key to its service provider and consumer forays. SFA and Cisco's Linksys routers are key to the company's interest in addressing the burgeoning consumer networking and digital entertainment market, while allowing service providers to increase revenue by offering more advanced IP services into the home.

Yet SFA is mostly a U.S. and North America play, analysts note. Cisco will be challenged in scaling SFA to international markets where cable is not as prevalent as DSL or passive optical networking.

Lloyd says international expansion begins with integrating the Cisco and SFA customer-facing teams. That effort is almost complete, and Cisco is ready to present a "joint face" in fiscal year 2008, which begins next month. Lloyd also says there's significant cable opportunity on a country-by-country basis in Europe.

Opportunities in other international regions, such as Asia, Australia and the Far East, will be "very targeted," he says, and already included in Cisco's road map for fiscal year 2008. He also indicated that Cisco plans to take SFA beyond cable access.

"I think it's very possible to imagine that the set-top box will become the home-delivery vehicle for all converged personalized services, regardless of the access," Lloyd says.

So Cisco's plate continues to expand. Its product breadth and sales and marketing savvy is unparalleled, but the company's work is clearly cut out for it.

"Interesting times are ahead for Cisco," says Yankee Group's Kerravala. "Here's a company that's executed on all cylinders for years. But there are some things that really might impact their long-term business."

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Jim Duffy

Network World
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