March 3, 2003
Cisco Systems Inc. (Nasdaq: CSCO) CEO John Chambers has always said that Cisco only wants to play in markets where it can be number one or number two. This conviction makes it easy to believe the recent buzz that Cisco is getting ready to discontinue some or all of its long-haul DWDM products.
The networking giant's entrée into the long-haul market came in late 1999, when it agreed to buy Pirelli SpA's optical systems business. The purchase price could have been as high as $2.15 billion, but part of the price was based on revenue targets and other performance milestones, so there's no telling what Cisco really paid (see Cisco Completes Pirelli Purchase).
The acquisition spawned Cisco's ONS 15800 product line and, since its completion, Cisco has steadily announced product improvements of various sorts. That said, Cisco still lags in the overall long-haul DWDM market.
In its measurement of the long-haul WDM equipment space, which includes all long-haul and submarine products, Infonetics Research Inc. says Cisco sold about $50 million worth of gear during the year 2002, giving it about two percent of the $2.4 billion market.
Fifty million a year in sales is nothing to sneeze at, but Cisco is fighting an uphill battle against several vendors that have double-digit market shares, including Alcatel SA (NYSE: ALA; Paris: CGEP:PA), Nortel Networks Corp. (NYSE/Toronto: NT), and Siemens AG (NYSE: SI; Frankfurt: SIE). "They have been a steady performer [in the long-haul market], but it's nothing they're gaining share in," says Michael Howard, principal analyst at Infonetics.
Cisco's long-haul products include the ONS 15800, which handles 64 OC192 (10 Gbit/s) channels per fiber and is best used for transporting data over networks where regeneration stations (and the cities served) are less than 600km apart. The ONS 15808, on the other hand, is used for networks where regeneration stations are up to 2000km apart. Cisco has advertised that the 15808 can scale to more than 160 channels at 40 Gbit/s transmission rates.
A look at Cisco's announced customers in the long-haul market shows that Cisco doesn't have a stranglehold on the space. Customers for Cisco's ONS 15800, ONS 15801, and its ONS 15808 boxes include Cogent Communications Group Inc. (Amex: COI); CTC Communications Inc.; Cambrian Communications LLC; Velocita Corp.; Matáv Group, a service provider in Hungary; Northwest Open Access Network (NoaNet), a regional not-for-profit provider; Réseau d'informations scientifiques du Québec (RISQ), Quebec's educational telecommunications infrastructure and service provider; and China Telecommunications Corp. (NYSE: CHA) (see Cisco's Learning Experience and Cisco Demos COMET).
Cogent, CTC, Cambrian, and Velocita were all backed by Cisco vendor financing, so Cisco essentially paid for much of that gear itself. Even still, CTC, Cambrian, and Velocita all went bankrupt, and Velocita was picked up by AT&T Corp. (NYSE: T) for pennies on the dollar (see AT&T Acquires Velocita, Cisco-Backed Cambrian Is Bankrupt, and Cisco-Backed CTC Is Bankrupt). The China Telecom installation was likely only a point-to-point link, not a full blown network upgrade (see Cisco's China Syndrome). Most of the remaining announced customers are either non-profits or other entities without much of an ongoing appetite for long-haul links.
The long-haul market itself is also shrinking, a fact that might add to Cisco's troubles (see Long-Haul Lag Lingers). Infonetics says the market shrank by about $3.6 billion from 2001 to 2002.
Would a full or partial bailout in the long-haul market leave Cisco customers high and dry? Not necessarily. By adding a DWDM blade to its ONS 15600 multiservice switch, Cisco could still handle the distances of 600km or less while saving carriers from having to buy separate, standalone DWDM platforms (see Cisco's Fine Young Cannibal).
Cisco did not return calls for this story.
— Phil Harvey, Senior Editor, Light Reading
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