Optical/IP Networks

Cisco Cautious on VOIP

In the small pond of existing voice-over-IP (VOIP) equipment installations, Cisco Systems Inc. (Nasdaq: CSCO) is unquestionably one of the big fish. But even Cisco executives admit that it's going to take some time for the market to sustain a catch worth talking about.

At a press briefing held Tuesday at Cisco's San Jose campus, Cisco executives said that expanding the arena for VOIP equipment is going to be a slow, tough process, one that the biggest potential customers -- service providers -- may have to be dragged into, sometimes against their will.

Attractive to end-user customers as well as investors like Intel Corp. (Nasdaq: INTC) (see Intel Snatches VOIP Startup for $550M) for its potential cost-cutting and open-architecture attributes, VOIP is an ugly acronym to some service providers for the very same reasons, especially given the current whipsaw market conditions facing most sellers of telecom services.

Though some service providers (see C&W Bets $1.4 Billion on VOIP) and large-enterprise customers may be attracted to VOIP platforms as a way to increase functionality and reduce prices, even Cisco knows that large service providers (especially those with lucrative TDM businesses) are loath to spend money on new equipment that will ultimately drive down the tariffs they can charge their customers.

"Proceed with caution" is how most RBOCs and PTTs approach VOIP, says Mike Volpi, Cisco's chief strategy officer.

"Like any market, the incumbents will not be the ones that move first," says Volpi. According to Cisco, most of its early VOIP wins are coming in places like China and Latin America -- not North America, where the RBOCs reign.

"Our strategy is to [sell] to the new players first, then drag the bigger guys along the way," Volpi says.

Drag is the operative word. According to Volpi, the whole idea behind VOIP support is to increase sales of traditional Cisco routing and switching platforms, many of which are being VOIP-enabled.

"It's about the infrastructure," says Volpi, who estimates that VOIP-related equipment sales currently represent at best a single-digit percentage of Cisco's revenues.

"We don't expect it to be huge right now," says Volpi. "This is a long-term play for us."

According to Alistair Woodman, director of marketing for Cisco's service provider line of business, the company has already sunk $1 billion into VOIP-related development and acquisitions (see Cisco Turns Up Voice Signal) over the past five years, and currently has approximately 1,000 engineers dedicated to VOIP development. In order to prime the market, Cisco even manufactures IP telephones, of which it claims to have sold 280,000.

Cisco, which claims that 80 percent of its product line has some form of VOIP support, also says it has sold equipment that accounts for 1 million VOIP ports, a number it embraces as a sign of market leadership. Still, that's somewhat like bragging about leading a marathon after the first 100 meters -- a reservation from which Cisco doesn't hide.

And even though Cisco enthusiastically demonstrates cool VOIP applications -- like Dialpad.com's free Internet phone service -- Woodman knows that many service providers are going to cringe, not cheer, when they hear about the competitive possibilities that Cisco says VOIP technology could allow, such as Web-based dialtone portals, where customers could pick and choose among voice service providers.

Woodman, who brought up the service-portal idea during his presentation, jokes: "I don't show that slide to service providers, because I don't want to make them uncomfortable."

But to make the VOIP market succeed, Woodman says Cisco and others will have to develop new applications to convince service providers to embrace VOIP (and they'll have to be more entertaining than the in-house app that delivers Cisco stock quotes, which, when demonstrated Tuesday, returned a slightly embarrassing answer). Otherwise, VOIP will remain but a small stream in the overall river of telephony opportunity.

-- Paul Kapustka, Editor at Large, Light Reading http://www.lightreading.com

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