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Optical/IP

Cisco's Russo: We're Just Getting Started

BURLINGAME, Calif. -- Cisco will focus on breaking the optical networking market into segments and will apply its IP expertise to gain an edge in carrier networks as data traffic increases, says Carl Russo, group vice president of optical networking for Cisco Systems (Nasdaq: CSCO).

Russo, speaking here today at the Opticon conference, sketched a general picture of global networks in which core optical networks converge with enterprise networks in the metropolitan area. Although pure wavelength technology will become viable in the core, many of the junctions of such networks in the metropolitan area will require a mix of optical DWDM and Sonet, electrical switching, and IP routing technology, said Russo.

In the next few months, Russo indicated, Cisco will examine further acquisitions and will make "four or five significant announcements in the optical space."

Russo defended the slow progress in converting Cisco's acquisition of Monterey Networks, which produces a DWDM wavelength router, into a product. He said Monterey's engineering schedule had be reset to ensure quality, and "he failed to communicate that to the market.

"We are in multiple trials [with Monterey], and over the next 90 days we will make some of these public."

He said that ongoing litigation between Alcatel SA (NYSE: ALA)(see Cisco Snagged in French Suit) and Monterey would not affect the product.

Russo also said there are no manufacturing problems at Pirelli (see Cisco Puts New Spin on Pirelli), a company that Cisco bought earlier in the year for $2 billion. He has no regrets over any of Cisco's acquisitions, despite industry rumors that neither the Monterey nor the Pirelli moves have been roaring successes. He said he has inadequately commmunicated why Pirelli was bought, which was for specific metropolitan-area DWDM technology and its "enormous intellectual property portfolio."

Looking forward, Russo said that Cisco plans to segment the optical market and attack each market separately, in an effort to chip away at the lead that companies such as Nortel Networks Inc. (NYSE, TSE: NT) and Lucent Technologies Inc. (NYSE: LU) have in selling large optical equipment to telecom carriers. "This won't happen overnight. I love a good fight, and this is a good one. There's Nortel and Lucent and startups coming from every direction."

Russo broke down the optical markets into: metropolitan Sonet, metropolitan DWDM, long-haul DWDM, and wavelength routing. So far, Cisco has made the most progress in the metropolitan-area Sonet market, in which its ONS 15454 product is now generating hundreds of millions of dollars in revenue. The Pirelli DWDM product, the ONS 15800, is shipping in volume, although the only significant sale Cisco has discussed publicly is an approximately $50 million contract with Cogent Communications Inc. The Monterey product has yet to ship. Cisco officials told Light Reading that it plans to ship in the first quarter of next year a metropolitan-area DWDM product that came from its $800 million acquisition of Qeyton Systems Inc.

For some observers, Russo's speech did not unleash enough new information to change their opinion of Cisco's optical networking strategy, which is crucial to the company's future.

"I feel the same," said Andre Desautels, principal of Trilogy Advisors, a New York City money management firm that owns Cisco stock. "I buy the Pirelli story -- they bought it for a piece of the puzzle," said Desautels. "I'm more skeptical about the Monterey product." Desautels said he felt that one of Cisco's underrated strengths in the space was the importance of IP routing, an area in which Cisco dominates. "They have the broadest IP portfolio."

-- R. Scott Raynovich, Executive Editor, Light Reading (http://www.lightreading.com)
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