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Optical/IP

Is Cisco Long for the Long-Haul Market?

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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gea 12/5/2012 | 12:31:17 AM
re: Is Cisco Long for the Long-Haul Market? ...will drop the 15800 and 15808, but I could easily be wrong. It seems to me that having an "end to end" solution that has supposedly already undergone some level of software integration with the other Cisco products would be something they would want to keep. I mean let's face it...no WAY they're going to sell off the 15454 and other transport stuff...that's their main foot-in-the-door to the more traditional service providers. So being able simply to SAY they have the DWDM piece too has got to be of value.

Plus, they don't even manufacture the 15800 anymore, right? Didn't Flex or somebody buy the Pirelli facility in Lexington SC? So "cancelling" the 15800 doesn't mean a lot, and ain't nobody gonna BUY it in this market.

Me? I love that old Pirelli stuff, but some of it is arguably out of date now. Perhaps they have a nice product line they want to buy as a replacement?
DCITDave 12/5/2012 | 12:31:17 AM
re: Is Cisco Long for the Long-Haul Market? The first version of this story had an error in the market share data. The 9th graf has been corrected to show a $3.6B drop in the DWDM market from 2001 to 2002.

ph
BobbyMax 12/5/2012 | 12:31:13 AM
re: Is Cisco Long for the Long-Haul Market? Cisco did not have its roots in the telecommunication market. Its optical products were most aqcquired with no continuity in the product lines. It was not posible to make any ehance or adopt these products to the market place.

Cisco's success in the market place was measured by its rising stock prices and the short term wealth it was generating for its upper management.
Its ad campaigns and and analysts conferences produced enormous profit margins. Nothing like this happened in the history of the world.

I do not believe that Cisco would voluntarily would get out of the long haul market as this allows Cisco to fill in with web pages with a variety of products.

Ciscco's acquisition of companies helped to boost up the profits. In other words the acquisitions did not have technical merit, neverthless it helped boost the stock prices.
digerato 12/5/2012 | 12:31:09 AM
re: Is Cisco Long for the Long-Haul Market? Bobby, I think you have ifluenza :-)

"Cisco did not have its roots in the telecommunication market" -- unlike Lucent, Nortel and other raging fiber optic success stories.

"Ciscco's acquisition of companies helped to boost up the profits. In other words the acquisitions did not have technical merit, neverthless it helped boost the stock prices."

Ah, but of course -- it's all a cconspiracy (sic).

Take a chill pill -- you're so angry you can't type!

Cheers,

Digerato
Regular Joe 12/5/2012 | 12:31:05 AM
re: Is Cisco Long for the Long-Haul 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 - message board; Paris: CGEP:PA), Nortel Networks Corp. (NYSE/Toronto: NT - message board), and Siemens AG (NYSE: SI - message board; 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.
-------------------------------------------------
Now I'm the last guy to go beating my Ciena drum all over the place, but didn't they come to market first with long-haul DWDM equipment in the middle 90s? Also aren't they the biggest slice of the market share pie even today with small customers like Sprint?

Phil, buddy. Lets do some fact gathering.

A question to the board in general... I hear Cisco is ramping up a new regional DWDM product. Is anyone out there privy to this G2?

southernlight 12/5/2012 | 12:31:05 AM
re: Is Cisco Long for the Long-Haul Market? Hard to believe Cisco would let that go.
Physical_Layer 12/5/2012 | 12:31:04 AM
re: Is Cisco Long for the Long-Haul Market? If the 15800 and 808 are already on the market and manufactured by an EMS partner, what's to be gained by shutting them down? Doesn't seem to add up unless technical support is killing them. Simply because they aren't #1 or #2 is not a solid economic reason for giving up revenue and/or profit. If they did want to exit that market eventually, wouldn't it be smarter to let the products die a slow death?

yikes_stripes 12/5/2012 | 12:31:03 AM
re: Is Cisco Long for the Long-Haul Market? Solectron bought the SC plant in a sweet-heart deal. Celestica eventually bought the business from Cisco. Cisco never got the market share that they wanted to edge out Nortel, as was their stated goal. Ciena does have the market share ...
signmeup 12/5/2012 | 12:31:02 AM
re: Is Cisco Long for the Long-Haul Market? gea,

Once again, you bring a ray of truth to the matter that burns through Booby's bs. As much as most traditional SONET vendors would like to disagree, the 15454 forced them to acknowledge that they could be beat by a start-up.

Cisco may never realize a return on their investment for the Cerent - but would Cisco be able to step foot in the RBOCs without it?

Again, gea, hat's off to another outstanding post.

signmeup


gea 12/5/2012 | 12:31:02 AM
re: Is Cisco Long for the Long-Haul Market? Booby wrote...

"Ciscco's acquisition of companies helped to boost up the profits. In other words the acquisitions did not have technical merit, neverthless it helped boost the stock prices."

Aside from containing a major nonsequitur ("in other words"...?), that which can be understood of what you've written is just plain WRONG.

The Cisco/Cerent 15454 was a great product, and it shook up the market. It's made some serious inroads into the traditional carriers, and over the next year we'll start seeing some real deployment in the RBOCs.

At Telcordia/Bellcore, we had this box in the lab in something like release 1, and it was the best first release we ever saw, and did things no other box could do.

More than that, it forced traditional SONET vendors to wake up and start thinking about the architectures that could be built off of new generation ASICs. So even if the 15454 dissappeared today, its impact will continue.
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