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Optical/IP

What Cisco Stepped In

LAS VEGAS -- Networld+Interop -- Even in the heat here, it wasn’t hard to feel the chill that Cisco Systems Inc.'s (Nasdaq: CSCO) recent quarterly earnings announcement had on the industry.

"Cisco had this aura of invincibility and now that's going away," says Russell Hertzberg, vice president of marketing, Zuma Networks.

In some specific product areas, the perception that Cisco is bulletproof has already been shot full of holes. After his keynote on Wednesday, James Richardson, senior vice president of Cisco's enterprise business, candidly confirmed that his firm's technology has been temporarily bested by Juniper Networks Inc. (Nasdaq: JNPR) in the core router market (see Juniper Wins!).

"We have tons of new innovation coming in the next two quarters that will allow us to leapfrog Juniper again," Richardson said, while sitting on the steps of the stage in the Hilton auditorium. "We are going to come back and we are going to innovate and the tide will turn."

In the service provider business, Cisco's swagger doesn't look the same after its missteps in bringing a wavelength router to market. "They killed my baby," says Michael Zadikian, the Monterey Networks founder who is now chairman of Iris Labs. Zadikian also opined that Cisco's core DWDM product, which it acquired from Pirelli SpA, "is no longer competitive in its space."

Where did Cisco go wrong? One key area was Cisco’s willingness to fund unproven businesses in order to jumpstart its presence in the service provider market. Even though it was relatively conservative in this regard, the collapse of the CLEC (competitive local exchange carrier) market has had a big impact on Cisco's business.

“In the heyday, [Cisco] had this incredible willingness to finance their customers' businesses,” says Marshall Eisenberg, director of product marketing at Foundry Networks Inc. (Nasdaq: FDRY). “All along, we’ve only wanted to do business with people who have money to spend.”

"We got a little carried away as an industry, and we were financing deals that couldn't get financed through banks,” says Cisco’s Richardson. “And you have to wonder why they couldn't they get financed through banks. [Those financing arrangements] were very risky, and in the future we're going to be more risk averse."

Somewhat similarly, Cisco miscalculated how fast the industry and its customers would grow, which led to its recent inventory troubles. After several consecutive quarters of increased growth, Cisco had built up capacity in its supply chain to handle 70 percent year-over-year growth, says Richardson. Given that, and the components shortage of last summer, it's understandable that Cisco couldn’t slow down fast enough.

"We took a bet that our industry was going to grow at 70 percent because we didn't want our customers to have long lead times,” Richardson says. “And, unfortunately, it was the wrong bet."

Richardson also mentioned that while Cisco is back to around last year’s revenues, its expense base is “still 8,000 people higher than it was then.”

But is the company being taken any less seriously? Foundry’s Eisenberg says no. “Our biggest competitor is always Cisco because they have so many product lines,” he says.

Most importantly, though, Cisco appears to have insulated its customers from most of the fits and starts it has had of late. One so-called “Cisco Powered” metro carrier, Cambrian Communications LLC, says Cisco hasn’t changed its main company contact and has continued to be an exceptional business partner.

Joe Cecin, Cambrian’s chief operating officer, says that even Cisco’s management changes have been in his firm’s favor as there’s been “a cross-pollination of former Cerent Corp. folks into other positions.”

Of course, Cisco’s Cerent acquisition continues to be the firm’s saving grace as it sells to service providers and attacks the metropolitan optical market. It’s also a reminder that Cisco’s growth-through-acquisition strategy has paid off in many ways.

In his remarks to reporters, Cisco’s Richardson brought up a key point regarding how Cisco will grow in a crawling economy. He said the firm’s sluggish quarter and beaten down stock price don’t prevent it from making a buy if the circumstances are right. Since market capitalization is relative and since Cisco is still a much bigger, more valuable company than its competitors, the firm’s low share price isn’t much of a deterrent to acquiring other firms, Richardson says.

"The real issue right now is that unless something is accretive immediately, then we won't bring it in," he says.

— Phil Harvey, Senior Editor, Light Reading
http://www.lightreading.com
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jssreenath 12/4/2012 | 8:27:12 PM
re: What Cisco Stepped In blah blah blah, we hate cisco, blah blah blah. Its always the same.
photonic 12/4/2012 | 8:27:10 PM
re: What Cisco Stepped In
Mr. Harvey,

Do you guys at lightreading coordinate? This is the fourth or fifth article writing about the same old BS of the big inventory write off and the slow down at Cisco. Give me a break and stop repeating yourself to prove the point that 260 million Americans already know.

jsailor 12/4/2012 | 8:27:10 PM
re: What Cisco Stepped In >>So, if that doesn't happen, what will Cisco be in 5-10 years in a world of IP over DWDM and/or photonic packet switching and/or MPLS? <<

Even if they don't "learn" optics, I don't see any reason why they wouldn't continue to be extremely competitive in everything above the physical layer. While it may be fun to comment on their current situation, look what they did to Lucent and Nortel. Cisco may have a few flesh wounds, but those guys are really hurting - Lucent especially.
ck 12/4/2012 | 8:27:10 PM
re: What Cisco Stepped In Does Cisco even offer a long haul DWDM system? Number of lambdas? Bit rate? What is it called?
Photonboat 12/4/2012 | 8:27:10 PM
re: What Cisco Stepped In >>In the service provider business, Cisco's swagger doesn't look the same after its missteps in bringing a wavelength router to market. "They killed my baby," says Michael Zadikian, the Monterey Networks founder who is now chairman of Iris Labs. Zadikian also opined that Cisco's core DWDM product, which it acquired from Pirelli SpA, "is no longer competitive in its space."<<

I'd be curious on anyone's opinions on Cisco and telecom carrier networks. Yes, they will continue to sell their IP router for Edge/grooming applications in the near term. But what about the network of tomorrow? (MPLS, IP over DWDM, MPlambdaS, photonic packet switching at some distant time, etc., etc. ...)

Sure, Cisco will get over the current economy and over-inventory situation. But this was a company that some were betting would, through its acquisitions, compete head-to-head with Lucent, Nortel, and Ciena for carrier equipment. Cisco's prowess with IP and data-networks would allow it to take on the incumbents in core networks. There is supposed to be a convergence of Layer 3 and Layer 4 into Layer 1 and Layer 2. Cisco, given its success in Layers 3 and 4, would "learn" optics and be competitive, maybe dominant at the DWDM (physical layer) also. So, if that doesn't happen, what will Cisco be in 5-10 years in a world of IP over DWDM and/or photonic packet switching and/or MPLS?
cable_guy 12/4/2012 | 8:27:09 PM
re: What Cisco Stepped In Yes

64 OC-192 lambdas

ONS 15800
Photonboat 12/4/2012 | 8:27:08 PM
re: What Cisco Stepped In Despite the fact that Pirelli (now Cisco) touted a 128-channel? (or was it 160?) Teramux at OFC 99, it appears this product never made it very far. One wiseguy even took a beanie baby Ciena giveaway lamb and put it in the mouth of the huge Tyrannosaurus Rex that was Pirelli's symbol for the Teramux--as in they would crush little Ciena.

What happened to Pirelli/Cisco?
skeptic 12/4/2012 | 8:27:07 PM
re: What Cisco Stepped In I'd be curious on anyone's opinions on Cisco and telecom carrier networks. Yes, they will continue to sell their IP router for Edge/grooming applications in the near term. But what about the network of tomorrow? (MPLS, IP over DWDM, MPlambdaS, photonic packet switching at some distant time, etc., etc. ...)
-----------------------------------------
Cisco has the ability to get into certain customers in part becuase they have products that the telcom dinosaurs can't offer. For now, cisco always has a foot in the door of even the most close-minded customers because of the routers.

As far as the future goes, all kinds of people have visions about where things are going, but nobody can predict what products are really going to be used and in what way. Cisco has as good a story in MPLS as anyone else does though.

gardner 12/4/2012 | 8:27:06 PM
re: What Cisco Stepped In Any prognosis on Zadikian and Baghdasarian's latest venture(s). What is the group's consensus on how well Iris, Metera Networks, Latus Lightworks and Coree will do in their respective spaces? Has the demise of the Monterrey box affected the Iris Group's credibility with the market?
skeptic 12/4/2012 | 8:27:06 PM
re: What Cisco Stepped In In the service provider business, Cisco's swagger doesn't look the same after its missteps in bringing a wavelength router to market. "They killed my baby," says Michael Zadikian, the Monterey Networks founder who is now chairman of Iris Labs. Zadikian also opined that Cisco's core DWDM product, which it acquired from Pirelli SpA, "is no longer competitive in its space."
----------------------------
Zadikian's "baby" was dead when cisco bought it.
The product didn't work when cisco bought it and
no matter how much effort they pumped into it after the purchase, it still never worked as the pre-purchase hype suggested.

The "baby" was sold (at the time) at a cheap price to cisco. The reason it went for so little money is that nobody had any confidence in Zadikian, the company or his baby anymore.




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