Cisco finds networking's silver linings

In the networking and telecommunications business these days, there's a lot of gloom and doom: Capital investment by carriers is in a slump, enterprises are waiting for revenue to pick up before they start buying new equipment, and some analysts and vendors say network gear is becoming a PC-like commodity made from standardized components.

But not on Planet Cisco.

Top executives from Cisco Systems, which already is the biggest rock floating around in the data networking universe, beamed down a much brighter picture at the company's annual analyst conference here this week. Carriers are in a "transition" from multiple types of networks toward converged IP infrastructures that carry voice, video, and data, they said. Meanwhile, enterprise spending is helping Cisco's revenue grow. As for routers, switches and the rest becoming commodities, it's not happening and won't, they said. Startups can buy processors and other components off the shelf, but deep expertise in processors, software and system design are still what make a winner in networking, they said.

Though Cisco President and Chief Executive Officer John Chambers and other executives acknowledged the crash that started in late 2000 left a meteor crater in capital spending by carriers and companies, they put an upbeat spin on networking's future. Throughout Tuesday's opening-day sessions at the conference, Cisco repeated its strategy for the next few years: move into new markets, most notably storage networks, security, wireless and voice, and integrate more features into its mainstay router and switch platforms. Industry analysts at the event had mixed reactions to the company's claims, but all gave Cisco credit for playing well to its strengths.

Chambers kicked off the conference by introducing a concept called the Intelligent Information Network, a robust, secure, scalable network that can support users both in the office and on the road and can be adapted to carry new kinds of services. In part, it calls for features in the infrastructure that support security, reliability and multimedia services.

Acting on that philosophy, Cisco recently has added features such as firewall modules for the Catalyst 6500 enterprise switch and a data cache that can be built in to some large Cisco routers.

"The networks of the future will have the intelligence in the network ... within that network it will be a combination of your own network, a service-provider network, wireless hot-spot networks, cable implementations, et cetera, that has to be completely transparent to the user," Chambers said.

The current slowdown in the carrier market is an opportunity for Cisco to push toward IP-based networks that can carry new kinds of services, while also generating demand for those kinds of services among its enterprise customers, he said. Currently, Cisco lags traditional carrier equipment vendors such as Lucent Technologies and Nortel Networks, claiming only about 3 percent of carriers' capital spending worldwide, Chambers said.

Overall, the company will use its silicon, software and systems expertise to make its products faster, smarter -- with characteristics such as better security and manageability -- and longer lasting. New modules and software should be able to go into old hardware platforms, Chambers said. On that point, he laid out an ambitious goal, adding that "time will tell" whether it is achievable.

"Our goal's going to be to never have to make a chassis change again," he said.

Cisco's hardware and software technology, plus its skill at putting the two together, help to give the company a fundamental edge in the industry, Routing Technology Group Senior Vice President Mike Volpi said in a Tuesday speech.

Volpi painted the network equipment business as a high-investment industry. In such industries, because it takes a massive amount of resources to develop a new product, a vendor can only succeed if that product sells in large volume. As in the PC microprocessor industry, where growing investment costs have narrowed a large field of competitors down to three main players, the networking business has a high barrier to entry by startups, Volpi said.

Building a competitive new networking platform requires more than 800 chip, software, system and testing engineers, he said. Startups can build a system for less money by buying chips and other components "off the shelf" from third parties, but those products won't be differentiated from the competition. Even those that build an innovative new product with an initial capital investment run out of steam when a new generation has to be developed, because sales volume isn't enough to support all the new development work financially, he said.

Cisco has the edge because of its ongoing volume, which fuels continued development, as well as its ability to offer a complete network, Volpi said. The company also knows how to decide in each product which functions should be carried out by fast chips and which by software, which is less fast but more flexible. Plus, in tough times, Cisco's sheer success helps sell its products.

"It's increasingly important for our customer base to bet on a winner," he said.

One longtime industry analyst acknowledged Cisco has a big head start on competitors because of its installed base of customers but said Volpi overestimated Cisco's built-in edge.

Startups can use off-the-shelf parts to build products that are less expensive than Cisco's and can be just as good, said David Passmore, research director at The Burton Group. Cisco doesn't have a monopoly on knowing how to fine-tune systems, he said, pointing out that most of the engineers at startups have worked for Cisco in the past.

In an overview of the company's router lines, Volpi emphasized the functionality Cisco is adding to various routers, such as a PBX (private branch exchange) or phone switch, firewall hardware add-ons and data caches that come with content networking capability. The caches could be used for downloading large multimedia files for viewing on the LAN instead of over expensive wide-area network (WAN) links, he said. Next year, the company plans to introduce some higher performance access router platforms to sit at the edge of enterprise and service provider networks, he said.

In its switch line, Cisco plans to boost performance and add more support for security and content networking, said Charlie Giancarlo, Cisco's senior vice president and general manager of product development. Advanced features that appear in high-end switches gradually will be integrated into lower end platforms as costs go down.

Giancarlo defended the higher prices of Cisco's switches as competition grows from less expensive competitors. Hardware acquisition cost, including installation, is only 5 percent to 15 percent of the total cost of owning and operating a switch, and Cisco's products pay off over time because they are easier to manage, expand and upgrade for new kinds of services, he said.

Cisco likewise is looking to integrate more capabilities into its switches, many of which already can act as routers but are designed for LAN rather than WAN communication, Volpi said. Although the LAN is different -- for example, the products are designed with the assumption that bandwidth is free on the LAN, unlike on the WAN -- features such as security and QoS (quality of service) are important on the LAN as well, he said. Internal firewalls protect against intruders who break in to a building or employees who gain unauthorized access to another department. QoS is needed if a user is trying to send and receive large amounts of data and talk on an IP phone over the same Ethernet connection at the same time, he said.

Volpi gave a glimpse of one future switch feature in a luncheon interview at the conference. Cisco hopes to provide a separate firewall function for every port on a switch so each one can have specialized, high-performance security. The challenge is that whereas a router has a relatively limited number of ports, a switch may have thousands of ports. A firewall in software or on one hardware module won't work so well for that.

"In the case of the switch, we'll need to put the firewall on the chip," Volpi said. "That chip will have thousands of instances of firewalls." He did not say when this feature would be available but said building such features into a chip usually is a two-year process.

Most enterprises want to use internal firewalls for less fine-grained applications such as blocking off a wireless LAN from the rest of the network or one department from another, said Jeff Wilson, an analyst at Infonetics Research.

"I don't think everybody needs security on every port in the network," Wilson said. NetScreen Technologies makes products with a similar design, which are sold not as switches to connect every computer in a network but as security appliances, he said. However, some companies would buy such a product.

"The thing with security is, anytime you try to say, 'This is the form factor people will use' ... you'll miss. The ways you can use security are up to the imagination of the user," Wilson said.

Cisco's strategy of integrating more functions in routers and switches is smart when it comes to features such as QoS, but may not make sense for some other features, said Burton Group's Passmore.

"That may be in Cisco's interest, but it may not be in the interests of the customer," Passmore said.

For example, an integrated PBX is likely to provide less flexibility than one based on a separate server, and an external content cache probably would be less expensive than one in a router and give the user more flexibility, he said.

Other analysts were more upbeat on some points of Cisco's outlook.

The company is better equipped than younger vendors to integrate many different kinds of technology in a single box, such as routers integrated into its carrier optical-network platforms, said Michael Howard, principal analyst at Infonetics. All-in-one platforms, or "god boxes" can cost less and take up less space than separate components, he said.

"A lot of carriers want a god box, but they want a god box they can trust," Howard said.

In the carrier equipment industry, if Cisco sees a sunnier outlook than other vendors, there's a good reason, said Chris Nicoll, a telecommunications analyst at Current Analysis. Whereas old-line suppliers such as Lucent and Nortel used to be the bulwark partners of big carriers, today Cisco has more financial stability than they do as well as a better foothold in the enterprise networks of carriers' potential customers, he said.

"Cisco looks better as a service-provider supplier now than they have in the past three years," Nicoll said.

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