Staff Writer, CNET News.com
Cisco Systems has been top dog in the networking equipment market for the past 20 years. But what about the next two decades?
The communications market is changing rapidly. Phone companies are merging as they consolidate their disparate voice and data networks onto the Internet to save costs. Soon, everything from telephone calls to TV programs will travel over an Internet Protocol network and into the home via a broadband connection.
Businesses large and small are also moving more of their applications and processes onto the Net, enabling offices throughout the world to stay connected as if they're right down the hall.
Cisco, considered the world leader in Internet equipment, is poised to benefit from this communications revolution. But critics wonder if Cisco still has the fire in its belly and the technological vision to remain at the top.
The company, which made a name for itself selling Ethernet switches and IP routers, will have to branch out with new products and services to remain competitive in this quickly changing environment. It has already named six new technologies, or "Advanced Technologies," to help it stay ahead of the curve. These technologies include storage area networking, wireless, IP telephony, home networking, optical networking and security.
While in aggregate, sales of these six technologies make up less than 20 percent of Cisco's total revenue today, they are among the fastest-growing market segments for the company and will likely play an increasingly important role in the company's future.
CNET News.com recently spoke with Cisco's chief technology officer, Charles Giancarlo, about some of the hottest technologies on which Cisco is focused. Giancarlo also talked about the impact of the recent carrier consolidation.
Q: What do you think of all the carrier consolidation? First, SBC Communications said it would buy AT&T, and now Verizon Communications plans to buy MCI. How do you think that's going to impact the telecommunications industry and networking in general?
A: We think that there does need to be greater consolidation in the telecommunications industry. Up to now, the market has been very fragmented in the United States, and that does some harm to the industry. For example, each carrier believes that it has a very unique environment, and then it builds its internal network in a different way. Therefore, the requirements for vendors are extremely varied.
When consolidation occurs, it makes it easier for vendors to be able to build their solutions to fewer standards or fewer architectures. We also think it will inevitably cause greater consolidation in equipment markets, and that will be something we have to respond to.
Do you think the mergers could slow down the industry and growth for equipment companies?
Whenever you have some consolidation, there is always a period of time where the companies have to go through an internal process of reorganization. That could cause some slowdown in their decision-making process. We understand that. So there could be some short-term slowdown that we may have to deal with. But on a longer-term basis, it's not only inevitable, it's also the right thing for the industry.
Do you think, when IP consolidation is complete—meaning that voice, video and data will all run over an Internet Protocol network—that there will actually be less money to be made on telecom services?
I think that there will definitely be less money in the areas that have been the traditional moneymaking areas for carriers. But the public's appetite for new services is such that carriers can make the same, if not more, money in areas of new services.
Take cell phones as an example. We're paying less per minute, but we're using more minutes. We're sending these instant messages, and we're now sending pictures and downloading ring tones. So even though the amount of money on a per-minute basis has gone down, the total amount of revenue going to carriers has generally gone up.
I think that we need to look at the same phenomenon in the wireline area. Carriers may be making less money from voice minutes, but they need to offer new services—things like video calls, not just audio calls or customizable ring tones, downloadable MP3s, picture sharing. A variety of other capabilities and services will allow these carriers to continue their role.
Let's talk about some future technologies that Cisco has its eye on. I heard you guys were working on XML routing. Can you talk about that?
We've not really made big announcements in that area. There's a lot of curiosity as to where we're going in the future. We've indicated that application-level networking is definitely an area in which we're going to go.
People keep asking what that means, and we say it includes things such as XML and other message-passing technologies. In general, we believe that there is a good opportunity for us to get more involved in application-oriented networking. And that's about as far as we've gone so far. But that's not a long-term view; that's a short-term view. We'll definitely have more to say on this later in the year.
Combined, Cisco's six Advanced Technologies now make up 19 percent of the company's revenue, up from 16 percent. When, if ever, do you think these products will overtake Cisco's main Ethernet switch and IP router business?
Once you hit a billion-dollar run rate and you're able to maintain the growth, it really starts to have a big effect on Cisco's top line. We've got a number of Advanced Technologies that are either just above or just about to reach that billion-dollar run rate. And if we're able to continue the growth as we've been doing all along in these Advanced Technologies, we think that's really going to start making a very big difference to Cisco's overall top-line growth rate.
On the last quarterly conference call, CEO John Chambers said storage area networking had grown 70 percent from the previous year. That's more than any of the other five Advanced Technologies. Why do you think storage came in so strong?
What these results show is that any new technology, no matter how strong and how stable, takes time for customers to fully test and deploy. It also takes some time to develop in the marketplace.
We came out about two years ago with our storage networking products, and these products were easily a generation or more ahead of our competition. They provided a lot of new value and added function. Today, they are rock-solid from a stability, security and reliability standpoint. And we are starting to really hit our stride.
I'd say it takes about a year for customers to learn about new products, test them and understand them. Now these things are really starting to take off. We're seeing growth in that market today because our products are superior and we've developed good partnership relationships with the major storage companies.
We're also seeing very strong growth in home networking and IP telephony. Security is a more mature market that we're seeing very good growth in.
Cisco recently announced its acquisition of Airespace, which has a different architecture for building wireless local-area networks than Cisco. Once the deal is finalized, how will these products fit into Cisco's portfolio?
Airespace has a different architecture in some aspects, but we think that it's very complimentary. As you may recall, when we first entered into the switching market, we made four strategic acquisitions, each one bringing to Cisco a set of capabilities and experiences, which provided leadership in a different segment of the switching market.
We believe that we are doing the same thing in the wireless space. We entered the wireless space with our acquisition of Aironet back in 1999, and that has allowed us to go from $0 to more than a $700 million run rate in that business. We believe that the Airspace acquisition positions us very favorably in a new segment of the wireless market.
What are Cisco's plans for getting into the carrier telephony or wireless market?
We have shipped about 470,000 voice over IP ports in the fourth calendar quarter of 2004. That's a lot of ports by anyone's measurement. And it's been growing extremely rapidly. So that's on the consumer side.
We are also participating in the service provider market. For example, Vonage is a good customer of both our gateways and our soft-switch technology. We're working with all of the major cable companies in the states, too. And we're working with many different competitive voice carriers, both in the United States and internationally. We're quite bullish on what we phrase as voice over broadband, or the use of IP to deliver voice to homes over a broadband connection such as DSL or cable.
What about on the wireless side? For example, what are you doing to offer Wi-Fi gear for public hot spots? Companies like Tropos Networks have already been doing this.
On the wireless side, we are absolutely the access point of choice for wireless hot spots. Nearly all wireless hot spots use Cisco Aironet access points because of the product's superiority in range and performance. We also offer a number of features and capabilities specific to hot spots that we've integrated into that product.
So when all these different cities talk about rolling out their own hot spots, will Cisco be one of the biggest equipment suppliers?
Yes, absolutely. Hot spots in general tend not to be a huge part of our marketplace, simply because the market could never be as large as what it is in the enterprise or consumer markets. But we think it is a very important strategic market. And it certainly helps us to develop the technology to be as good as it can possibly be, so it's an important one from that standpoint.