8/14/2019 For Cisco, It's Change or Perish - by Bret Swanson - 04.18.01

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For Cisco, Its Change or Perish

By BRET SWANSON April 18, 2001; Page A22

Oh, how the mighty fall.It wasn't so long ago that Cisco Systems was

the world's largest company and the envy of all thetechnology industry. It had exceeded published earningsestimates 14 straight quarters in a row, was hiring likecrazy, and had topped $555 billion in marketcapitalization. These days, Cisco is slashing 15% of itsworkforce, missing all its numbers and wonderingwhere more than $400 billion of market value went.

To his credit, Cisco head John Chambers sawthings coming and was the first chief executive tosmartly call on the Federal Reserve to cut interest ratesand for Congress to cut tax rates. But unfortunately for Cisco, Washington getting its act together won't beenough to put the networking company on the rebound.That's because Mr. Chambers's real problems aren'teconomic. Cisco is increasingly in the wrong business.

Heroic Processing

The company that defined the 1990s and made theInternet possible is being squeezed from above by fiber optics and from below by microchips. It has a corecompetency in neither. Cisco's great advance was itsvision for the first post-telephone network. It developedthe architecture and crucial software standards thatmade the Internet work. Then it cobbled together thechips and wires and code into high-margin boxes thatfew others knew how to make. But unless Mr.Chambers can set his firm on a new path, Cisco will beremembered as a transitional, if temporarilytransformative, enterprise.

The key to understanding Cisco's prospects isto understand the history of communications networks.Real-time communication over a distance was firstmade possible by Samuel Morse's telegraph, or copper wire carrying electromagnetic signals. As technologyevolved we were soon able to send voices, rather than

just simple dashes and dots. Voice calls were switched

by operators plugging wires into a switchboard. Later,this switching function would be overtaken bymammoth electronic boxes from Lucent and Nortel.

Still, the architecture remained the same for nearly a century: Each telegraph or phone call receivedits own connection. You may have only used your telephone 20 minutes a day, and you may have onlyspoken 15% of the time, but the connection was always

there. Relative to the application, we had a lot of bandwidth to spare.Enter the Internet. With the first online

services in the early 1990s and the introduction of the Netscape browser in 1994, the data-centric Internet became a phenomenon. E-mails, Web browsing, andlater e-commerce threatened to overwhelm the voice-optimized telephone network. The mostly copper telecommunications infrastructure wasn't ready.

Broadcom, Applied Micro Circuits, EZchip and others are integrating more

and more of the functionality of Ciscoboxes

Cisco foresaw this data explosion. And itfound a way around the narrowband copper links tooffices and homes, as well as the more capacious -- butstill not big enough -- fiber-optic strands connecting our cities. Cisco discovered that if you didn't give everyonea connection, but instead chopped up the messages andgave the packets a destination, you could throw the

packets out into the Internet, let them take any number

of paths, and then have them reassemble at the other end. The new Cisco-powered network was ruthlesslyefficient. There were no more circuits between users.There was no more silence. The Cisco network usedevery bit of bandwidth available.

Now, bandwidth scarcity is over and Cisco'stime has passed. The new all-optical network doesn'tneed heroic processing of billions of bits each second.All it must do is change the direction that light travels.The Cisco network treats messages as bits rather thanlightwaves, laboriously processing what should simply

be steered. It's as if rivers worked not by banking theflow of the stream but by checking and sorting each

H2O molecule for its KMI reports that in 1999 and2000 some 150 million kilometers of optical fiber werelaid world-wide. Avanex, the leading optical networking

company, can make and sort and direct thousands of colors of light, each carrying distinct messages, down asingle fiber strand. Yipes is connecting urban businessdirectly to fiber, and wireless start-up Soma Networkscan supply residential broadband connections that are

faster than copper DSL or broadband cable TV. Ciscoand its big, central routers can't handle this second waveof data. And right now it has no back-up strategy.

Focused for too long on routers and other electronic network modules, Cisco doesn't now have theoptical capabilities to prosper in a new world of

bandwidth abundance. Just weeks ago Cisco announcedit would shut down one of its lone optical plays,Monterey Networks. Commenting last May, we notedin the Gilder Technology Report that there were toomany real optical companies for Cisco to simplydabble: "Cisco's $500 million investment in Monterey issuddenly irrelevant and will never be a significantfactor in the network. . . It's Sonet hardware investment,$7 billion for Cerent, may be even more fruitful thananticipated in the short term . . . but faces an evenshorter life expectancy." Indeed, while Cerent was arevenue star in 2000, in 2001 it has already beenrendered obsolete by the continually multiplying colorsof light from Avanex, ONI, and Sorrento.

Creative Destruction

Of course we will still need electronic terminals androuters and switches at the edges of the network. But if Cisco's failing optical strategy weren't enough, its

products are increasingly being disrupted by Moore'sLaw of microchips. Broadcom, Applied Micro Circuits,EZchip and others are integrating more and more of thefunctionality of Cisco boxes -- all the wires andseparate processors and software -- onto single siliconchips. If the router becomes a chip, what does Ciscohave to sell except its software and protocols?

The destruction in the market affords Mr.Chambers a perfect opportunity to practice somecreative destruction on his own company. Namely, heneeds to remake it in the image of the new all-opticalnetwork.

Mr. Swanson is a technology analyst at the Gilder Technology Report.