Cisco doesn't know how to rest on its laurels. The acquisition-hungry company, whose 1998-9 revenues were double the previous year's, recently bought IBM's network business in a $300 million (£185 million) deal.
Cisco cuts deals at an alarming rate. It hit the headlines in August by buying Cerent for $6.9 billion, its largest purchase to date - and made all the more remarkable by the fact Cerent has never even shown a profit.
The IBM purchase is not Cisco's biggest - at $300 million it comes ninth in the list of Cisco's top 10 acquisitions - but it does have huge significance. (see Newswire 1 September)
At stake is a growing slice of voice and data communications, voiceover Internet protocol (IP) and the routing and switching infrastructure that will underpin the ecommerce revolution in the next millennium.
Cisco's latest deal also has major implications for millions of IBM's network customers. In the long run, they face migration from their favourite legacy hardware to IP-based Cisco products. In the short term, there are questions about the quality and level of support customers can expect from IBM network systems.
The acquisition, Cisco's 41st in six years, revealed a hidden crisis within IBM. It says it was forced to sell its router and switching technologies because it had fallen behind in developing this part of its business.
IBM does, however, retain its legacy Token Ring card business and proprietary systems network architecture (SNA) gear.
“We’ve done the deal because of the increasing discrepancy between the possibility of delivering in-house network components compared with the pace of ebusiness developments,” says Klaus Span, head of European marketing at IBM's network services division.
He says IBM Global Services, the consultancy arm of IBM, has increasingly been shopping for network equipment from other vendors. This represents a significant loss of revenues for the network products side of IBM because Global Services is now the number one worldwide player in terms of revenue.
Why was IBM losing this technology race? Span says that Big Blue concentrated for too long on its traditional enterprise networking products, based on SNA and Token Ring, rather than getting into the IP-based routing market.
“We were late into the routing business, which made Cisco big enough to strike this deal,” he said.
IBM also acknowledges that its breadth of operations makes it hard for the company to compete with companies such as Cisco, which made networks its bread and butter.
Span says IBM would have had to spend millions to compete with Cisco. “We’ve kept up with the technology, and we’ve even caught Cisco up on routing, which is why Cisco wanted to buy some of our routing patents. But we have to focus on our main assets,” he says.
So rather than try to play catch-up in the router and switching market, IBM has decided to focus on its ebusiness services, buying back in the technologies it needs to make that work.
What does Cisco get from the deal? It does get some technologies, of course, in the shape of the IBM patents on router and switching products. But access to IBM's customer base will be more important to Cisco than technologies.
Here, it scores a double whammy, not only getting into existing IBM networking hardware customers, but also signing up IBM's Global Services division as a Cisco preferred partner, at a time when the division is pushing hard into corporate accounts with its message about the benefits of ebusiness.
As corporate customers buy into the ecommerce world, more and more of the kit on which they’ll be running their ebusinesses will be Cisco's.
At stake is a slice of the growing network market. Analyst Forrester Research says the number of online transactions will more than double in value in the next 12 months, from the current $7.9 billion in Europe to $21.5 billion in 2000. By 2001 that figure will reach $64.4 billion.
Cisco is competing for a place in that market. It wants to ensure that the network hardware and software that you use for your .com business come from Cisco. And it wants to ensure that telcos and Internet service providers (ISPs) run the Internet using Cisco kit.
The increasing value of networking and ecommerce can be seen by looking at the figures: Cisco's revenues for the last year to August weighed in at $12.2 billion, an increase of 43% on the previous year. Rival Lucent Technologies saw this year's second quarter earnings grow by 30% to $5.4 billion.
These are huge numbers. “The markets are exploding, driven by ecommerce and the web, and there’s an opportunity for everyone. That's what is driving this: everyone wants a piece of it,” says Colin Gibbs, director of systems engineering at Nortel Networks, whose revenues last year totalled $17.6 billion.
Phil Blades, UK head of technology at consultancy Cap Gemini, says IBM made a sensible decision in getting out of network hardware to concentrate on its ebusiness services.
“IBM is very good at recognising when it should do something and when it shouldn't. It has recognised that in a market where it had only a three per cent share, against Cisco's 70% share, it gets a better deal through this move.”
Some analysts say that IBM customers will have to migrate to new products. Meta Group says users of IBM networking equipment should plan to migrate to products sold by more mainstream vendors such as Cisco and Nortel as soon as possible. Customers will inevitably feel pressure to move towards Cisco network products now that IBM will no longer develop existing product ranges.
Part of Cisco's aim is to migrate customers from IBM's proprietary SNA environment towards IP. But both Cisco and IBM say they will support existing customers of its routing and switching products.
Pascal Turchi, director of European operations at Cisco, says: “The aim of the relationship [with IBM] is to build up Internet business solutions and professional services, and evolve our market share.”
IBM must support existing products properly, otherwise it will alienate customers, says Blades. “How customers will feel about the deal very much depends on what the real guarantees are from IBM about supporting the equipment. The product ranges of any large company change,” he says.
“As long as IBM continues to support its users as it has done in the past, I wouldn't see this as a huge risk to users. And to be fair to IBM, it tends to be among the better companies in terms of product support over time.”
Span says IBM will provide support for users until the end of all guaranteed product lifecycles, and claims the deal will not make any big differences for those using IBM networking equipment who then move over to Cisco systems. “All our components use common code and open architecture, so they fit into any vendor offering,” he says.
Cisco faces an additional problem with customers, caused by its growing size. Darren Previtt, network sales manager at Cisco value-added reseller Ultima Business Systems, says Cisco faces a PR nightmare as customers worry about its dominant position, and whether Cisco becomes ‘the Microsoft of the hardware world'.
“The takeover of IBM's networking equipment puts Cisco in an extremely strong position to dominate the market,” says Previtt.
Worries about support and concerns about Cisco's growth may seem like minor concerns to the network giant now as the company faces up to growing competition. Larger customers and ISPs especially could be tempted away by rivals such as the increasingly predatorial Lucent, whose annual revenues last year reached $30.1 billion.
Historically, Lucent has been carrier-focused, supplying big boxes to telcos and ISPs for voice and data services. Now the war between Lucent and Cisco is hotting up; the summer saw each move into consultancy territory.
Lucent followed Cisco's $1 billion investment in consultancy firm KPMG International with a $3.7 billion deal to merge with data networking design and management consultant International Network Services.
Lucent, like Cisco, will use consultants to win customers' mindshare rather than relying on the sale of boxes to increase revenues.
Blades says the big three network players, Cisco, Nortel and Lucent, are all positioning themselves for what he believes will be a major technology push over the next few years.
'IP is now on everyone's lips, and with the convergence of voice and data, these companies are limbering up around the whole provision of IP technology,' he says.
Cisco's deal with IBM is firmly in the data communications market. But for Nortel and Lucent, traditional specialists in voice rather than data, the challenge is to consolidate their position in the data networking area.
Nortel Networks says this is where its acquisition of Bay Networks, for $7 billion in 1998, will pay off. (see Newswire 28 October 1998)
“The big challenge facing Cisco is in the carrier market, but our challenge is in the opposite direction, in the enterprise market,” says Nortel's Gibbs.
Cisco cleans up
IBM's decision to bow out of making network products was a significant step in the ecommerce revolution.
Although IBM has guaranteed the future of product support, Cisco has made it clear that customers will move to IP. At stake is a place in the ecommerce land rush, as Cisco, Nortel Networks and Lucent want you to go .com with them.
The future is likely to see more acquisitions as each of these companies fights for the largest chunk of ecommerce territory. And Cisco, with a history of 41 acquisitions, is likely to lead the charge, mopping up hosts of smaller vendors who possess either specialist knowledge of particular technologies or valuable market share.
“If you're not one of the top three, you're probably a target for one of them,” says Blades.
CISCO'S NETWORK CONTENDERS
Richard McGinn, chairman and chief executive officer
Revenues for 1998 fiscal year were $30.2 billion, up from $26.4 billion the previous year. 1999 results are expected at the end of this month but already the signs are promising. Since August 1998 Lucent has signed new business deals worth $9 billion, several in the carrier sector.
John Roth, vice chairman, president and chief executive
Northern Telecom, $15.5 billion maker of carrier class routers and switches, merged with $2.1 billion Bay Networks, local area and enterprise network's maker, in a $7bn deal in 1998. Nortel Networks notched up
Second-quarter results in July of $5.4 billion.
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