Is Cisco transmitting ominous signs?

When Cisco Systems, a bellwether for all that's technology and Internet, announced this month that it missed its Wall Street estimates, CEO John Chambers cited a slowing economy and - in particular - deteriorating sales to telecommunications carriers.

When Cisco Systems, a bellwether for all that’s technology and internet, announced this month that it missed its Wall Street estimates, CEO John Chambers cited a slowing economy and — in particular — deteriorating sales to telecommunications carriers.

In a conference call with analysts, he also said falling sales to dot-coms (about half of last year’s level) and budget cuts at some of its large customers in manufacturing were reasons Cisco missed earnings estimates by a penny per share.

All this may be so, but Cisco’s real problem is that it competes in many different networking markets, diluting its effectiveness in its core router technology.

In the 1990s, almost all of Cisco’s revenue came from selling routers, and it had a stranglehold on the market. But in 1997, the company made more money from sales of non-router products than from routers. Cisco moved into the voice over IP market in 1998 with the purchases of Precept Software, Summa Four and Selsius. Cisco powered into fibre-optic equipment, buying Skystone Systems and Pipelinks, and in 1999, it paid $US7 billion for Cerant. It bought WheelGroup and Global Internet Software for the encryption and security market.

In the meantime, competitors lined up to take pieces of Cisco’s once-core business: selling routers to internet service providers and telecommunications carriers.

Throughout the 1990s, Cisco’s Internet Operating System (IOS) was the lingua franca for moving large amounts of data through the pipes of companies such as Qwest and UUnet. It still is. Rather than its boxes, using IOS to tie a branch to the data centre may be Cisco’s greatest contribution to IT operation.

But those 13 million lines of IOS code were aging, and companies like Juniper Networks and Foundry began nipping at Cisco’s heels, winning big customers such as MCI WorldCom, UUnet Technologies and Qwest Communications International with focused internet products.

We’ve seen large established networking companies succumb to market shifts. StrataCom was acquired by Cisco in 1996. Bay Networks was acquired by Nortel in 1998. Wellfleet, Ascend and Cascade were once mighty giants. 3Com was once competition for Cisco, as was Cabletron Systems. Today, they’re footnotes.

But Cisco could be supplanted as well. Its near-monopoly on the router market — around 85% — seemed invincible. No longer. It’s facing a technology challenge from Juniper Networks’ JUNOS operating system and in Gigabit Ethernet from Foundry Networks.

Another issue is Cisco’s stock, which has fallen more than 60% from its high last March. Cisco uses stock to do deals (as part of its R&D efforts).

This past May, Cisco’s chief strategy officer, Mike Volpi, said Cisco might make more than 30 acquisitions this year. Perhaps, but a lower stock price means deals will be more expensive.

Finally, a report in PR Week said Cisco had been sounding out Washington-based public relations firms to handle crisis work. The question is, is this for the crisis that has passed, or one yet to come?

Fox is Computerworld US' West Coast bureau chief. Send email to Pimm Fox.

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