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The Pulpit
The Pulpit

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Weekly Column

More Good News!: Cisco's Another Bright Light in an Otherwise Dark Quarter

Status: [CLOSED]
By Robert X. Cringely

Last week's column on Apple excited a lot of people. Maybe it was because I seemed to be a solitary cheerful voice in an otherwise gloomy week. Maybe people are just starved for some thoughtful business analyses, which are painfully absent from most of the business press these days. But I really think it has more to do with an effect I have seen ever since I started writing this column several years ago — readers really like a topic that is fully considered and explained in some depth. This is in contrast to the prevalent Internet editorial theory that says people want to read no more than 500 words at a time on the World Wide Web.

Of course this is nonsense, but if you pay attention to what you are reading on-screen, you'll see that it is the guiding principle of nearly every Web site. Jesse Berst, my friend who writes the daily Anchordesk for Ziff-Davis, swears by it. I've been asked lately to write aviation stories for both and, and they are looking for 500 word chunks, too. There are two problems with this. First, 500 words aren't journalism, but television. You can't really explain much of anything in 500 words that you can't also explain just as well in 100 words. It's good for ideas like, "There is a storm coming," or, "George W. Bush was in town last week and wants your vote." The second problem is that the more I write, the greater the response. This column is usually around 1,500 words, but often jumps over 2,000 because the Web is a big bucket into which you can pour as many words as you like. My column a few months ago about Homer Sarasohn and the rebuilding of Japan ran 4100 words, and I'm still getting hate mail about it. Hate mail is good in my business. Hate me, but keep reading.

And have you ever been to When those folks get going on a subject it can run to 10,000 words or more. So I think the conventional wisdom that people don't want to read much on the Internet is flat wrong.

Now back to business. Since you seemed to like last week's approach, I'll do a little more of the same. Stocks continue to flop around, and you have to wonder what's going on. Is this the beginning of the end? No. But it IS a time in which cracks that have always been there are finally beginning to be seen. One of the losers this week has been Lucent Technologies, a former high-flier that suddenly sees its stock at a record low. Lucent has made a lot of mistakes recently, but two stand out in my view more than all the others. First, Lucent expected Y2K to be more of a problem than it actually was. Remember Y2K? I did a TV show about it that generated mail from people who actually wanted me to DIE, people who thought civilization was coming to an end. They though that by predicting little impact, I was putting the world in even greater danger. Well, Lucent was prepared for the worst, too, and when it didn't happen, they suffered.

The other thing that has really hurt Lucent is bad debt from failed dot-coms. A couple years ago, I write about this in a column titled "Cooking the Books" which you'll find in the archive. It details the financial shenanigans used by companies like Lucent, Cisco, and Nortel to make their balance sheets look better than they really ought to. With the big downturn of Internet companies, Lucent is suffering for this behavior, but what about the others?

Nortel has stumbled a bit, too, but is far from Lucent's condition. Don't worry about Nortel, trust me. And Cisco? Cisco is the bright light in an otherwise gloomy business week. As one of the highest cap companies of all, Cisco's health has an impact on America's health. To paraphrase some old congressional testimony from 1960, what's good for Cisco is good for America.

Understand here that I own no Cisco stock right, now though I have in the past.

So here is my look ahead for Cisco in the next few months. The company's challenges come in three areas — DSL, wireless, and managing its own growth. DSL has become a very competitive business, and the profit margins are getting pretty darned thin. Cisco is frankly behind in wireless networking, and that segment is particularly prone to component shortages, which of course affect everyone. But the greatest challenge is just managing complexity. Cisco grew more than 50 percent last year, and will grow as much this year, too. No large company has every sustained growth at that rate, so Cisco is facing unique challenges.

Cisco, which started as a router company, then became a networking company, now is in the business data/voice/video networking business, which puts it in direct competition with old-line telco suppliers. A fundamental idea behind this data/voice/video stuff, by the way, is that voice is free. Think about that one for awhile, because it means the world is moving toward flat-rate voice service. No wonder AT&T is scrambling to turn itself into anything but a long-distance phone carrier.

While Cisco attacks this year the $10 billion local caching business, the $17 billion PBX replacement business, and the $2.3 billion Virtual Private Network business, they'll also be entering at least one industry segment that surprised me — network attached storage. This is the province of big companies like EMC and little companies like TrueSAN, which I wrote about a few months ago. Expect Cisco to enter this market, too. They'll start selling disks that can be placed anywhere on the network for instant incremental storage. And they way they'll do it is especially interesting, because it involves the encapsulation of FiberChannel packets in TCP packets, essentially running a FiberChannel network inside gigabit Ethernet (1000Base-T).

A new competitor in the Storage Area Network business is not good news for EMC or companies like Agilent Technologies. And Cisco's encapsulation strategy, if it works well, further hurts the SAN companies as it devalues FiberChannel.

This networked attached storage business is interesting. Last week, Quantum sold its disk drive business to Maxtor specifically to concentrate on the low-end network attached storage business where it was making all its profits. The hard disk business was no longer profitable for Quantum, nor is it profitable enough for giant Seagate to remain a public company. With the disk business commoditized, the opportunity lies in moving upstream into network attached storage and storage area networks, but now Cisco will be there, too.

And what about Cisco's traditional competitors? Lucent self-destructed. 3Com, once a tough competitor, literally walked away this year from a $1.5 billion business. Cabletron has been dismembered. This year, Alcatel absorbed three Cisco smaller competitors and will be slowed-down while it digests them. IBM sold its network business to Cisco. Nortel is too focussed on 3-G wireless. The real challenges come from smaller companies like Juniper, Extreme, and Foundry, all of which are likely to merge or be bought in the near future.

So expect Cisco to continue kicking business butt for the rest of this decade.


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