Two weeks ago in my column on Nortel (NYSE: NT), I eliminated Cisco Systems (Nasdaq: CSCO) from the comparison because -- I wrote -- Cisco does not provide fiber optics, enterprise solutions, telephones, etc. That misconception elicited immediate responses from many Cisco employees. Looking deeper into this company, I learned that I was incorrect.
Now, quick, when you hear of Cisco Systems, what do you think of? I always thought of routers, and if you look at the company's profile on any investing site, all that is mentioned is networking products. Last week an analyst appeared on CNBC and was asked his opinion of the company, and he spoke glowingly of Cisco's router sales.
This past week, I called Cisco and received quite an education regarding everything the company does. Originally, this company was a router manufacturer, but it has shown the ability to transition. Cisco is now a full-solution provider for small and medium-size businesses, service providers, and corporations. Service providers are providing over 80% year-over-year growth. Cisco also stated that it is going right up against Nortel and Lucent Technologies (NYSE: LU), and it believes (not surprisingly) that no other company provides solutions like it does.
What we are seeing in the industry (as we've mentioned before) is a convergence of voice and data. In the conversation that I had with Cisco's representative, I was informed that dedicated voice networks tend to be very proprietary and data networks are very open. Also, data networks are more innovative and standards-based. Cisco is aiming to bring the two networks together, which can provide significant efficiencies and savings.
Let me talk a little bit about my own experience on this topic. In my previous life as a facilities engineer, we needed to provide a significant amount of resources to our data network and to our phone system. Both required back-up power, back-up air conditioning, conduit, and square footage for servers and switches. Also, every time we built or renovated a building, we needed to provide for two sets of wiring. Whenever you moved an office, the communications people went through significant trouble to rewire phones so people could keep their same telephone numbers.
With a converged network, you would have reduced expenses for your physical plant, since you don't need two sets of back-up power or two sets of wiring, and you would have reduced air conditioning and square-footage requirements. From the communications standpoint, each phone has its own IP (Internet Protocol) address, so when you move an office, your phone just needs to be carried in and plugged in the new jack -- no rewiring the cabinet, etc. My concern was the reliability of the data network; we've all experienced server crashes. According to the Cisco representative, a data network can be constructed to be as reliable, or more so, than the phone network.
Going from networks, we discussed IP vs. ATM (Asynchronous Transfer Mode). One of the key differences in ATM has been its ability to prioritize voice over data, and provide higher quality. IP is a bit more flexible than ATM in how it routes data over a network, and in my understanding of the technology, IP can be carried over ATM. I was informed that there is software available that allows IP to prioritize voice over data (which I've also been told by others in this industry). However, ATM will be around for a while, and Cisco also provides for this technology. They stated they will provide any type of network the client wants.
Further in our conversation, I was informed that to make money as a service provider, you have to provide for data as well as voice traffic. The older companies are supplementing voice with data, and the newer ones are going directly to data. We are also seeing video transmitted through networks, as video conferencing is getting more important.
I asked about optical networks and I was told that Cisco has a fairly complete end-to-end optical solution for customers. They have expanded into this area with acquisitions of Pirelli, Cerent Corporation, Monterey Networks, and Pipelinks. Over the next few years, they see this area growing to a $30 billion to $50 billion industry. Cisco was able to go from zilch in revenue to a $400 million annual run in six months.
Summing up our conversation, I was told that Cisco is able to provide a variety of solutions from the home, to Enterprise Solutions, small and medium-size businesses, and to service providers. Growth will be a matter of execution, and they see their key competitors as being Lucent, Nortel, Juniper Networks (Nasdaq: JNPR), Foundry Networks (Nasdaq: FDRY), and Redback Networks (Nasdaq: RBAK). By 2003, the converged data and voice market opportunity will be about $155 billion. Had Cisco stayed in traditional data alone, the market opportunity would probably have been only $60 billion. Management believes that Cisco can change when necessary, and it has shown it is able to do so.
Finally, I asked the obligatory question: "Will you ever have a Drip?" Right now, Cisco is a growth company and does not pay dividends, so, they say, a Drip is out of the question. However, they do offer a direct purchase plan through the NAIC (National Association of Investors Corporation). The fees appear to be a bit high in this plan, so it may be more inexpensive to go through Sharebuilder or BuyandHold.com. Study the plans carefully and determine which is right for you.
As I've been writing about the Pathfinder companies, one of the difficulties has been understanding the technologies. I've read a number of books on telecommunications and the Internet, and frankly most of them haven't been very good. They either give too superficial of an explanation of the technology, or they go in-depth just enough to make it confusing.
However, last week I purchased an excellent book that I strongly recommend you read if you wish to invest in this area. It is Understanding Telecommunications and Lightwave Systems, by John G. Nellist, published by IEEE Press. It is not too heavy in the technical area, but it explains items in sufficient depth so that they can be understood. Sadly, it is a bit outdated, but with the rapidly changing technology, that is one of the hurdles we face.
Next week I will be speaking to Nortel. We'll see how they see the future. To discuss this column, please visit the Drip boards linked below.
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