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For Cisco, It’s Change or Perish

By BRET SWANSON Still, the architecture remained the same for company, can make and sort and direct thousands of
April 18, 2001; Page A22 nearly a century: Each telegraph or phone call received colors of light, each carrying distinct messages, down a
its own connection. You may have only used your single fiber strand. Yipes is connecting urban business
Oh, how the mighty fall. telephone 20 minutes a day, and you may have only directly to fiber, and wireless start-up Soma Networks
It wasn't so long ago that Cisco Systems was spoken 15% of the time, but the connection was always can supply residential broadband connections that are
the world's largest company and the envy of all the there. Relative to the application, we had a lot of faster than copper DSL or broadband cable TV. Cisco
technology industry. It had exceeded published earnings bandwidth to spare. and its big, central routers can't handle this second wave
estimates 14 straight quarters in a row, was hiring like Enter the Internet. With the first online of data. And right now it has no back-up strategy.
crazy, and had topped $555 billion in market services in the early 1990s and the introduction of the Focused for too long on routers and other
capitalization. These days, Cisco is slashing 15% of its Netscape browser in 1994, the data-centric Internet electronic network modules, Cisco doesn't now have the
workforce, missing all its numbers and wondering became a phenomenon. E-mails, Web browsing, and optical capabilities to prosper in a new world of
where more than $400 billion of market value went. later e-commerce threatened to overwhelm the voice- bandwidth abundance. Just weeks ago Cisco announced
To his credit, Cisco head John Chambers saw optimized telephone network. The mostly copper it would shut down one of its lone optical plays,
things coming and was the first chief executive to telecommunications infrastructure wasn't ready. Monterey Networks. Commenting last May, we noted
smartly call on the Federal Reserve to cut interest rates in the Gilder Technology Report that there were too
and for Congress to cut tax rates. But unfortunately for many real optical companies for Cisco to simply
Broadcom, Applied Micro Circuits, dabble: "Cisco's $500 million investment in Monterey is
Cisco, Washington getting its act together won't be
enough to put the networking company on the rebound. EZchip and others are integrating more suddenly irrelevant and will never be a significant
factor in the network. . . It's Sonet hardware investment,
That's because Mr. Chambers's real problems aren't and more of the functionality of Cisco $7 billion for Cerent, may be even more fruitful than
economic. Cisco is increasingly in the wrong business.
boxes anticipated in the short term . . . but faces an even
shorter life expectancy." Indeed, while Cerent was a
Heroic Processing revenue star in 2000, in 2001 it has already been
Cisco foresaw this data explosion. And it
found a way around the narrowband copper links to rendered obsolete by the continually multiplying colors
The company that defined the 1990s and made the of light from Avanex, ONI, and Sorrento.
offices and homes, as well as the more capacious -- but
Internet possible is being squeezed from above by fiber still not big enough -- fiber-optic strands connecting our
optics and from below by microchips. It has a core Creative Destruction
cities. Cisco discovered that if you didn't give everyone
competency in neither. Cisco's great advance was its a connection, but instead chopped up the messages and
vision for the first post-telephone network. It developed Of course we will still need electronic terminals and
gave the packets a destination, you could throw the
the architecture and crucial software standards that routers and switches at the edges of the network. But if
packets out into the Internet, let them take any number
made the Internet work. Then it cobbled together the Cisco's failing optical strategy weren't enough, its
of paths, and then have them reassemble at the other
chips and wires and code into high-margin boxes that products are increasingly being disrupted by Moore's
end. The new Cisco-powered network was ruthlessly
few others knew how to make. But unless Mr. Law of microchips. Broadcom, Applied Micro Circuits,
efficient. There were no more circuits between users.
Chambers can set his firm on a new path, Cisco will be EZchip and others are integrating more and more of the
There was no more silence. The Cisco network used
remembered as a transitional, if temporarily functionality of Cisco boxes -- all the wires and
every bit of bandwidth available.
transformative, enterprise. separate processors and software -- onto single silicon
Now, bandwidth scarcity is over and Cisco's
The key to understanding Cisco's prospects is chips. If the router becomes a chip, what does Cisco
time has passed. The new all-optical network doesn't
to understand the history of communications networks. have to sell except its software and protocols?
need heroic processing of billions of bits each second.
Real-time communication over a distance was first The destruction in the market affords Mr.
All it must do is change the direction that light travels.
made possible by Samuel Morse's telegraph, or copper Chambers a perfect opportunity to practice some
The Cisco network treats messages as bits rather than
wire carrying electromagnetic signals. As technology creative destruction on his own company. Namely, he
lightwaves, laboriously processing what should simply
evolved we were soon able to send voices, rather than needs to remake it in the image of the new all-optical
be steered. It's as if rivers worked not by banking the
just simple dashes and dots. Voice calls were switched network.
flow of the stream but by checking and sorting each
by operators plugging wires into a switchboard. Later, H2O molecule for its KMI reports that in 1999 and
this switching function would be overtaken by Mr. Swanson is a technology analyst at the Gilder
2000 some 150 million kilometers of optical fiber were
mammoth electronic boxes from Lucent and Nortel. Technology Report.
laid world-wide. Avanex, the leading optical networking