By

Kim Bui

Jimmy Shih

Suet-Fei Li

Pushkar Ranade

Cisco along with the other big networking companies (Bay Networks, Cabletron, and 3Com) wants to prevent a repeat of what had happened to computer behemoths like Data General and DEC. Both of these companies were displaced as the market leader due to their arrogance and preoccupation with their installed bases. These companies were blindsided by emerging technologies like client server and the Internet. As a result from this fear, Cisco and its competitors have aggressively pursued rapid product development, close customer contacts, open standards, and partnering opportunities.

Cisco has successfully adopted partnering and outsourcing as a strategy to gain market leadership and entry into untapped markets. For example, if the employees at Cisco cannot develop a technology quickly and cheaply enough in house, management will look outside for a company who can. But more importantly, if the technology fits into the long-term strategic vision of the company, the executives running the company won’t shy away from making a quick acquisition. For instance, since 1993 Cisco has acquired 20 companies costing more than $7 billion. The company has successfully transformed itself from a company heavily dependent on the router business to one that now has the broadest range of networking products in the industry.

Cisco’s interest in M&A and partnering activities is based on the assumption that long term networking solutions will require integrating disparate networking devices and services into one cohesive source. In developing VoIP solutions, Cisco opted to enter into a technology based partnering arrangement with Gric, Ozemail, and NEC. Technology based corporate partnering arrangements developed as an outgrowth of the biotech industry in the mid 1980 when cash strapped companies began using partnering arrangements to finance expensive clinical development of drug products. For a company like Cisco with over $2 billion in cash, access to funds to finance new technology is not a mitigating factor. A more critical point for Cisco is that a technology based partnering arrangement will enable the company to leverage its core routing products with its partner’s strengths in: network security, control signaling, accounting, and fault-tolerance design.

Cisco wants to use the Internet Protocol (IP) technology to build an integrated network to support both voice and data. It is more economical to have one integrated network instead of two separate networks. And it is cheaper to build this integrated network using the IP technology instead of the telephone technology. IP routers are so much cheaper than the telephone switches because IP routers enjoy Internet's economy of scale. Furthermore, an integrated network based on the IP technology will be easier to maintain and upgrade. Therefore, we can build an inexpensive IP-based telephony network by using inexpensive IP routers.

Cisco has the technical experience in building data networks. Cisco is very good at designing IP routers that can scale to support millions of Internet users. Cisco is also familiar with the following three Internet technologies that can be used in an integrated network. First, Cisco can use quality of service protocol to support real-time traffic like voice. Second, Cisco can use mobility management protocol to support wireless roaming, similar to the cellular telephone technology. Finally, Cisco can use multicast technology to support new applications like video conferencing.

On the other hand, Cisco has no technical experience in building voice networks. Cisco faces the following four technical challenges in supporting voice traffic in an integrated network. First, Cisco needs a signaling technology for setting up phone calls. Second, Cisco needs security measures to ensure privacy and authentication.

Third, Cisco needs pricing and accounting mechanisms for the integrated network. Finally, Cisco needs fault-tolerant designs to make the integrated network more reliable.

Today's IT and telecom managers are faced with unprecedented demands to deliver cost-effective, technologically sound communication infrastructures that will support data, voice, and video across the Internet, intranet, and extranet. Driving these demands is the explosive use of Web technologies that are transforming the manner in which business is conducted.

There are several technology options for building the integrated, multiservice network. Managers and engineers responsible for this network implementation must grapple with the issue of effectively implementing a network that enables the quality-of-service (QoS) delivery through disparate networks while meeting the needs of tomorrow's integrated multiservice desktop (IMD). One possible answer lies in the implementation of multiservice network solutions available through Cisco Systems. As such, Cisco Systems formally entered this emerging market almost two years ago and is making a considerable effort to secure an early lead over its competitors. Over the last two years Cisco has made a number of acquisitions and agreements with smaller companies to provide an integrated multi-service voice-data network.

In October 1997 Cisco announced the first phase of a data/voice/video integration strategy that will ultimately encompass all aspects of enterprise and service provider infrastructures. Aimed at enterprise wide-area networking, this announcement included a systems and technology strategy, new products and future product directions.

Cisco's technology strategy for data/voice/video integration is to use only standards-based implementations where available, and standards-proposed implementations where the standards are under development. Other strategic technologies implemented by Cisco are voice over IP, in which Cisco is taking an active role toward standardization, and voice activity detection (VAD), a technique for reducing voice bandwidth by halting traffic generation during silence. Cisco is also taking a leadership role in the development of standards and ultimate implementation of full QoS capabilities over IP, which would then be introduced as a software upgrade to most Cisco systems.

Cisco’s partners get in return for entering a partnering arrangement is risk sharing and validation. Risk sharing is becoming a common motivator in the high tech industry where the high costs of product development and testing are matched by the high likelihood of failure. Cisco’s smaller partners, such as Gric and Ozemail, get to share the cost of developing VoIP with Cisco and Cisco avoids the costs and technology risks associated with establishing an independent research effort. From a validation perspective, the small technology companies will get the credibility they need in establishing a viable industry standard. For example, a small company will enter a technology based partnering arrangement with the intent that the identity of its corporate partner will lend credibility with third parties.

Cisco's alliance with NEC is to address technical challenges such as control signaling and fault-tolerance systems design. NEC, a developer of advanced communications products and software for public and private networks, is one of the the top worldwide PBX (Private Branch Exchange) developers and has extensive experiences in fault tolerance system design. In the Cisco alliance, NEC will contribute expertise in the areas of PBX technology, voice communications, and vertical market application development while Cisco will provide expertise in data communications and Internet technology.

GRIC Communications

To address technical challenges such as network security, settlement and accounting, Cisco teamed up with GRIC Communications. The two companies are working together to facilitate the global deployment of Internet telephony gateways, roaming authentication and settlement services as well as the development of a global Internet telephony settlement standard.