Cisco router monopoly cloud has silver lining

As revitalised router suppliers begin to emerge, Cisco will find its monopoly is eroded.

As revitalised router suppliers begin to emerge, Cisco will find its monopoly is eroded.

Giga has been inundated by requests from its clients desperate to find some way to extract better discounts from Cisco, its incumbent wide area network router supplier.

As Giga has frequently pointed out, this is a tall order. With its dominant position in the router market, and few credible competitors with a broad product range and global service organisation, Cisco is sitting pretty. It knows that few of its customers are willing to jump to another supplier, and thus preserves the fat margins that have reaped it big profits and a huge cash reserve despite the economic downturn.

It is not just the fact that most of Cisco's once-fierce competitors have misplayed their hands or folded. Cisco has an ace up its sleeve - its customers' fear of managing multisupplier networks and their associated costs:

  • The dilution of spending levels across multiple suppliers, resulting in lower discounts from each
  • The need to manage multiple suppliers, source additional maintenance contracts, train IT staff on new equipment, invest in more network management systems and maintain multiple sets of spares
  • The spectre of supplier finger pointing - when the inevitable interoperability issues arise, most suppliers are not much interested in working with their competitors to solve them.

Many IT managers conclude that these ramifications are not worth some cost savings up front. That is consistent with Giga's assertion that ongoing operations costs often work out to twice the initial hardware, software and maintenance costs of a router over a three-year lifespan.

But Giga sees two trends on the horizon that may yet change this calculus: growing customer frustration with the lack of negotiating leverage that is a side effect of their all-Cisco networks, and the advent of new competitors that present more palatable alternatives.

Cisco's router hegemony faces erosion from several potential rivals:
Nortel Networks: Since acquiring Bay Networks, Nortel has seemed uncertain what to do with it - its management team clearly has its priorities set on its traditional base of telecom service provider customers. Consequently, its enterprise products have steadily lost market share and technology leadership to Cisco.

A recent management reorganisation seems to suggest that Nortel is ready to sell Bay Networks, or spin it off as an independent company much as Lucent did with Avaya. Giga thinks this would be a positive development, giving Bay Networks the management focus it needs to recover its eroding status as Cisco's toughest competitor in the large enterprise market.

Alcatel: A renewed commitment to the enterprise networking space, an impressive product refresh and a global service presence make this supplier another credible Cisco competitor for large enterprise deals.

Huawei: This supplier, which is based in mainland China (with hefty government backing), is largely unknown to western IT managers. But Giga thinks it is poised to make a big splash outside of Asia, where it gets most of its annual revenues of $3bn (£1.8bn).

Operating in the US under the name FutureWei, Huawei unabashedly knocks off Cisco gear, even assigning helpful product names such as the Quidway 3640, which looks a lot like a Cisco 3600-family router. With research and development and manufacturing based in India and China, it can sell its products at prices 60% to 70% less than those of comparable Cisco gear. It has a lot of catching up to do with Cisco's service and distribution organisations outside of Asia, but it clearly intends to try.

Dell: With its recent introduction of a low-cost local area network switch product line, Dell has made Cisco's official list of competitors. (Cisco recently decided it did not want Dell reselling its products anymore.) An extension of this Lan play to the Wan side is not a hard stretch to make, and would present some stiff competition to Cisco in the commodity end of the router market.

The bottom line for Giga clients remains the same: you may have painted yourself into a negotiating corner by going all-Cisco, but don't let your zeal to regain control of your destiny blind you to the costs associated with introducing other suppliers' routers into your network. But the prospect of throwing off the Cisco yoke will become more tempting in the next two years as these new or revitalised router suppliers play out their hands. At the very least, you can anticipate some relief from Cisco's current monopoly-like margins.

Jim Slaby is an analyst at Giga

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