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FEBRUARY 20, 2003 STREET WISE By Olga Kharif Cisco's Juicy Margins: Too Rich? [Page 2 of 2]
In a statement, Cisco says it "frequently reviews and adjusts product and service pricing to extend out customers' dollars and deliver greater value. We believe we will continue to squarely position Cisco in the switching market. But Cisco welcomes competition as it increases our innovation and results in delivering better solutions to our customers." The company declined further comment. Competition is building. In the past 12 months, Nortel has revamped its product portfolio and released a series of new offerings, particularly so-called IP-telephony parts, which allow companies to make calls and send data over the Internet. Customers already using Nortel's voice network might want to stick with the company when upgrading for IP telephony since it offers a cheaper option than Cisco does, says Mort Rahimi, chief technology officer at Northwestern University in Evanston, Ill. "A company such as Nortel could slowly move into the Cisco space," he says. MIX AND MATCH. Nortel, which derives 25% of its revenues from corporate purchases, has also recently begun catering to midsize businesses, in addition to large corporations. "We are solidly back and completely committed to the enterprise space," says Nortel's Collins. Besides offering lower prices, Nortel believes by changing its interface it can get Cisco customers to mix and match network gear. IT staffers fear that if they buy another company's equipment, they would have to take expensive and time-consuming courses on how to use it, says Collins. So Nortel is designing its next-generation products so that anyone who knows how to use Cisco equipment would be able to use Nortel's switches and routers with little additional training, he says. Now that equipment from different vendors is interoperable and has similar features, mixing up gear from different suppliers is no longer as big a deal as it was only a few years ago. "It's like renting a new car, you can drive it almost immediately," says Tom Wilburn, general manager of Alcatel's North American enterprise business. SPEEDY TRAINING. France's Alcatel (ALA ), which came out with a series of new products in the past two months, is also aggressively going after Cisco market share. In December, Alcatel released a free mail-in CD tutorial, explaining the differences between configuring its and Cisco's gear, says Wilburn. An IT manager can go through the course, then take an online test and obtain certification in two to three hours, he says. Networking market entrants are also accelerating their efforts. Dell unveiled two products for large corporations last summer that sell for a third to a quarter of what similar Cisco products cost, claims Ulrick Hansen, Dell's senior manager for product marketing. Privately held Omnium Worldwide in Omaha, Neb., is one happy customer. The debt collector, which has previously bought Dell servers and PCs, upgraded its 1,200-user network last summer -- and ended up buying 80 switches from Dell rather than Cisco. They were faster and cost half to a third less, says Steven Cartwright, Omnium's corporate network manager. Dell will introduce more enterprise-networking products this year. Perhaps the biggest near-term threat comes from vendors that have established themselves in China. Two of them, UTStarcom (UTSI ) and Huawei, have gained ground in the past year. Thus, 2002 sales of UTStarcom, headquartered in Alameda, Calif., have climbed 57%, to $981.8 million, over 2001. In 1995, its revenues were only $10 million. And it's now aggressively moving into South America, Southeast Asia, Eastern Europe, and the Middle East. LIMITED SUPPLY. Some Chinese suppliers, in fact, offer prices that are a tenth those of U.S. vendors, says Danny Briere, CEO of telecom consultancy TeleChoice. Many also offer longer warranties and shorter lead times. Of course, it's not much of a threat that such small companies will displace Cisco as the networking favorite any time soon. And despite increased interoperability and training, many companies still worry that it would be a hassle to switch providers. "We would have to be really dissatisfied [to leave Cisco]," says John Kenagy, chief information officer at Oregon Health & Sciences University (OHSU), a hospital and medical school. Still, when OHSU renegotiates its maintenance contract with Cisco this summer, it expects concessions. "I don't have an infinitely expandable supply of revenues," says Phil Isensee, director of technology management at OHSU. And that's exactly why Cisco may face some challenging times ahead.
 Kharif covers technology for BusinessWeek Online in Portland, Ore. Edited by Beth Belton Get BusinessWeek directly on your desktop with our RSS feeds.  Add BusinessWeek news to your Web site with our headline feed. Click to buy an e-print or reprint of a BusinessWeek or BusinessWeek Online story or video. To subscribe online to BusinessWeek magazine, please click here. Learn more, go to the BusinessWeekOnline home page  | | FEBRUARY |
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