The Network Is Cisco

Thirteen years ago, three airlines pooled their mainframe computing systems and created Worldspan. Their aim was to process reservations submitted by travel agents then typing on green-screen terminals.

By 2002, Worldspan’s mainframes processed half of the 36 million airline reservations made over the Internet. If all goes well, Worldspan could soon dominate the market for handling Web-based travel reservations. To that end, the company plans to spend $125 million on technology this year to increase its lead.

So, what’s the problem?

Worldspan risks becoming increasingly dependent on one vendor—Cisco Systems—as it migrates to computing systems that use Internet protocols.

Cisco has a near-monopoly on the routers and other equipment Worldspan needs to take queries and send back answers from all parts of the globe. There are few alternatives. Worldspan executives say switches they have purchased from Foundry Networks are unstable and firewalls from Nokia don’t keep pace with Cisco products.

Worldspan is not alone in its increasing dependence on Cisco. A Merrill Lynch survey issued in May reveals 30 of 44 Cisco customers polled are buying more gear and new products from the networking giant.

“We’re pretty much on the Cisco path—we haven’t gone with another vendor in three years,” says Sean Burke, director of network operations at inChord Communications, a marketing firm focused on healthcare companies.

In an era where companies are increasingly linked with customers, suppliers and business partners over the Internet, the possibility of a monopoly supplier of Internetworking software and hardware looms.

Cisco now holds 84% of the router market and 68% for Ethernet switches, according to Dell’Oro, an industry research firm. Federal case law defines a monopoly as 70% or more of a market.

Just as Microsoft and Intel came to be dominant suppliers of personal computer software and microprocessors, Cisco casts a similar shadow over the building blocks of networks.Customers believe that will potentially raise their costs and limit their flexibility to speed or improve service.

“The downside is, you have to wonder if all your eggs are in one basket,” says Worldspan’s director of e-commerce Kelly Higgins. “You have the opportunity for volume purchasing, but do you lose leverage [as you replace your older equipment]?” Worldspan plans to work with a handful of vendors and play them off each other to get the best prices and access to emerging technologies.

So far it has worked for the Atlanta-based company—in other areas. Using software from both IBM and Microsoft gives Worldspan reliable information on both the Java and Microsoft.NET development environments. Using hardware from IBM and storage from EMC means IBM won’t be quick to raise prices on servers. Meanwhile, Big Blue will chase Worldspan to try to sell it storage, forcing EMC to keep costs low.

But when it comes to the hardware and software that connects networks via the Internet’s protocols, there’s largely just Cisco. Technology executives say they are having trouble finding vendors to pit against the giant.

“The problem with infrastructure is that once you’re down that path … you have to have a very compelling reason or someone with very deep pockets to let you swap,” says John Southard, executive director of the office of information technology at the New York Institute of Technology.

That means Cisco will be entrenched for years. Large competitors have fallen by the wayside. Lucent Technologies lost $27 billion in the last three years, revenue dropped by more than half to $12.3 billion and its work force has been slashed. Now, it is betting its turnaround on services, not equipment.

Nortel Networks, the other big equipment supplier, is emerging from its own woes. Nortel’s net loss from continuing operations for the past three years was $30.9 billion as revenue slid from $28 billion in 2000 to $10.56 billion.

Contrast Cisco. For fiscal 2002, ended July 27, Cisco reported revenue of $18.9 billion, down from 2001 but on par with 2000. Cisco had earnings of $1.89 billion for 2002 and has improved its bottom line in fiscal 2003 amid flat sales.

Meanwhile, rivals such as Juniper Networks, Foundry and Enterasys specialize in slices of the market, notably high-performance switches and routers. These companies, which declined to comment for this article, can’t cover all the pieces of the network such as storage and optical transport products the way Cisco can.

Would-be Cisco-killers often wind up as part of the giant. When Nortel led in optical gear in 1999, Cisco acquired startups Cerent and Monterey Networks, two companies focused on products that transport digital signals in pulses of light. In 2002, Cisco bought Andiamo to enter the storage area networking equipment market.

On May 31, Cisco completed the $500 million acquisition of The Linksys Group to supply gear that lets household users and small businesses connect their computers wirelessly to the Net.

On the technology front, Cisco tightly integrates its products. Its Internetwork Operating System manages routers, firewalls and other Cisco products like Internet Protocol TV. “If you’re sitting on a Cisco network it’s so easy and natural to plug it in,” says Southard, a locked-in Nortel customer. “If you’re not a Cisco shop, you won’t get that same leverage.”

Vendors also monitor how Cisco shares the technical information they need to interoperate with Cisco networks. Cisco is one of several vendors trying to take advantage of the infrastructure it already has to build and sell security products.A Cisco spokesman says the company is committed to interoperability and “strongly believes” in competition.

Could Cisco be in jeopardy of being an antitrust target? Probably not.

Legal experts say each case is unique. Dominating a market doesn’t necessarily mean running afoul of the law. Intel avoided serious sanctions from the Federal Trade Commission despite being sued for abusing its monopoly on PC microprocessors.

In general, experts say, monopolists are forbidden from pricing products below cost, preventing customers from using competitors’ products, or using inferior products to extend lawful monopolies into new areas.

More likely, Cisco is a throwback to the 1980s, says Craig Johnson, principal of The PITA Group. This was the last time the technology industry consolidated and a few big vendors locked down customers.

“Everybody hated IBM, but you never got fired for using them,” Johnson says. “If you’re a CIO and you’re constrained on how much money you can spend, your only real stick to Cisco is to tell them to add value at the table to make you keep wanting to buy their product.”