Convergence of Voice and Data Networks: A Collision Course for Cisco and Lucent

Strategic Insights -

The telephone industry is shifting focus from voice to data networking, creating a convergence of these two technologies. This convergence sets the stage for a high-stakes battle between Cisco Systems Inc. and Lucent Technologies Inc., two industry leaders with vastly different approaches to data networking. Lucent has been making strategic acquisitions to strengthen its position in the market, and a change in accounting practices allows it to use its stock value to make larger acquisitions. Meanwhile, Cisco, with its dominance in data networking, is fighting Lucent in court over technology patents. The stakes are high, with demand for data networking equipment expected to grow 25 percent per year for the next few years.

Key Takeaways:

  • Lucent will make a much larger acquisition possible due to a change in accounting practices, which will allow it to use its stock value to handle a "pooling of interests" transaction.
  • Cisco and Lucent are competing in the marketplace and fighting each other in court over technology patents, with Lucent accusing Cisco of infringing on eight patents relating to data networking.
  • The battle for Lucent is with Cisco, and the company filed a federal lawsuit in Delaware in June accusing Cisco of infringing on eight patents relating to data networking.
  • Lucent's Carly Fiorina, president of Lucent's global service provider business, frames the battle in blunt terms, stating that Lucent is not trying to hold on to market share, but rather trying to gain share.
  • Lucent executives are late in getting into the data game, so they need to broaden their portfolio of communications equipment, with potential targets including companies that make fast Ethernet switches, frame relay technology, and ATM switches.
  • Ascend Communications, Fore Systems, and Xylan Corp. are potential acquisition targets for Lucent, with Xylan making high-speed bandwidth switching systems used in corporate networks and Fore and Ascend making asynchronous transfer mode (ATM) switches used to help unclog Internet traffic.
  • The demand for data networking equipment is expected to grow 25 percent per year for the next few years, making it a crucial piece of the Lucent puzzle that the company needs to find in order to grow beyond $30 billion in revenue in the future.
  • Cisco and Lucent are not the only companies shopping for data networking firms, with Northern Telecom buying Bay Networks this year, and Ericsson buying part of Newbridge Systems.

Statistics:

  • 25 percent: The expected annual growth rate in demand for data networking equipment for the next few years.
  • $30 billion: The future revenue goal for Lucent, which requires it to expand its data networking portfolio.
  • $22.1 billion: The revenue for Lucent in 1998.
  • $8.4 billion: The revenue for Cisco in 1998.
  • $1.3 billion: The profit for Cisco in 1998.
  • $536 million: The profit for Lucent in three quarters through June 30.

Sources:

  • The Star-Ledger of Newark, N.J.
  • Fortune magazine
  • Communications Network Architects
  • Lucent Technologies Inc.
  • Cisco Systems Inc.