Analysts say piece still missing in Cisco's optical-networking puzzle

Cisco System's (San Jose, CA) recent acquisition of Cerent Corp. (Petaluma, CA) and Monterey Networks Inc. (Richardson, TX) generally drew positive reviews from industry observers. But while the debate continues over whether Cisco paid too much for Cerent and how it will use Monterey's technology, agreement seems to have been reached on one point: The company is still at least one technology card shy of a full optical-networking deck.

The two acquisitions enable Cisco to compete in the optical-networking market, a space the company views as a potential boom town. "I think it's pretty clear that there's an optical-transport market that's there today," says Kelly Ahuja, head of marketing at Cisco's optical-internetworking business unit. "The numbers that I've seen are that this market is expected to grow to about $17 billion by 2002, of which around $10 billion is addressable by both the Cerent and Monterey devices."

Cerent, purchased for an eye-popping price of about $6.9 billion, makes a multiservice add/drop transmission platform, the Cerent 454, based on Synchronous Optical Network (SONET) technology. Despite its startup status--the company is barely two years old--Cerent has established a customer base of approximately 100 carriers, mainly in the regional network space. On the other hand, Monterey focuses on the emerging intelligent optical-network core with its 2000 Wavelength Router, a large wavelength-switching product that has yet to reach the market. Cisco will pay roughly $500 million for Monterey. Both acquisitions will be stock transactions, and the two companies will become business units within Cisco's Transport Group, reporting to Kevin Kennedy, senior vice president of the company's service-provider business line.

According to analysts Chris Nicoll and E. Keith of Current Analysis (Herndon, VA), the Cerent product line enables Cisco to operate in the potentially lucrative network edge space, which some manufacturers expect will be 10 times the market size of the network core. The two analysts speculate that the company will use the Cerent 454 as a platform to extend Cisco's recently announced Dynamic Packet Transport technology from metropolitan area networks into the access layer.

Meanwhile, market-analysis firm RHK Inc. (South San Francisco, CA) also sees the acquisition of Cerent as positioning Cisco to compete within the SONET market, which the firm predicts will grow more than 60% this year to $7.3 billion. But not every analyst expects Cisco to make an impression in SONET. The Cerent acquisition will provide Cisco with only limited play in this market, says Tom Valovic of International Data Corp. (Framingham, MA). Valovic cites Cerent's comparatively small market share and the 454's current lack of suitability for long-haul applications as limiting factors in this area. However, he does believe Cerent's product line complements that of Pipelinks, a developer of SONET-based access routers that Cisco purchased last December.

The Monterey acquisition adds a necessary optical component to Cisco's core networking thrust, say the analysts. The Monterey product acts very much like a wavelength crossconnect, which would provide optical-layer protection switching and other functions between switch routers such as Cisco's gsr12000. Cisco has touted the ability of its switch routers to connect directly to the optical layer via dense wavelength-division multiplexing (DWDM) equipment as part of its optical-internetworking vision. However, Ahuja says customers who want high-bandwidth, clear-channel pipelines may use the Cerent equipment to aggregate traffic, then pass it directly to the Monterey Wavelength Router for transmission across long-haul backbones. Conversely, data and Internet protocol (IP) traffic may be aggregated by the Cerent 454 for transmission to the gsr12000--which in turn would pass it to the Wavelength Router for transmission on the optical core.

Ahuja denies that this scenario represents a change in the original optical-internetworking vision. Michael Zadikian, vice president of marketing and cofounder of Monterey, says smaller, purely IP network cores may continue to be built with a combination of DWDM gear and switch routers. But larger, more-complex networks will require the addition of intelligent optical-networking equipment such as the Wavelength Router.

"I think initially they may have underestimated the level of intelligence needed to do this sort of thing," Zadikian theorizes. "The other aspect of it, I think, is that as Cisco has learned more about the space, they have decided that they are better off having transport products, which I think put them in a much better competitive position against the Lucents and Alcatels and the Nortels of the world, who have that piece. It's better to have products and let the customer decide which mix is the best way to implement their network, rather than to tell them this is the way to do it because we don't have these other products."

Meanwhile, analysts such as those at Current Analysis speculate that Cisco may try to incorporate Monterey's optical switching technology into a switch router to further the optical-internetworking market thrust. "I see the value in linking things like quality-of-service interaction between [the Monterey and Cisco equipment]," Zadikian says. "I see the value in provisioning of IP services and simultaneously bringing online optical virtual pipes that we manage. I see the value in element and [network-management system] integration. Hardware integration makes no sense at all. When you look at the hardware of this kind of system, this is a highly modular, multishelf, multirack system. Even an 'integrated product' would still be separated by racks and shelves, because you need the modularity."

Yet, if Cisco is to offer a complete optical-networking product line for carriers, analysts agree that it will need to add another arrow to its quiver: DWDM. Currently, Cisco partners with companies such as CIENA Corp. (Linthicum, MD) and Pirelli Cables and Systems (Milan, Italy) to provide DWDM to its carrier customers. However, Nicoll and Keith say that optical networks currently tend to be single-vendor shops, which would leave Cisco at a disadvantage when competing with companies like Lucent Technologies and Nortel Networks. The two analysts also point out that the additions of Cerent and Monterey potentially causes significant overlap between the product lines of Cisco and CIENA and may strain their relationship.

Strain or no, analysts agree that a DWDM acquisition may be in Cisco's future. Cisco appears to be keeping its options open on this front. "For now, we're going to continue to work with our external WDM partners to provide our customers a total transport solution and a data solution," says Ahuja. "But we're also going to continue to examine the needs of our customers in this market space--and let's just leave it at that for now."

To this end, it is worth noting that the company has invested in such firms as Corvis, Optical Networks, and Tellium, all of which have incorporated DWDM capabilities into their product lines. Cisco had acquired stakes in both Cerent and Monterey before completing full acquisitions.