October 5, 1998 2:25 PM PDT

Cisco walks line with partnerships

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The convergence of computer networking and telecommunications is creating a business climate where differentiating between strategic partnerships and illegal acts of collusion may be getting tougher.

Cisco Systems is just the latest company to face an inquiry from the Federal Trade Commission over concerns it may have colluded with others to divide up a high-tech market.

The networking giant denies any wrongdoing. In a statement today, the company said it "abides by the rules" and is trying to "grow new markets and service joint customers."

But some analysts say the networking industry--led by Cisco--is ripe for regulatory scrutiny similar to that given to the chipmaking and computer operating system businesses. As reported, dealmaking involving both Microsoft and Intel has drawn the attention of regulators, and many analysts view Cisco, Microsoft, and Intel as the "Big Three" in the high-tech world.

"I see there are two things here at play," said Ray Keneipp, an analyst with Current Analysis. "I think there have always been discussions of working together and dividing up the markets. In the past, though, these networking companies were not that large, so the dynamics of changing the markets was not that great. But now these companies are much larger and, with the consolidation of the market, these kinds of deals can change the market."

John Armstrong, an analyst with Dataquest, agreed that the stakes have gotten much higher as the networking industry consolidates.

"They have a lot more to lose and a lot more at stake," he said.

Joseph Krauss, assistant director of the FTC's pre-merger notification office, said the agency is concerned when mergers and acquisitions may increase the potential for collusion by reducing the number of players in a given market.

And when it comes to partnerships and collusion, it's illegal to engage in price-fixing, decreasing output of a product or service, and setting agreements to divide the marketplace by reducing competition.

"In terms of the high-tech market, I don't think we can say it's more prevalent here than in other industries," Krauss said. "In the future, I don't know if we'll see an increase in the number of cases."

He added that some agreements between competitors do not violate antitrust laws, under which collusion falls, and that the agency finds some such agreements may improve efficiencies in the marketplace and ultimately reduce costs for consumers.

The multibillion-dollar networking companies that dot the landscape from the Northeast to Silicon Valley are a product of a rapidly evolving market. Cisco, 3Com, Cabletron Systems, and the Bay Networks unit of Nortel Networks, among others, regularly partner with various firms to augment their own strengths.

This has become ever more important as service providers and carriers start to merge what were previously separate voice and data networks. This convergence has forced traditional data players to look to the voice world for expertise--the most obvious example of this market evolution being Nortel's recent acquisition of Bay Networks.

Meanwhile, traditional telecom equipment providers increasingly are setting their sights on Cisco because it is the networking industry leader. The company already has partnered with the likes of Microsoft and Hewlett-Packard, among numerous other industry giants.

In previous interviews, Cisco chief John Chambers has said that he would partner with traditional voice-based firms such as Lucent and Nortel if they could find several areas that could reap mutually beneficial gains for both sides.

Chambers in the past has dismissed talk of an arrangement with Nortel after that firm bought Cisco rival Bay Networks early this summer. A potential deal with Lucent also evidently fell through when it became clear there were too many areas of overlap between the two companies, Chambers has said.

But Keneipp said that, because the markets are evolving so quickly, some companies may ask others to stay out of certain areas and be rebuffed.

"Some companies may find that's asking too much of a commitment, as things are changing," he said.

 

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