Cisco's prime position in IP networking

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Today the entire Advanced Technologies group yields only a small portion of the company's total $20 billion in annual sales, but it is among the fastest-growing segment of the business. And as Cisco looks to grow between 10 percent and 15 percent a year for the next few years, the Advanced Technologies group could help push it toward that goal. During the third fiscal quarter of 2006, the company said, revenue for Advanced Technologies grew 20 percent from the same quarter the previous year.

"Getting trends right is important," Chambers said. "We made our investments three to five years ago when it wasn't obvious to others what the trends were going to be."

New markets such as home networking and video are completely different from Cisco's traditional markets, and they highlight how Cisco's strategy has evolved. The company has moved beyond simply supplying infrastructure gear for networks, Chambers said. Now, it is developing products for businesses and consumers that are expected to drive network usage and demand.

This strategy sets Cisco apart from competitors such as Alcatel, Lucent and Nortel, which derive a lot of their business from supplying gear that simply transports traffic. For example, Nortel leads the market in optical networking equipment. Alcatel has developed a strong DSL (digital subscriber line) portfolio. And Lucent has developed a strong radio frequency portfolio for mobile operators.

Except for optical, which has been a disappointment to Cisco, the company has chosen to stay out of DSL equipment and radio frequency gear. Instead, it has concentrated on adding more intelligence and value to the network.

"I was concerned two years ago when we outlined our strategy and nobody followed us," Chambers said. "It's like when you're out in the middle of a frozen lake and you're catching the heck out of fish, and nobody comes. You have to wonder if you're missing something."

Amibitions for mobile?
While Chambers views the Alcatel-Lucent pairing as a defensive move to better compete against Cisco, he said that the Siemens-Nokia partnership could complement Cisco's portfolio. Both Siemens and Nokia provide radio frequency technology and cellular handsets to carriers, markets that Cisco has chosen not to enter.

For now, Cisco is addressing the mobile wireless network by offering software on its edge routers that provides cell phone users on 2.5G and 3G GSM (Global System for Mobile Communications) networks access to the Internet or to corporate networks. But some analysts wonder if Cisco may not have its eye on bigger ambitions in the mobile wireless market.

"If you look at Cisco's history, they went into the home with Linksys and then they bought Scientific-Atlanta to get further into the cable market," said Infonetics Research's Howard. "It's not too far afield to think they might buy into mobile itself."

Still, Howard concedes that Cisco is unlikely to make a big move right now. Over the past couple of years, the company has been rumored to be in talks with Ericsson and Motorola, but Chambers said it's much more likely that his company would partner with mobile equipment makers instead of trying to buy with one of them.

"Mergers among equals have a high failure rate," Chambers said. "I don't know how to do those" kinds of acquisitions.