Cisco Systems and SBC Communications Make a Deal
By S.P. Brown

The Monte Hall of the high-tech world is at it again. Internet switching and router king Cisco Systems (CSCO) announced a multi-billion deal today with San Antonio-based Baby Bell SBC Communications (SBC).

Under the terms of the deal, SBC agrees to make Cisco its preferred provider of networking gear. As for Cisco, it agrees to provide SBC with more efficient dial-up access to networks that covers high-speed digital subscriber line (DSL), switching devices based on asynchronous transfer mode (ATM), dial-up access equipment and virtual private network (VPN) technology.

What's more, over the next two years, SBC will buy more than a $1 billion of Internet routing equipment from Cisco, making it the biggest deal Cisco has ever cut with a Baby Bell. The equipment will be used across SBC's vast network of 60 million access lines serving 36 million customers.

In return, Cisco will steer business customers to SBC's network, which SBC has pledged to expand to the 50 largest US metropolitan areas by the end of 2001.

For SBC, the deal is part of a continuing effort to expand its data services business, which consists of more than 100,000 customers with broadband networking services and more than 60,000 customers with e-commerce and Web-hosting applications.

The data services division accounted for 5.7 billion of SBC's $50 billion in 1999 revenues. However, the company expects data services revenue to double during the next three years.

Partnering with Cisco is just one of many moves SBC has made recently to grow its data services brand. Last fall, the company launched a $6 billion network upgrade and expansion effort, and, more recently, it bought Sterling Commerce for its e-business marketplace know-how.

As for Cisco, the deal with SBC is a breakthrough transaction. In the past, the heir-apparent to the trillion dollar market cap throne has had difficulty selling its networking equipment to traditional telephone companies. In fact, most of the Baby Bells have use equipment from Alcatel (ALA) for their DSL service.

As a result, Alcatel has a commanding 56 percent share of the market for DSL equipment, according to market researcher Cahners In-Stat.

Nevertheless, Cisco isn't totally telecom-free. The company boasts US West (USW) and GTE (GTE) among its customers. Still, despite its reputation, Cisco has yet to displace the significant investments the Baby Bells have made in equipment from telecommunications equipment veterans such as Lucent Technologies (LU) and Nortel Networks (NT).

That may change. SBC has stated that it will rely more heavily on Cisco equipment in the future. In the past, SBC provided high-speed DSL links primarily through equipment from Lucent and Alcatel.

Cisco has been seeking inroads into the lucrative $300 billion telecommunications equipment market for the past two years. With the SBC deal, the company may finally convince other telecoms that its equipment can indeed reliably handle all high-speed data and voice traffic.

Because of the explosive growth of the Internet, companies that provide the networking infrastructure, such as Cisco, Alcatel, Lucent and Nortel Networks are racing to sell next-generation equipment that can transmit voice, data and video across one network.

Both Lucent and Nortel are angling to take market share away from industry leader Cisco in the Internet-networking market. By teaming up with SBC, Cisco is returning fire, by gaining more leverage in the phone-equipment market.

Ultimately, all three equipment companies want to be the premier all-purpose supplier of network gear as voice-dominated phone networks and data-dominated computer networks merge into seamless Internet-based systems.

And it looks as if Cisco has just upped the ante - again.