Summary
Cisco Systems used to not be one of Verizon’s favorite suppliers. However, the wireless leadership is not as anti-Cisco as the wireline operation was in the past. There now seems to be a shift in policy at the entire service provider regarding the vendor.
Analysis
A change in attitude at Verizon regarding Cisco Systems appears to be happening. Earlier, the supplier had alienated the RBOC to a large extent with its apparently cocky and arrogant approach when it came to selling routers and fiber optic equipment.
It was curious at first that Cisco spent so much money to buy Starent Networks. The explanation in the press that it was a way to lock out Juniper Networks at AT&T did not seem to justify such a high price tag. In addition, we are not convinced that Juniper is necessarily in trouble at AT&T because of Cisco’s move. There are way too many advocates for Juniper at AT&T and some industry observers are probably giving the carrier too much credit in its current ability to really enforce a domain vendor list. The service provider has not really integrated all of its properties together and has had trouble in executing on anything these days. Of course, we have all heard that Juniper earlier was supposed to be on the outs at AT&T – and that assertion turned out to be not correct.
At first, when Cisco made the announcement, it appeared to be a move to muscle in more on Verizon Wireless’ business. Verizon will continue to heavily depend on Starent well into the future. The thinking was that the carrier’s leadership would enjoy sticking it to Cisco for such a large investment. However, paying almost $3 billion with the potential for not getting Verizon Wireless’ business did not seem to make sense. Now it is becoming evident that there will be extensive “collaboration” between the two companies. Of course, it will also help with Cisco's strong ties to Sprint.
Given a friendlier relationship with Verizon, it raises questions about further acquisitions in the public network realm. Ciena would immediately come to mind for some analysts. But the Ciena leadership has no intention of selling out and would demand such a heavy price tag that Cisco would likely balk anyway. Cisco’s previous experience in the telco wireline network, especially on the optical side, would definitely make the vendor think twice about any purchase of a vendor that supplies landline equipment to these carriers. In addition, Starent fits in with Cisco’s philosophy regarding acquisitions. It goes after companies that either already has or will have the potential to become dominant suppliers in their space. One would be hard-pressed to come up with too many examples of mid-tier and small manufacturers in the carrier wireline market that is in that category.
Of course, Calix does come to mind. The independent telco space is increasing and Cisco has apparently shown some interest in going after the municipal market as well. But as with Ciena, the price that its management would be willing to sell out for would probably be way too high to attract Cisco.
All in all, we view Cisco as continuing to concentrate more on making acquisitions of companies that tend to be in its areas of strength: enterprise, video, and security. In effect, Starent helps Cisco in the only area in which it has a strong presence in the telco telecom network – routers.
Samuel Greenholtz consults with leading institutions through GLG
Analyses are solely the work of the authors and have not been edited or endorsed by GLG.
