How Cisco Lost Its Edge

NEW YORK (TheStreet) -- Cisco(CSCO) has lost a step, and may have lost its way.

As tech giants go, you don't find many with the sort of scale that Cisco has. Nearly everywhere in the world where computer systems are connected and Internet traffic is routed, Cisco gear is involved. The company has 70,700 employees with nearly half located outside the U.S.

Its size and reach used to be an advantage when weak sales in some regions or products would be offset by strengths elsewhere. Cisco chief John Chambers used to boast on earnings conference calls that Cisco had 80% or more market share in its top five product categories.

Those were the good times.

Lately, with the stock hitting new one-year lows, Cisco hasn't had much reason to pound its chest. And its size is now seen as a vulnerability, as upstarts and old rivals alike try to pick off Cisco's customers.

A succession of quarterly outlook disappointments has knocked 25% off the stock since November. Crippled budgets at state and foreign governments have pinched the spending that Cisco used to rely on. And an 11% plunge in cable TV set-top box sales in the past year has added to Cisco's heavy burden.

Mojo?

But there's a nagging sense that Cisco's woes aren't all due to external forces. It may be that the years of dominance in network gear-making has fostered some complacency or helped limit Cisco's ability to see key technology shifts early.

A good illustration of this flaw is in so-called edge routers, a small yet crucial product category where Cisco got beat when it failed to innovate.

In the early 2000s, when Cisco was raking in billions in sales of routers to phone companies, a small outfit called TiMetra was focused on a growing problem that couldn't be answered with Cisco's approach.

"The network architecture was unsustainable," says TiMetra cofounder Basil Alwan, who now heads Alcatel-Lucent's(ALU) router unit.

Edge routers are junction boxes that handle a variety of network traffic like video and phone calls, streamlining the traffic into IP data packets that travel over the vast Internet backbone.