By ROGER CHENG
THE WALL STREET JOURNAL
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April 1, 2005

NEW YORK -- While corporate spending remains tight, a majority of the new telephone systems being purchased are based on Internet protocol technology, said Cisco Systems Inc. (CSCO) Chief Technology Officer Charlie Giancarlo.

For Cisco, IP voice service remains a small part of the company's overall business, but it also represents its fastest-growing segment, Giancarlo said. An IP-based infrastructure creates a "horizontal network," allowing companies to combine several different applications such as wireless and traditional fixed line service, and add other features such as data and video transfer.

"It's still an early stage for IP," Giancarlo said. "It represents a minority of the (total phone service) market."

But the technology is catching on. About 90% of the new systems Cisco sells use IP technology, he said.

One of the main obstacles to broader adoption is cautious investing by Cisco's corporate customers. Many of the purchases are still dependent on the return on investment level.

"We see things improving," he said, adding that he doesn't see a real turn in the market yet.

On the service provider side, consolidation in the industry is partly a result of the adoption of IP technology, Giancarlo said. Companies in the sector are buying each other up, from SBC Communications Inc.'s (SBC) acquisition of AT&T Corp. (T), to Sprint Corp.'s (FON) merger with Nextel Communications Inc. (NXTL). IP phone service is driving down costs, resulting in a drop in prices for consumers. To stay competitive in the lower pricing environment, companies need to merge to increase their customer base and stay competitive, he said.

Security is another issue Cisco has been vocal about. Companies aren't willing to invest in new networking infrastructure if there isn't adequate protection in place.

"Unless these networks are secure, they can't be up and running," he said.

One concern consumers have is the rise of spam and phishing scams on the Internet. Giancarlo said spam will be a "non-issue" in three years. Cisco and partners such as Yahoo Inc. (YHOO) and Microsoft Corp. (MSFT) are developing methods of countering spam, including "digital signatures." or limiting the amount of e-mails and recipients for users.

"We want to get to the point where insecurity is acceptable," he said. Although he noted that there can never be complete protection against security threats, he said technology will eventually catch up to the mounting threats.

Cisco recently traded at $17.95, up 6 cents, or 0.3%, on volume of 26.8 million shares. Average daily volume is 61.3 million shares.

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