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Cisco, SBC Ink Deal for Gear and Outsourcing

Cisco Systems and SBC Communications Tuesday said they have entered into a non-exclusive, three and a half year strategic sales and marketing deal that is likely to lead to a variety of enterprise outsourcing contracts.

Cisco networking equipment will be used by SBC as it offers a variety of networking services to clients, effectively constructing and managing networks for companies.

The partners in the deal claim corporate clients will be able to slash their costs and outsource non-strategic contracts. This marks a further push by SBC to raise its revenues by offering a variety of services for enterprise networks. No financial details were disclosed.

"These companies are aiming to tap into one of the biggest markets, namely managed services and outsourcing. AT&T and every other service provider is focusing on it. But enterprise customers have very different needs and the complexity of the business is getting way beyond the ability of corporate IT managers to manage it, which is a gaping opportunity, which SBC and Cisco are trying to jump into," says Jeff Kagan, an independent telecom analyst, based in Atlanta.

SBC is the second largest U.S. local telephone company and has said it has seen annual sales growth of 25 percent in its managed services business. The San Antonio-based telco will use Cisco gear as it moves to integrate voice, data and video, as well as offering advanced network security, wireless local area networks and managed Web and storage area network hosting.

Cisco has made it clear that it wants to be a competitive force selling equipment for directing Internet traffic to various telephone companies across the country. Cisco has said that it wants to increase telecom accounts from its current level of 20 percent to more than 40 percent over the next five years.

"Cisco is not as tapped into the local phone companies, including the RBOCs (Regional Bell Operating Company) and ILECs (Incumbent Local Exchange Carrier), as much as they want to and this is a high-profile deal they would like to duplicate with other phone companies," says Kagan.

"This SBC-Cisco announcement is an extension of an existing agreement signed a few years ago to partner equipment and services, and the markets reaction to it has been lukewarm, so far. We've not seen a lot come out of it, but it still holds a lot of potential," added Kagan.

Within the networking market, Cisco's deal with SBC isn't likely to be welcomed from Lucent and Nortel , who have been the primary vendors of networked equipment for the local telephone marketplace.

"It's a wakeup call to Lucent and Nortel, because Cisco has broken into their core business of selling gear to the telcos," Kagan said.

While telecom demand for network gear has been slack in recent years, Kagan says local phone companies have to modernize to remain competitive and will likely increase network equipment spending in the coming years.

Both Lucent and Nortel were trading lower Tuesday, neither company's stock is above $2 per share.