Cisco virtually created the voice over IP (VoIP) market and has identified the technology, and its wireless extension, voice over WLAN, as one of its six key areas for reveue and earnings growth, as its core backbone business starts to slow. But the company is facing intensifying competition from smaller players as VoIP increasingly overcomes its technological clunkiness and becomes a respectable enterprise option.

When Cisco lost its flagship VoIP customer Merrill Lynch recently, it was clear that it will need to fight hard to keep its huge market lead. Voice specialists such as Avaya are making inroads on Cisco's dominance here; Avaya has recently formed a partnership with Motorola that could prove a powerful force in wired and wireless VoIP. More and more stories abound about bugs in Cisco's equipment, just as Cisco knows that, in a converged world, it needs to improve its share of the enterprise voice market. It currently has only 2% of this space, compared to 90% of routers and 70% of switches.

Now it sees a new threat from the voice giants, notably Siemens and Nortel, which are offering integrated systems that combine traditional PBX and IP telephony - something Cisco offers, but only reluctantly. On the other side are the IP-only start-ups that bypass the phone network altogether, including names like Shoreline Communications.

As it sees its market share slip, Cisco is turning to increasing the advanced features in its systems, announcing the world's first color VoIP handset last week and incorporating Wi-Fi options. Not that it should panic yet - it has 50% share of the VoIP handset market and over 70% of the back end equipment, but this is a noticeable drop on a year ago, as competition and customer churn increase.

The main problem, analysts say, is that Cisco was early into the market and inevitably ran into beta test hitches - those customers are now renewing their systems and their mixed experience encourages them to look elsewhere. It has also been accused of fixing bugs slowly, and has lost some business through its insistence on a pure IP play - there has been an unexpected rise in interest in hybrid PBX/IP systems, which clearly benefit the voice companies.

VoIP remains a small part of the total corporate telephony picture but it is a rapidly growing one, up from 3% of enterprise phone lines a year ago to 6% this year, according to Canalys. Cisco says it replaces traditional lines with VoIP at the rate of 5,000 lines a day now, twice the pace of a year ago.

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