December 1, 2004 4:00 AM PST

Cisco's core router lead hangs on new product

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plans to replace a large number of its existing Cisco routers with M-series and T-series routers from Juniper. Cisco and AOL have a longstanding marketing and technology relationship. The deal was first reported on Monday on TheStreet.com.

The deal with Juniper extends a relationship that the two companies have had since last year. In January, Juniper's CEO Scott Kriens announced that AOL had bought a handful of M-series and T-series routers. The deal currently being finalized is worth considerably more than this earlier deal, say sources.

Neither AOL, Juniper, nor Cisco would comment on the pending deal. AOL insisted that it plans to continue its relationships with all of its long-term infrastructure providers, including Cisco.

But AOL isn't the only Cisco customer that has turned to Juniper for core routers. Earlier this month, Juniper announced it had won a deal with China Telecom, the largest wireline telephone provider in China, to build a significant portion of the carrier's new IP backbone, known as ChinaNet Next Carrying Network, or CN2. Cisco has been a primary equipment supplier to China Telecom since it began building its IP network more than five years ago.

Cisco claims it has retained a piece of this business, but analysts believe that Juniper has gotten the lion's share of the core router business in this deal, which some analysts speculate could be worth more than $100 million.

"Juniper definitely won the largest share of this contract," said Mark Sue, an analyst with RBC Capital. "Juniper is a tough competitor, and it shows in the market share figures. They've gotten a lot of momentum, particularly in Asia."

Still, Cisco did not walk away from China Telecom empty-handed. The networking giant won a significant portion of the carrier's edge-router build. What's more, Cisco also is supplying the carrier with metro optical gear.

Mixing it up
Merrill Lynch's Liani said the China Telecom deal reflects an overall trend in the carrier market. Other network contracts, including the U.S. Defense Department's Global Information Grid Bandwidth Expansion (GIG-BE) deal and Verizon's new IP network, have been divvied up in a similar fashion.

"Nearly half of the carriers out there today are using Juniper routers in the core and Cisco routers at the edge," he said.

"Nearly half of the carriers out there today are using Juniper routers in the core and Cisco routers at the edge."
--Tal Liani,
an analyst with Merrill Lynch

So far, all of the business Cisco has lost to Juniper in the core has been based on evaluations of Cisco's older core routers versus Juniper's newer T-series routers.

In the past, when carriers have bought core Internet routers, decisions were based primarily on specifications and technology. But Liani said the playing field has changed recently, and more carriers are focused on pricing. That means that more deals are now being decided based on which vendor can provide the biggest discount, Liani added.

Earlier this year, Cisco and Juniper went head-to-head in a bidding war for a contract with the Israeli army. Eventually, Juniper gave the bigger discount, reducing its equipment from a list price of $100 million down to $20 million, said one source familiar with the talks.

Similar anecdotes have been told about other deals.

In the AOL deal, TheStreet.com reported that Juniper has offered to give away about $40 million worth of equipment and buy back $1 million of existing equipment, to win the deal.

Cisco executives have already acknowledged in conference calls earlier this year that the core-routing market has gotten more price competitive. The company expects to see even more pricing pressure as competitors in Asia start to step up their efforts. But so far, the deep discounts have not affected gross profit margins on either the Cisco or the Juniper side, Liani said.

The true test of Cisco's mettle will be over the next few quarters, as more carriers finish evaluations of the CRS-1.

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