December 1, 2004 4:00 AM PST

Cisco's core router lead hangs on new product

A price war has erupted over high-end routers that power the Internet's core, putting pressure on Cisco Systems just as it begins to push its latest and greatest product for this small but important market.

At stake are deals with large telecom carriers that are beginning to open their wallets for network upgrades that can support new high-bandwidth applications and services. Cisco's main rival in core routers is Juniper Networks, a tenacious upstart that has steadily stolen market share over the years, including recent wins with big Cisco customers.

Cisco is counting on its next-generation core router, the CRS-1, to start winning deals back. But while analysts said they believe the CRS-1 appears to have closed the technology gap with Juniper, some warned that customers are now focusing more on cost than performance, making Cisco's job tougher.

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What's new:
Cisco continues to lose business in the core IP routing market to rival Juniper Networks. Most recently Cisco has lost business with two key customers: AOL and China Telecom.

Bottom line:
Sales of Cisco's next generation router, the CRS-1, need to kick in to ensure that Cisco stops losing marketshare.

"Most carriers don't see a lot of difference between the products that Cisco is offering and the ones from Juniper," said Tal Liani, an analyst with Merrill Lynch. "So in a lot of cases, it's coming down to price."

Core routers sit in carrier backbones, shuttling millions of IP packets across the Internet. According to Infonetics Research, in the past year Cisco's share has dipped 14 percent in the market for core routers. Juniper's share has jumped 16 percent since last year.

While the core-router market makes up a fraction of Cisco's $22 billion a year business, it is still important to the company's strategy of wooing service providers. Analysts agree that it would be a devastating blow for the networking giant to lose its tight grip in a market that currently only has two viable players: Cisco and Juniper.

"The fact that Cisco has lost some market share isn't that critical, although I'm sure they want as much of the market as they can get," said Timm Bechter, an analyst with Legg Mason. "The danger for Cisco is if they continue to lose market share at the high-end, and the lower-end of the market gets commoditized."

Pay to play
As broadband deployments and new IP services such as IP telephony increase traffic on the Net, carriers find themselves on the cusp of a major equipment upgrade cycle. Carriers are already looking toward next-generation routers that will provide more capacity and flexibility and better reliability.

Cisco's answer to the next generation core is the CRS-1, a hefty, expandable router that took four years and $500 million to develop. After years of speculation, the product finally came out of the shadows in May. The router, outfitted with a new operating system, was designed to replace Cisco's aging Gigabit Switch Router 12000 routers.

Due to long testing and sales cycles, the CRS-1 has only recently begun shipping. Cisco claims that it has sold the product, which costs $500,000 to $1 million, to four customers. It also said it's being tested in more than a dozen carrier networks. So far, the company has not announced who the customers are. When the product was first announced, Sprint, Deutsche Telekom, NTT Communications and MCI were testing it.

The next few quarters will be critical for Cisco as carriers evaluate the CRS-1 against Juniper's offering, say analysts. But with Juniper's momentum in this market, it won't be a cakewalk for Cisco.

Cisco is bullish about the product's prospects.

"We are pleased with the positioning and mind share of our new routing products, including the CRS-1 router," said Jim Brady, a spokesman for Cisco. "The feedback we have gotten from trial customers and the four paying customers on the CRS-1 has been strong."

Juniper's edge
Juniper, which introduced its next-generation core router, the T-640, more than two years ago, offers similar features, capacity and scalability. The company has wasted little time capitalizing on its head start.

The most recent evidence of Juniper's growing influence in the core is a deal that Juniper is finalizing with Time Warner's Internet service provider, America Online. According to sources close to the talks, America Online, which has been rumored to be testing Cisco's CRS-1,

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