Riverstone Networks Inc. (Nasdaq: RSTN)announced today that it has won a multimillion-dollar contract with cable operator Cox Communications Inc. (NYSE: COX) (see Riverstone Routes Cox). Terms of the deal were not disclosed, but the news was enough to edge the company’s stock up $0.58 (3.75%) to $16.05 on a day when the Nasdaq Composite lost 2.5 percent.

The deal is significant for several reasons. For one, Riverstone actually beat out market leader Cisco Systems Inc. (Nasdaq: CSCO) in the deal, according to Cox officials. Second, Cox is one of the leading cable operators in the market. And third, the cable market is expected to be one of the fastest growing service provider segments next year, as more cable operators provide data services via cable modems.

The deal calls for Riverstone to deploy hundreds of its RS line of edge routers throughout all 28 cable systems in the Cox network as part of an extensive program to create its own national, high-speed data provisioning system. While Cox officials wouldn’t give specific details, Jay Rolls, vice president of data engineering at Cox, did say that the deployment will take place over the next several months.

Rolls also says Riverstone is the only company providing Cox with gear for edge switching in its new network. Cisco’s 7600 router was in contention for the contract, but he says Cox decided to go with Riverstone for several reasons. One was cost. Riverstone offered a better deal on the gear. He also says Riverstone offered the same or better performance in areas like latency, and it offered a better support and service package.

“Riverstone’s pricing was competitive outright,” says. “We also liked the fact that we could get more custom care and service from Riverstone. Sometimes when a company is large, it can’t move as swiftly as a smaller player.”

Cox says it plans to use Cisco’s GSR family of routers in the core of its network.

The deal shows that Riverstone is making inroads against Cisco in the important edge-routing market. Cisco leads that market, with 60 percent market share during the last three quarters, according to Infonetics Research Inc. But that is down from previous years.

"A year ago [Cisco] had over 80 precent of the market,” says Michael Kennedy, managing partner at Network Strategy Partners LLC. “You know how that works. If people sense they are vulnerable, they won’t get the benefit of the doubt they’ve enjoyed with customers over the last five or ten years.”

The fact that Riverstone's product is targeted at a slightly different market segment may have helped it edge out Cisco. In an ISP network, customers need DS0 (64 kbit/s) and T1 (1.5 Mbit/s) interfaces. But in a cable network, the traffic is already aggregated into gigabit Ethernet pipes by the time it reaches the router in the cable head-end site, says Kennedy. Cisco, which has been very successful in the ISP market, is known for its DS0 and T1 aggregation, whereas Riverstone is known for its gigabit Ethernet interfaces.

Market share data gathered from Infonetics reflects this strength. While Riverstone comes in third behind Cisco and Juniper Networks Inc. (Nasdaq: JNPR) in revenue market share, it places second after Cisco in the number of ports shipped per quarter.

“Riverstone is known for its Ethernet ports, and those are generally cheaper,” says Kevin Mitchell, directing analyst with Infonetics. “So what these numbers mean is that they are selling an awful lot of ports, but, because Ethernet ports are generally cheaper than these other interfaces, they aren’t getting the same revenue as Cisco or Juniper.”

Cable operators are now a strategic segment of the telecom industry, because cable modems are beating DSL in the battle for broadband access in the United States. Cable operators are gearing up to take advantage of this new revenue stream. Right now there are more than 60 million cable subscribers, and only about 3 million of those are using cable modems. This means the market is only about 5 percent tapped right now.

But the operators face at least one big technical problem. They must upgrade their cable plants and build new infrastructure to link their networks to the Internet backbone. Currently, companies like AT&T Broadband, Comcast Corp. (Nasdaq: CMCSA, CMCSK), and Cox are using the Excite@Home (Nasdaq: ATHM)network to connect their cable head-ends with the peering sites of the Internet. AtHome ran into financial problems and has filed for bankruptcy.

Cox and Comcast announced in August that they would be terminating their contracts with AtHome as of June 4, 2002. Instead of partnering with a third party, these providers are building their own networks. AT&T owned a controlling interest in Excite@Home, with a 23 percent ownership stake and a 74 percent voting interest.

The new cable networks present an opportunity to sell routers. Riverstone and Cisco aren't the only edge-routing companies poised to capitalize on this situation. Juniper recently announced the acquisition of Pacific Broadband, a maker of cable aggregation equipment (see Juniper Buys Pacific Broadband ). The deal should help Juniper get its foot in the door to sell cable operators routers. Also, Unisphere Networks Inc. (Nasdaq: UNSP) has recently announced Ethernet support, which should make it more attractive to cable operators, says Infonetics' Mitchell (see Unisphere Intros Ethernet Edge Router).

While the cable market may be one of the only growth markets in the service provider business, Mitchell cautions that the impact on routing vendors needs to be kept in perspective.

“The cable market opportunity is growing,” he says. “But it won’t be huge or dominate the revenue stream. Edge routing vendors will continue to sell the majority of the gear to the tier-one players like Williams Communications Group [NYSE: WCG], Verizon Communications Inc. [NYSE: VZ], and Qwest Communications International Corp. [NYSE: Q].”

— Marguerite Reardon, Senior Editor, Light Reading
http://www.lightreading.com