June 5, 2003
More information is surfacing regarding the coveted Verizon Communications Inc. (NYSE: VZ) IP data contract.
Word on Wall Street is that Juniper Networks Inc. (Nasdaq: JNPR) has lost a significant chunk of the business to Cisco Systems Inc. (Nasdaq: CSCO).
Sources close to Juniper say Verizon informed the company last week that it would not be getting any of the core routing business and that it would only be receiving half of the business it had expected for its edge routers. The routing vendor has already been shipping some initial edge routing and core routing gear to the carrier.
Verizon announced its plan to build out its IP network last year (see Verizon Does Enterprise Data). At the time, talk of the contract helped boost both Cisco’s and Juniper’s stocks (see Verizon Talk Stokes Stocks). For well over a year, Juniper has been working this deal (see Juniper Still Working Verizon Deal). Some speculate that Juniper acquired Unisphere Networks last summer, in part, because Unisphere had established inroads with Verizon (see Unisphere Close to $200-300M Deal?).
According to several sources, the company had indeed won some business with the carrier. Verizon had already started deploying the ERX edge platform over the last couple of quarters. Based on the previously negotiated contract, Juniper was looking to Verizon to bring in about $15 million to $25 million this quarter, say sources. Most analysts anticipate Juniper to report $157 million to $160 million in total revenue in the second quarter.
Juniper’s loss appears to be Cisco’s gain. Originally, the companies were supposed to split the IP buildout, in a series of contracts valued at about $300 million over the next two to three years. Juniper had been expected to take half the edge and also a sizable chunk of the core business. But that has all changed, say sources.
The $70 million to $80 million core router contract will now go entirely to Cisco. As for the edge router business, Cisco is expected to eat into half of the business Juniper had expected. While analysts estimate that Verizon spent almost $10 million on Juniper gear last quarter, it’s expected to only generate about half that this quarter.
So what happened? Cisco went back to Verizon and heavily played its enterprise hand, say sources. It told the carrier that it could leverage its existing relationships with enterprise customers to help Verizon win business. The company has used this sales tactic successfully with other regional Bell operating companies (RBOCs), including BellSouth Corp. (NYSE: BLS). In an interview earlier this week discussing Cisco's recent optical win with BellSouth, Sameer Padahye, vice president of worldwide service provider marketing for Cisco, explained how the two work together (see BellSouth Chooses Cisco (and Lucent)).
“When enterprise customers are building their LAN and WAN, they are looking for certain services,” he said. “Because of our understanding of the enterprise, we can match these requirements with services available from the carrier. We also enable the carriers to identify where the demand is to drive new services.”
While not much is known about Verizon’s decision to award the core routing contract to Cisco, sources say that protocol support was a key sticking point in its choice of edge routing gear. Many enterprise customers, which also happen to be Cisco routing customers, use Cisco’s proprietary Interior Gateway Routing Protocol (IGRP) and Enhanced Interior Gateway Routing Protocol (EIGRP).
These protocols are used in large networks to learn the best routes through private and public IP networks. The latest, enhanced version, EIGRP, also provides link-to-link, protocol-level security to avoid unauthorized access to routing tables. Because the protocols are proprietary, Juniper cannot support them -- so Verizon did not select Juniper's gear to service these enterprise customers.
That said, Juniper will still be used in Verizon’s DSL network. Traditionally, the carrier has deployed SMS gear from Redback Networks Inc. (Nasdaq: RBAK) for DSL aggregation and remote access. For the last couple of quarters, however, the carrier has started deploying Juniper’s ERX platform for new buildouts.
But, according to one source, Juniper hurt its pricing position by offering a 75 percent discount on its M-series and T-series routers to win more business in the core. The plan seems to have backfired, and instead of buying Juniper’s core products, Verizon asked for the same deep discounts on the ERX edge products. This could hurt Juniper’s margins going forward.
“A lot of times when you know you’re going to lose some business, you’ll discount the products drastically,” says one source close to the Cisco sales team. “But in this case, Juniper screwed up, because they were also trying to win business in another part of the network.”
Juniper is rumored to be winning some business with another RBOC, SBC Communications Inc. (NYSE: SBC). The carrier, which has already announced a contract with Cisco for its core routers, is expected to deploy Juniper’s ERX for DSL aggregation and broadband remote access. Revenue on this contract is not expected to begin until later this year.
Cisco, Juniper, and Verizon all declined to comment for this story.
— Marguerite Reardon, Senior Editor, Light Reading
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