Cisco Gets a CESR Wakeup Call

With the carrier Ethernet switch/router (CESR) market poised to more than double to $4.3 billion in 2012, it has become an attractive investment opportunity for vendors seeking to capitalize on Ethernet as the technology of choice for service and network convergence. Just last week, Redback Networks Inc. – now part of Ericsson AB (Nasdaq: ERIC) – became the latest firm to introduce a CESR platform. (See Redback Targets AlcaLu – Again!.)

While the industry has been abuzz about Provider Backbone Transport (PBT), not much has been written about the changing CESR landscape and what it means for market leader Cisco Systems Inc. (Nasdaq: CSCO). Let's put things in perspective.

Four years ago, Cisco owned 54% of what was then an fledgling CESR market worth $26 million (in the first quarter of 2004). It faced only three revenue-generating competitors: Atrica Inc. , Extreme Networks Inc. (Nasdaq: EXTR), and Riverstone Networks, now part of Alcatel-Lucent (NYSE: ALU). The MEF was nine months away from launching its certification program. Relatively few major operators had deployed CESRs for Ethernet business services, and even fewer for triple-play services.

Fast-forward to today. Cisco has watched its CESR share soar to a high of 58% in the third quarter of 2007, then settle back down to 53% of a $530 million market in the first quarter of 2008 – as detailed in the latest edition of Heavy Reading's Carrier Ethernet Switch/Router Quarterly Market Tracker.

While still holding a commanding lead, Cisco now faces competition from 19 vendors delivering CESRs or planning to deliver them before the end of 2008, including No. 2 Alcatel-Lucent, No. 3 Foundry Networks Inc. (Nasdaq: FDRY), No. 4 Hitachi Cable Ltd. , Huawei Technologies Co. Ltd. , Extreme Networks, Juniper Networks Inc. (NYSE: JNPR), Nokia Networks , Nortel Networks Ltd. , Ciena Corp. (NYSE: CIEN), and Redback. More than 400 data and optical systems from 75+ suppliers have received MEF certification. At least 444 operators and other entities have deployed CESRs to support enterprise, IPTV/VOD, and cellular/WiMax backhaul services.

Given the intensifying competition, it would appear time for Cisco to get more ambitious about CESRs. Yet the vendor has made no major CESR product announcements in recent quarters and reportedly is not pitching its flagship CESR product (the Catalyst 6500) much for new deals. Cisco's centerpiece solution is the 7600, which overlaps into the CESR space but really falls into the Ethernet Services Edge category. Folks have been waiting months for Cisco to launch a new CESR platform.

Contrast this with moves made by Cisco's competitors. Alcatel-Lucent has introduced significant bandwidth, scalability, and service-enabling enhancements to its 7450. Ciena has been shipping the LE-3300 for revenue in major accounts since the third quarter of 2007. Juniper began shipping the MX480 and MX240 for revenue in the fourth quarter of 2007 and the first quarter of 2008, respectively. ECI plans a generally available release of its MEF-certified 9000 family in June 2008. And Redback is turning up the heat with its new SM 480.

Customer news? Cisco has made only one notable CESR customer announcement in the past 18 months – a deal with Sonaecom . This contrasts with dozens of new customer wins for Alcatel-Lucent, with operators such as Brasil Telecom Participações SA (NYSE: BRP), Chunghwa Telecom Co. Ltd. (NYSE: CHT), Portugal Telecom Inovação SA (PT Inovação) , and SFR ; several Tier 1 wins for Foundry; and multiple big customer wins for other competitors.

I am looking forward to getting the latest scoop from Ethernet players roaming the NXTcomm08 floor. Perhaps we'll learn more about Cisco's plans at the show.

— Stan Hubbard, Senior Analyst, Heavy Reading

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