Optical Oracle: Core Incompetence?

News Analysis Light Reading 5/21/2002

Capital spending is down, prices for bandwidth are declining, and the telecom carriers are announcing historic losses. At the same time, 13 players have gathered in the core IP routing market for the final showdown. In the end, only two or three will be left standing.

That's the grim reality painted in the latest Optical Oracle, Light Reading’s paid research service.

This month’s edition of the Optical Oracle concludes that there isn’t enough room for all the players trying to grab market share from Cisco Systems Inc. (Nasdaq: CSCO) and Juniper Networks Inc. (Nasdaq: JNPR), the two main players in the market. According to the report, Cisco, with its current 72 percent of the market, and Juniper, which has approximately the remaining 28 percent, are probably the only two companies that will still be making competitive core routers when the meltdown is over.

The report says the other companies proposing next-generation IP core routers don’t necessarily have bad products, but the equipment is costly, and there is a good chance that the ranks will be quickly thinned -- whether it be through shutdowns or acquisitions. The vendors covered in the report, in addition to Cisco and Juniper, are:

Alcatel SA

Avici Systems Inc.

Caspian Networks

Charlotte’s Networks Ltd.

Chiaro Networks

Foundry Networks Inc.

Hyperchip Inc.

Lucent Technologies Inc.

Marconi PLC

Pluris Inc.

Procket Networks Inc.

“Definitely more than half will disappear,” says Chris Bulkey, Optical Oracle's research analyst. “Cisco and Juniper might be the only ones to survive.”

Of course, this consolidation process has already begun. Only yesterday, Juniper announced that it will be acquiring Unisphere from its parent, Siemens AG (NYSE: SI; Frankfurt: SIE) (see Juniper Nabs Unisphere for $740M).

The main problem today is that the equipment vendors’ customers, the service providers, continue to struggle with huge debt loads, and many have already tumbled into bankruptcy (see Optical Oracle: More Carrier Cutbacks ). Another problem is that supply and demand of bandwidth are still out of balance, which has resulted in the prices for bandwidth plummeting. The main challenge is therefore to create equipment that can deliver more capacity at a lower price as well as create new revenue, the report says.

Traditionally, service providers have had to upgrade their networks with newer and better equipment every two or three years. In the current market, few want to keep up that pace of upgrades. That means cutting-edge startup equipment is not likely to be welcomed unless it introduces revolutionary cost savings. This is where major players like Cisco and Juniper have an advantage over the many startups trying to make it in this space.

Another thing that will separate the winners from the losers in this race is density, the report says, pointing out that just because a company claims to have the densest router doesn’t mean it actually does. The report, which examines the densities of the leading next-generation router products, concludes that they're not always all they're cracked up to be. In addition to density, the winning routers need to fill the provider’s requirements, fit into standard-sized racks, and meet weight and power consumption requirements. Having software stability is also a must, if the equipment vendor wants its core router to survive.

Feeding the core from the edge might actually be a safer bet than standing square in the center. Bulkey says that near-term, the edge router market is a better place to be. Building an edge router “require[s] less pure hardware muscle and more software finesse,” Bulkey writes in the report.

The report also provides analysis of public companies playing in the general IP market, including edge routing and switching players. These companies are:

Extreme Networks Inc.

Redback Networks Inc.

Riverstone Networks Inc.

Unisphere Networks Inc.

The report expects about half of these companies, all public except for Unisphere, to disappear before the economy starts improving. Some will be spun back into their parent companies, Bulkey says, while others will disappear through merger and acquisition activities.

— Eugénie Larson, Reporter, Light Reading
http://www.lightreading.com The current Optical Oracle, "The Core IP Report," profiles 10 public companies and seven private companies, including detailed product and financial analysis for each. For more information or to subscribe, go to www.opticaloracle.com. Editor's Note: Light Reading is not affiliated with Oracle Corporation.