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Optical/IP

Telco Processing Revolution

Take Lucent Technologies Inc.'s (NYSE: LU) earnings. Please! (See Lucent Dips on Q1 Numbers.)

Then take Juniper Networks Inc.'s numbers (Nasdaq: JNPR). There were plenty (see Juniper Counts Q4 Strong). The funny thing about these two companies is that they are now partners. As we've pointed out before, Juniper's engineered a masterful plan to pick off Lucent's customer base (see Another LU-LU).

One company is growing, the other is not. Why this continues to be a mystery to some people perplexes me. It's as clear as night and day: Juniper has occupied the high-value, high-performance service provider routing and security space – the fastest growing and most promising segment of the telecom industry. As Juniper CEO Scott Kriens says, they're in the "sweet spot."

Meanwhile, Lucent remains stuck in the legacy circuit-switching businesses. Yes, Lucent is trying to salvage its business around next-generation wireless technology and even appears to be making a decent go at it (see Cingular Confirms 3G Trio). But like a large family living on a single paycheck, it struggles to meet the bottom line in supporting some 30,000 employees – and masses of pensioners. A one-product wonder ain't going to cut it. It needs a portfolio of next-gen infrastructure products. And for that it's partnered with... Juniper.

The reseller deal with Lucent looks to be a great deal for Juniper. The company announced last night that, for the first time, its business with Lucent reached 10 percent of its revenue.

Juniper's Kriens, in full recognition of Juniper's sound position as a routing kingpin, sounded unusually glib on Juniper's conference call last night, almost mocking the competition. Kriens says Juniper will continue to occupy the data processing space, staying away from cutthroat businesses such as physical transport.

"You don't make money digging trenches," Kriens said. "You make money in processing the data. We are in the virtual business."

Where does this all lead? To lots of pain for those in the physical, non-virtual world, as Kriens describes it.

"Let the flailing continue," said Kriens, predicting more failure and consolidation in the communications business, and sounding quite confident that Juniper would be a winner.

Kriens's point is that Juniper has no interest in moving into equipment markets such as access and transport, a thought that must have been painful to some competitors that have been banging their heads against that wall (including Lucent).

Therein lies the beauty of a Juniper conference call. Kriens is enraptured with the technology and communicates articulately where it is going. He's a technologist at heart.

Part of this vision springs from Juniper founder and CTO Pradeep Sindhu, who thinks of Juniper more as a "processing" or "computing" company than as a networking company. Sindhu says the challenge for Juniper is in processing and securing data, rather than just moving it. Juniper is trying to automate the way the network "thinks."

This vision poses some terrible dilemmas for those companies hoping to make money on the FTTP spend, in which their margins are sliced to the bone by powerful incumbent carriers that need to squeeze every dollar out of their capital spending budgets. Kriens has a point: If you don't add processing power, are you adding value? If you're selling a dumb fiber widget, is there any way to differentiate? In short, it's pretty hard (see FTTP Influenza).

If you're not virtual, as Kriens defines it, and in the business of processing, you're at high risk of becoming a commodity. I suppose a lot of people who listened to Juniper's conference call might have lost some sleep last night. Expecially those in the trenches.

— R. Scott Raynovich, US Editor, Light Reading

paolo.franzoi 12/5/2012 | 3:29:20 AM
re: Telco Processing Revolution
The Chinese will turn routing and security into a commodity. Then routing will be a low margin business.

seven
rbkoontz 12/5/2012 | 3:29:18 AM
re: Telco Processing Revolution Will last another 2 years, then drop 5-10% per year when the Chinese begin to build reliable products. Then Kreins will walk with his billions. JNPR employees should enjoy this dominance while they can (read: sell your stock!!!)

The ethernet switching market will be the first to collapse in 2006, followed by edge routers, and finally core routers.
Krypton_Blue 12/5/2012 | 3:29:11 AM
re: Telco Processing Revolution It's easy to dispense savvy business decisions when you're at the top ...warranted or not. The true test will be... what will Juniper do when China and India and perhaps Russian tech companies commoditize these "intelligent processing" routers? In the end, just like Nortel, Lucent and others got hit by Chinese low cost products (which are becoming more & more reliable) ...so will Juniper. Technology is no longer in the hands of a few and most companies get all or most of their h/w from the same global suppliers. Dominance in Telecom product design is short-lived but arrogance is not ...I hope Juniper sees the storm coming where others did not ...no more than 2 years away. Probably less.

It will only be then that Juniper can be judged for its foresight, creativity and business savvy. That's the real test!

Krypton_Blue
DocGonzo 12/5/2012 | 3:29:04 AM
re: Telco Processing Revolution This reads more like "Juniper and LR, an IP love story".

As others have stated, the commoditization of IP routing is inevitable. Subsequently, Juniper needs to develop more sophistication beyond their fundamentals. Give Juniper credit for their strategy, execution and results. They are building a company that should endure for years to come.

I will not defend Lucent's current state of affairs. But it is a herculean if not impossible task to try to evolve such a large company that is deeeply rooted in a dying technology. Wind the clock back eight years ago and you would hear John Chambers (among others) predicting the demise of circuit switching and companies like LU and NT. These two both have had their share of trouble and made attempts to re-position for the IP revolution. Both were in fact early investors in Juniper. But fear not as there are companies that have successfully evolved; IBM is a classic example.

The JNPR to LU comparison made in this article is awful. In the absence of "a portfolio of next-gen infrastructure products" what else would you have LU do? At least they partnered to provide their customers with a more complete solution instead of allowing Cisco to accelerate Chambers' prophecy.

It is not difficult to shine when you are in the "sweet spot" of your endeavor. But. let's see what story history will tell after Juniper experiences a similar evolution.

Doc

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