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Networking gear makers vie for federal cash

President Bush's proposed federal budget for 2005 writes in a smaller rise for IT budgets than in recent years--a situation that should spur competition among networking equipment providers.

After several years of large spending increases on information technology in the federal government, networking gear providers are preparing for a smaller rise in the 2005 budget--a situation experts say should spur more competition.

Last week, President Bush released a proposed federal budget, which asked the U.S. Congress to allocate a record-breaking $2.4 trillion. In the budget, IT spending and funds for fighting cybercrime got a boost.

But compared with years past, the increase in IT funding is small. As a result, experts say competition among networking equipment vendors will heat up, as they vie for a slower-growing portion of the spending pie.

"The budget will make the federal contracting marketplace more competitive, given that companies need to grow their top and bottom lines at a much higher rate than federal outlay percentages," said James Kane, CEO of the Software Productivity Consortium, an industry group that represents federal defense and aerospace contractors.

President Bush's proposal calls for a total IT budget of $59.8 billion, slightly more than the 2004 allocation of about $59.1 billion. This compares with bigger rises over the past three years: The IT budget climbed roughly $12 billion between 2001 and 2003, with the biggest jump coming in last year's budget, when funding went from about $49.8 billion the previous year to about $57.1 billion.

Juniper Networks doesn't expect the smaller rise in government IT spending to have an impact on the growth it has seen in federal sales, said Dubhe Beinhorn, a vice president at Juniper Networks' new Juniper Federal Systems division. The company, which has traditionally sold its gear to carriers and Internet service providers, developed the division in 2003 to address government opportunities. The company won't say how much revenue it generates from this segment, but it is pouring more resources into the market, increasing its federal team to 35 people.

Beinhorn said Juniper's strategy is to win new business and compete for multiyear contracts of rival Cisco Systems that are now coming up for renewal. The proposed budget could intensify competition, she noted.

"Whenever budgets stop growing, competition increases," she said. "But we think federal customers are happy to have an alternative to Cisco."

Experts have suggested that Juniper is acquiring NetScreen Technologies to help bolster the appeal of its end-to-end security product to federal agencies.

Juniper intends to focus sales efforts on segments of the government that have the largest portions of the budget, such as defense, and those that are expected to increase spending, such as homeland security, Beinhorn said.

Other networking gear makers are also pitching for federal dollars. Foundry Networks, an Ethernet-switching vendor, has attributed much of its profitability over the past year to strong federal government sales.

And during a Cisco's earnings conference call in February, CEO John Chambers said government sales continue to be an important part of the networking gear maker's overall enterprise business, making up between 15 percent and 20 percent of its total sales in any given quarter.

The growth in federal IT spending in earlier years was a reaction to the Sept. 11, 2001, terrorist attacks, after which President Bush laid out initiatives for improving security and communications among government agencies. The Department of Homeland Security was created to help consolidate efforts among local and state authorities and federal law enforcement and intelligence agencies.

These IT budget rises came at a time when many large corporate customers, telecommunications and Internet service providers were slashing technology spending. The additional federal spending helped many technology companies weather one of the worst economic downturns in recent history.

In the proposed 2005 budget, the Department of Defense will take about $27.4 billion of the total. The Homeland Security Department will get about $4.4 billion. While funding for most federal agencies is likely to grow by only a few percent, agencies such as the Department of Justice and the Homeland Security Department are expected to increase their spending by as much as 10 percent.

"The federal market is still attractive," the Software Productivity Consortium's Kane said. "There's still about $60 billion up for grabs, and some agencies, like Homeland Security, are increasing spending within the overall budget. But I think companies that are addressing this market will have to work harder to sustain the growth they've seen over the past couple of years."