Cisco preps new enterprise routers

Next week, Cisco rival Juniper Networks plans to launch a line of routers targeting the corporate market, according to sources close to the company. The J-series routers, which have been anticipated for the last few months, will take on some of Cisco's hottest-selling products, including its 1700, 2600 and 3700 branch office routers.

Cisco is fighting back with two next-generation IP (Internet Protocol) routers designed for the enterprise, sources familiar with the products said.

A Cisco representative declined to comment on the unannounced products. But sources said they will replace Cisco's 1700 and 2600 routers.

Anthony Caputo, CEO of SafeNet, a Cisco partner that supplies security technology for its switching and routing products, said the new routers will incorporate for the first time hardware embedded security features such as a virtual private network (VPN) and a firewall--products that have until now been sold separately as software modules. They will also include new microprocessor chips that handle voice traffic, according to another source close to the company.

"I think it's clear from the things that Cisco has been doing that they are embedding security into their switches as standard features," Caputo said. "By adding the security right into the design, they can eliminate extra cost. We see among networking companies and general IT, a clear trend to embed security into products."

Cisco's enterprise router business, unchallenged for years, could soon face pressure from rivals intent on growing revenue by moving into the market and stealing sales.

The company is responding with new product enhancements aimed at cutting competition off at the knees before it can get started. Cisco's products work well, and the company has a good reputation for customer service, making the barrier to entry into the market extremely high. Coming improvements could make it even higher.

But Cisco could face a genuine fight from Juniper, a company that has already proven its mettle in the telecommunications carrier market.

Analysts said Juniper's success has given it unusual credibility for a network gear supplier among enterprise customers. Corporate buyers have historically leaned away from newcomers out of fear that they might not be able to survive long against Cisco--a near monopoly responsible for some 90 percent of enterprise router sales, according to The Yankee Group.

"Juniper is the biggest threat to this market for Cisco," said Joel Conover, an analyst at Current Analysis. "They have a reputation through their service provider products of having good, quality software. None of the other enterprise router vendors have that."

Cisco, which has faced no serious competition in the enterprise router market for the better part of a decade, has made only a few major changes in this product category over the years. It has added software features for VPN and firewall capability, along with special acceleration modules that process packets in hardware. But it hasn't introduced a next-generation router. As customers focus more on security and add voice to their IP networks, they are looking for more features in these routers, analysts said.

"Cisco hasn't had any significant pressure in the enterprise routing market for the past seven years," Conover said. "New products with enhanced feature sets are the only way the company will be able to hold onto its current customer base."

Cisco's $500 million router
In a sign that times are changing, top executives at Cisco including CEO John Chambers and Chief Development Officer Mario Mazzola recently announced that the company would be making significant product announcements throughout the year. The first major release arrived last month, with the launch of a carrier class router, the CRS-1.

The CRS-1 product, which took four years to develop at a total cost of $500 million, is designed for ultra high-end service providers and reaches a routing capacity of up to 92 terabits per second. Cisco developed brand-new software for the product as well.

Analysts said the new enterprise routers could have more of an immediate impact on the company than the much hyped CRS-1 announcement.

"The CRS-1 gets Cisco into a new super high-end router market," said Zeus Kerravala, an analyst with The Yankee Group. "Cisco's enterprise routers are the cornerstone of their business. Introducing new products in this category is more about maintaining their dominance."

The market for the CRS-1, which is targeted at high-end service providers, is roughly $750 million to $800 million per year, according to Stephen Kamman, an equities analyst with CIBC World Markets. By contrast, the market for low-end branch office routers, such as the 1700, 2600 and 3700 models, is about $2 billion to $2.5 billion per year, he said.

Kamman estimated that Cisco will bring in roughly $5.3 billion in total router revenue in 2004. All told, the branch office router market makes up roughly 40 percent of Cisco's overall router sales, he said.

"This is a really healthy market for Cisco," Kamman said. "They are making a significant amount of revenue here, and they've got pretty good profit margins. It's really important for them to stay ahead of the curve to keep their lead."

Cisco is bracing for one of its biggest threats in this market in years next week, when Juniper is expected to unveil its first enterprise router products.

Juniper's entrance into the corporate market is a shift in the company's overall product strategy. Since its inception in 1997, Juniper has targeted the Internet service provider and telephone carrier markets. The strategy has worked well for the company. It now represents about 30 percent of all router sales in this market every quarter. It has carved out this niche at the expense of Cisco, which for the most part owns the other 70 percent of the market.

In February, Juniper took the first step in changing this service provider-focused strategy with the acquisition of VPN and firewall maker NetScreen Technologies. Since then, Juniper has publicly stated that it plans to enter the enterprise market.

Asked about the expected release next week, a Juniper representative declined to comment.

While most analysts agree that Juniper's products will likely be looked at closely by corporate customers, they are by no means a shoe-in as a second supplier to Cisco. Juniper still has several hurdles to get over before it can challenge Cisco in a significant way.

For one, the first release of the new Juniper routers will not have security features from NetScreen integrated into them. Conover said he wouldn't expect the NetScreen features to be added into the product for at least another six to 12 months. This is a strike against Juniper considering that Cisco is making security features standard on its new routers expected out by the end of the summer.

"Routing requirements for the enterprise are so different from the service provider market," Conover said. "For Juniper, it's like going back to the drawing board. But because their software is stable, customers can be assured it won't crash."

Another challenge for Juniper is the distribution of its products into corporations and the support of these customers. The company will likely use NetScreen's established channel, but it will have to invest more into its service and support to accommodate a new set of customers.

"Service provider customers are much more technically sophisticated than their counterparts in the enterprise," Kerravala said. "Cisco has always been known for its customer service, so this could be tough for Juniper."