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Cisco's $500 million router

The company's new high-end router hits the market this summer, but the networking giant isn't likely to see any revenue from it for at least six months to a year.

MOUNTAIN VIEW, Calif.--After four years and $500 million in investments, Cisco Systems unveiled its high-end router--but it could be six months to a year before it starts seeing any revenue from the product.

The router, dubbed the Carrier Routing System-1 (CRS-1), is designed for carrier networks that handle the highest volumes of Internet traffic. It is the first product engineered by Cisco that will allow several boxes to be clustered together to function as a single router.

CRS-1, which previously had been code-named HFR for Huge Fast Router, also is the first core router to offer 40 gigabit-per-second optical interfaces. Rumors and speculation about the product have circulated for almost a year.

Four carriers, including Deutsche Telekom, Sprint, MCI and NTT Communications, were at a Cisco event here Tuesday to kick off the router. The carriers said they have been working with Cisco for the past few years to develop the product, which can be clustered through a switch fabric chassis to reach a routing capacity of 92 terabits per second. One gigabit is a billion bits; 1 terabit is a trillion bits.

While all these carriers have already tested portions of the router, none of them indicated that they would be purchasing one this year. Cisco said the CRS-1 will be commercially available in July.

It's typical for carriers to test new core routers for several months, but the sales cycle for the CRS-1 will be lengthened by the fact that Cisco also has built brand-new software for the product. Sprint, which has had the hardware and software in it labs since the summer of 2003, started running live traffic over a CRS-1 on Sunday in its San Jose, Calif., facility. But it plans to continue testing the product even more.

"We will continue testing the CRS the rest of this year and probably into 2005," Kathy Walker, executive vice president of network services for Sprint, said in an interview. "Then we will look at developing a deployment plan."

Walker said that Sprint, which uses Cisco routers exclusively in the core of its IP (Internet Protocol) network, will continue to purchase Cisco's previous generation of routers, the Gigabit Switch Router (GSR). The company has already begun using the GSR 12800, which was introduced in December 2003.

One key issue for Sprint to work out before it can start using CRS gear is what to do with the existing routers in its network, Walker added. The company has invested millions of dollars in the previous versions of Cisco routers.

"One CRS replaces eight GSRs," she said. "But I may already have seven GSRs in my network that I've already paid for. I have to figure out what I am going to do with them before I buy a CRS. Sometimes it doesn't make economic sense to put in something new."

The cost of the new product hasn't been finalized yet, but Cisco said the base price will likely be around $450,000. Walker estimated that a fully loaded system could easily cost about $1 million. Considering the high cost of these devices, she said, it's unlikely Sprint would purchase one with only the hope of growing into it. The company plans to purchase CRS-1 routers when it is fully ready to begin converging traffic from its different voice and data networks onto a single Internet-based backbone.

Other carrier customers also said they don't expect to be buying the new Cisco router this year. MCI, which demonstrated Cisco's 40-gigabit optical interface at the event, said it will be at least six months before it can even consider buying the CRS-1. MCI will begin full commercial testing of the product in June or July. But there is a possibility that Cisco may not actually win over MCI with the product.

"We plan to test it vigorously," said Jack Wimmer, a vice president of network architecture and advanced technology for MCI. "It's hard to predict how long this will take. We won't make a decision on whether or not we will deploy the product until we see how it stacks up to equipment from other vendors."

MCI already uses core routers from Cisco as well as from Juniper Networks, Cisco's closest competitor. In terms of building out its next-generation core network, Wimmer said MCI is evaluating products from various vendors including Cisco, Juniper and Avici Systems. He also said the company is evaluating gear from start-ups, although he wouldn't name them. Several companies including Caspian Networks, Chiaro Networks, Procket Networks, and Hyperchip have all developed routers in this high-end category.

Reality check
So how long will it take for Cisco to make its money back? Executives say that's hard to tell.

"It purely depends on the growth of the Internet," John Chambers, CEO of Cisco, said in an interview after the event. "The key is how fast the Internet grows. A conservative estimate is that it's growing 100 percent per year, but then you look at Japan, and they are having growth of 400 (percent) to 500 percent per year."

Mario Mazzola, chief development officer for Cisco, admitted in an interview that it could be a long time before the company fully makes its money back on the CRS-1. But he said the investment was well worth it, considering that some of the hardware and software developed to make the product more reliable can be ported to other Cisco products.

"This is a long-term type of investment," he said. "We don't expect to make a return on the investment in one year. It's hard to say how long it will take, especially when you consider the technology will also be leveraged in many other products."

Analysts said $500 million over four years is not an outrageous investment, considering Cisco spends about $700 million to $800 million in research and development every quarter.

"It's such an incredibly strategic product for them," said Erik Suppiger, an equities analyst with Pacific Growth Equities. "They simply have to have a product that is competitive in this market. It's hard to say if they've overinvested since we don't know how well-received it will be among customers."