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Nortel takes new road against rival in router market

The networking company hopes to chip away at Cisco Systems' dominance with the help of Intel, Microsoft, Motorola and hundreds of other technology companies.

Nortel Networks is hoping to chip away at Cisco Systems' dominance in networking with the help of Intel, Microsoft, Motorola and hundreds of other technology companies.

While young companies like Juniper Networks are gunning after Cisco directly and making some headway in the high-end router market, Nortel has taken a different--and as yet unproven--tack by attacking Cisco on the low end of the market.

Routers are devices that allow telecommunications carriers, Internet service providers and corporations to send Net traffic from point to point along a network at fast speeds. Cisco owns the lion's share of the router market, with about 75 percent.

To combat Cisco, Nortel wants to move the routing of information away from the back-end infrastructure, where high-end routers reside, and closer to consumers by embedding software in computers, cell phones, Palm handhelds and any electronic device that connects to the Net.

Gartner analyst Tim Smith says that incorporated into servers, PCs, cell phones, personal digital assistants and other devices, routing software could provide more widespread connectivity and improved security.

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While Cisco keeps the routing software used in its networking devices in-house, Nortel for the past year has licensed its routing software code to 200 technology companies, including Microsoft, which built the routing features into the Windows 2000 operating system, and Intel and Motorola, which build chips for communications devices.

Analysts say Nortel's strategy is smart, but it may take years to determine its success or failure.

"It's a terrific strategy, but Nortel really didn't have much choice," said analyst Dave Passmore of The Burton Group. "They're not under any illusions that this will displace (Cisco's routing software code), but it allows them to more effectively compete."

Nortel's attempts to compete head-to-head against Cisco in the router market have failed, despite gaining some routing technology from its acquisition of Bay Networks. Nortel recently had to strike a deal with Juniper to sell the emerging company's high-end router for service providers after suffering delays in building its own product.

Cisco captured 75 percent of the $505 million high-end router market in the second quarter of 2000, followed by Juniper with 22 percent, according to market research firm Dell'Oro Group. Nortel had 0.3 percent.

In the rest of the router market, which totaled $1.79 billion in the second quarter of 2000, Cisco also led the pack with 91 percent, followed by Nortel with 3 percent, according to Dell'Oro Group.

So far, Nortel's 11-month-old routing software licensing effort has yet to make a dent in Cisco's overall router market share, said Dataquest analyst Tim Smith. "Cisco's router market continues to grow, so it has not made any meaningful differences in how routed networks are put together."

Bill Conner, Nortel's president of enterprise solutions, said the company is making more than $100 million in revenue from licensing its routing software to 200 companies. But the goal is to change the way networks are built, not to create a huge revenue generator for the company, he said.

With routers becoming a commodity under Nortel's vision, the company can try to capture revenue from selling other networking equipment, including high-speed optical gear, he said.

"Nortel will hopefully get the lion's share of the network themselves," he said.

Conner said having routing features in a cell phone, for example, will speed up networks by reducing bandwidth use. For a feature such as caller ID to work, cell phones check phone numbers in a database at the phone company's computer system. In Nortel's vision of the world, that routing can be done in the cell phone's processor, he said.

"It wouldn't have to go all the way back carrying data over a wireless network, chewing up bandwidth," Conner said. "You don't have to go through a network to look up this or that. You do it on the device, and therefore you have cheaper bandwidth costs and applications work much faster."

Conner--who a year ago declared the router market "dead"--believes Nortel's strategy will show momentum in the next few years, especially as more Web-enabled products with Nortel's routing software begin shipping.

Dataquest's Smith said Nortel's vision still has potential, but he doesn't believe that will displace the current use of routers. "The idea of routing functions finding its way into more and more handheld devices is a trend that will come true, but that does not necessarily have a predatory effect on the existing router market. It's an 'add to' kind of market."

Nortel executives say they hope to eventually license the routing software to 1,000 companies.