Nortel takes aim at Cisco with router price cuts

The company plans to cut prices for its network routers by as much as 50 percent--part of its goal of becoming more competitive in the market for network devices and the software that runs in them.

3 min read
Nortel Networks today detailed a two-pronged strategy intended to hit rival communications equipment provider Cisco Systems where it hurts.

As reported earlier by CNET News.com, Nortel plans to cut prices for its network routers by as much as 50 percent. The move is part of the Brampton, Ontario-based company's goal of becoming more competitive in the market for network devices and the software that runs in them. The lucrative market is now dominated by Cisco.

Nortel also detailed plans to license its routing software code to third parties, including Intel and Microsoft, for use in operating systems, "thin client" devices, Palm-based computers, and set-top boxes, according to sources. The company said it had already issued 75 software licenses for its routing code to third parties as part of an effort Nortel calls the "Open IP Environment."

"We're moving from 'Old World' routers to an Open IP Environment based on software and silicon that dramatically reduces the cost of networking and makes the Internet accessible to everyone," Bill Conner, Nortel's president of enterprise solutions, said in a statement. "Open IP Environment ushers in a new era of networking that expands the way businesses and consumers use the Internet."

At the core of network routing devices is software that directs network traffic. Nortel apparently aims to shift its networking focus to software, essentially leaving hardware concerns to its rival Cisco.

Nortel launched out of the gate with a partnership with chip giant Intel. The two companies will work together on programmable networking devices, with Nortel providing the software and Intel the hardware based on its Exchange (IX) Architecture.

"There's no way they're going to get top billing in the router market--Cisco owns it," one industry insider said. "But not the market for the enabling technology."

Nortel is looking to draw users away from current routing technology, toward all-encompassing routing software that can link many different computers to Nortel's fiber optic-based equipment, according to industry observers. The initiative also furthers the company's aim to reconstruct itself as an Internet-based company.

The announcement's timing isn't coincidental--Nortel plans to announce its newest business deals the same day rival Cisco releases earnings for its most recent quarter.

Cisco is expected today to announce per-share earnings of 23 cents for its first quarter, according to consensus estimates compiled by First Call. The announcement is likely to be closely watched, given recent rumors that Cisco may miss Wall Street's expectations.

In 1998, Cisco garnered 70.5 percent of the routing market, compared with Nortel's 9.1 percent share, according to market researcher Dataquest.

Bay Networks, the data-oriented networking firm Nortel acquired in 1998, purchased routing technology last year for use in the Open IP environment.

Nortel plans to discount its line of so-called enterprise routers, sources said. The cost of the technology is dependent on how complex the installed software is. Base prices run as low as $30,000, according to industry analysts.

Though there are few specifics, Microsoft plans to incorporate Nortel's software in an upcoming release of its Windows 2000 operating system, according to sources. Windows 2000 is scheduled to ship early next year.

A Cisco spokesman seemed unconcerned with Nortel's new plans. In response to the strategy, the spokesman said that Nortel's routers will "finally be priced what they're worth."