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Terabit start-ups challenge Cisco

The latest crop of upstarts are responding to growth demands of the congested Net--a massive multibillion-dollar opportunity.

It is fair to say that data communications giant Cisco Systems provided the technology that built the Net as we know it. Now a new generation of high-end networking equipment start-ups want to renovate it.

Aspirants to Cisco's claim to the data networking throne have come and gone, but this latest crop of upstarts are responding to a single issue--the growth demands of the congested Net, a massive multibillion-dollar opportunity that could leave room for more than just the 800-pound gorilla of networking.

Two premises pervade the strategies of start-ups like Juniper Networks, Pluris, and Avici Systems, among others.

First, service providers require more bandwidth and speedier equipment to keep up with the explosion of the Net and the demands it has placed on their infrastructure. These same companies also need more sophisticated methods to allocate bandwidth and provision service so they can, in turn, differentiate themselves to customers in a crowded market for data and voice-based network connections.

Some Cisco competitors have created a niche with Net access providers, such as Ascend Communications--a company that has chipped away at Cisco's dominance by providing access equipment. But no one has approached Cisco in delivering core high-end routing devices that send Net-based traffic to its destination. These routers serve as the "backbone," or brains of the network for most ISPs, including UUNet Technologies.

This fresh group of start-ups share a few things: a common enemy in Cisco, rosters of all-star talent from established networking companies, and a belief that starting from scratch gives them an inherent technology advantage as networks grow to terabit speeds.

"It's a very busy market area--it's going to be very competitive," said John Armstrong, analyst with market researcher Dataquest. "It's the new companies that are coming out with the different approach."

The clearest evidence that many believe these terabit-speed start-ups--and this type of technology--have a chance to compete with Cisco is the gaggle of venture capitalists (VCs) and Cisco rivals that have latched on to these nascent firms:

  • Littleton, Massachusetts-based Argon Networks, for example, garnered $34 million from various venture firms in two rounds of financing.

  • Silicon Valley entrant Juniper has collected $62 million in funding from both VCs and companies such as 3Com and IBM, among the rivals salivating at the opportunity to create more competition for Cisco.

  • Avici, another Boston area player, received $16 million in a first round of venture funding that closed last July. That windfall was supplemented by an equity investment from Northern Telecom--which purchased a 20 percent stake in the company worth approximately $39 million--and a second round of venture financing worth $17 million, bringing the grand total in the firm's coffers to nearly $72 million.

  • NetCore Systems, another aspirant, has raised nearly $14 million in two rounds of VC funding.

    What else do all the above companies have in common? None are currently shipping products, despite the wads of cash being thrown at them.

    The promises emanating from these terabit-speed devices recall the predelivery hype surrounding gigabit-speed Ethernet equipment, another giant market opportunity that was accompanied by a start-up glut that continues to sort itself out.

    "The hype on this is as great or greater than during any technology cycle I've seen," said Craig Johnson, principal analyst with the Pita Group.

    The list of entrants hasn't come close to completion. Others like Nexabit Networks, Torrent Networking Technologies, and NEO Networks are also gunning for ISP network build-out dollars. Still others remain cloaked in secrecy, unwilling to divulge their particular bent on the market.

    Some believe these firms are specializing in too much secrecy to create hype. "I think the value proposition for half of these companies is negligible," said Tom Nolle, president of CIMI Corporation, a technology researcher. "These guys are playing a statistical game. They're building a product for which there is no market."

    To the degree that Cisco is the acknowledged kingpin, the ongoing investments are an indication of what it takes to develop a product that can conceivably poach a portion of Cisco's high-end routing business, the cash cow that catapulted the networking giant to its current position.

    "We have to convince every single customer to buy something without a Cisco label on it," admitted Hank Zannini, cofounder and vice president of business development at Avici. "It's kind of like the IBM days--you can't get fired for buying Cisco products."

    It also indicates a prevalent view among service providers--they would love to have a more competitive market from which to choose equipment from. "We're always looking at ways to enhance our technology, whether it comes from a start-up or an incumbent," said Doug Hickey, president of Frontier GlobalCenter, the data arm of Frontier Communications.

    Noted another start-up: "The ISP community is very eager to see alternatives to Cisco emerge. The biggest competitive advantage we have to Cisco is we aren't them," said Gordon Saussy, vice president of marketing at Torrent, a rare new entry which has devices currently shipping in some slower configurations.

    Frontier GlobalConnect announced plans to install high-end Cisco routers as it builds out its data network earlier this week. Cisco itself has also announced plans to meld ATM-based (asynchronous transfer mode) technology with IP-optimized hardware to cut off new entrants at the pass. Attempts to reach a Cisco representative were unsuccessful.

    The strategies of the majority of the start-up firms appear remarkably similar: assimilate into separate voice and data networks built on voice switches from the likes of Nortel and Lucent Technologies and Cisco data equipment, then slowly meld those layouts via upgrades to this faster technology. Due to this approach, it will likely take some time before any of these firms will see revenue results, given the long test processes and sales cycles associated with high-end equipment and software.

    Juniper, for one, teased the market in June with the announcement that its Junos network operating system had been tested by prominent service providers since the start of the year. Most say their total packages of equipment and software will hit the market by the end of this year or the first half of next year.

    What Cisco has previously accomplished with the software that runs on its routers, these firms want to provide in silicon, with specialized chips known as ASICs (application-specific integrated circuits) that can move data at faster rates. Some start-ups are promising terabit-per-second speeds.

    In addition, these firms hope to add industrial-strength features and flexibility, with some combining high-speed and intelligent ATM technology with speedy routing for IP, the dominant form of transmission on the Net.

    All entrants also admit to the requirement that their complex software must run in conjunction with Cisco's as well, a realization that if you're going to play in an ISP's infrastructure, you're going to have to interoperate with the entrenched competitor. Some of this software includes behind-the-scenes functions that allow ISPs to offer varying degrees of service quality and bandwidth allocation to customers and on-the-fly updating to ISP administrators, among other features.

    "You've got to get both parts [hardware and software] fundamentally right," noted Joe Furgerson, director of marketing for Juniper.

    Like the evolution of gigabit-speed Ethernet market, most pundits project a scenario in which several terabit-routing players get snapped up--one after another--with others remaining independent, hoping a public stock offering can legitimize their technology.

    "I would expect these guys to get sucked into the Lucents and the Nortels," noted Dataquest's Armstrong. "I'd be very surprised if these little guys survive independently."

    Regardless of the likely outcomes for these aspiring Cisco killers, this latest series of players arrive at a moment when the networking industry is in ever-increasing flux. The result is a landscape where previous assumptions about market strength are rapidly falling by the wayside, as telecom and data continue to blend into a single "packetized" network.

    Cisco, Nortel, and Lucent are all huge and yearn to dominate this market with a confidence that comes with their current positions and cash flows, but with every technology shift comes the opportunity for new entrants to make waves: "The data networking world has only just begun," mused Chris Baldwin, vice president of marketing for Argon.

    Separately, Nexabit plans to announce a $20 million round of financing Monday from a series of investors, highlighted by a stake from Microsoft cofounder Paul Allen's Vulcan Ventures.