Juniper Networks (NYSE:JNPR) and Cisco (NASDAQ:CSCO) may have had a field day in the core router market cornering over 80% of the market and enjoying a near-duopoly till now but all that might change soon. Alcatel Lucent announced last week that it is entering the core router market with its Extensible Routing System (XRS) 7950 family of core routers.  These routers are essentially the company’s existing 7750 edge router in a bigger multi-chassis package and are touted to be five times as fast and 66% more power efficient than competing core routers.
With carriers moving to higher-speed 4G networks like LTE to support the explosion of data traffic caused by the rapid adoption of cloud computing solutions and burgeoning video usage, Alcatel Lucent is looking to take advantage of the industry transition and leverage its existing base of edge routers to find an opening in the core router market. We believe Juniper will be the most concerned by this move as it derives most of its values from the routing division, unlike Cisco.
Power of incumbency in router market
Alcatel Lucent may find it challenging initially to find customers for its core routers considering the strong grip that Cisco and Juniper have over the industry. Also, service providers have a tendency to stay with their incumbent vendors due to the difficulties associated with changing or adding new products and new vendors in a highly critical area like core routing. This has been one of the reasons for the long-standing duopoly of Cisco-Juniper in the industry.
However, while Alcatel Lucent may have not had a core routing solution till now, its edge routers are fairly well-known. In fact, it has steadily climbed the charts from being just an entrant in the edge routing business in 2003 to surpassing Juniper as the number 2 vendor in the industry last year. With about 24% market share of the edge routing industry currently, Alcatel Lucent has done well to find a place in many networks and can now use that as a leverage to push its core routers as well.
LTE market shift
It is too early to say how much of an impact it will have on Cisco and Juniper but the current industry trend of shifting to higher speed and more efficient technologies such as LTE tells us that a shake-up in the routing industry is surely on the cards. If Alcatel’s core routers are indeed as fast as they’re being touted to be, they could address the growing demands on carriers’ core networks caused by an explosion of data traffic due to the proliferation of mobile devices and cloud computing solutions. The wireless industry is transitioning to higher speed 4G networks such as LTE and Alcatel could find a place for its core routers in these networks.
Since service providers account for about 65% of Juniper’s revenues, it may feel the most immediate impact as a result of Alcatel’s foray. Most service providers are dialing down their land-line spending and instead diverting their capital expenses towards wireless networks. A big chunk of these expenses will be incurred in building out infrastructure for their new high speed networks. This is where Juniper may lag behind Alcatel.
In fact, Alcatel has already scored a big win by lapping up Verizon as one of the first customers for its new core routers.  Verizon is also one of Juniper’s more important customers and accounts for almost 15% of its revenues. The carrier will be using Alcatel’s core routers to power its new 4G LTE network. Alcatel’s ploy of delivering an end-to-end solution consisting of core as well as edge routers may help it wrest core router market share from Juniper as well, having already trumped in the edge router market.
This can have a significant impact on Juniper’s stock value since it derives more than 50% of its revenues from routers. We estimate that the routing business contributes close to 40% of our $26 price estimate, the most among all divisions, not only due to the higher revenue contribution but also due to its high gross margins.Notes:
- Alcatel-Lucent enables a faster, more efficient Internet, Bloomberg, May 22nd, 2012 [↩]
- Verizon Looks to Alcatel’s 7950 XRS Platform for Capacity, Efficiency, ComputerWorld, May 23rd, 2012 [↩]