Equipment makers revive corp. net plans

Traditional telecom equipment vendors are increasingly targeting the enterprise network market, banking on growing demand for packet-based capabilities similar to those for carriers.

The fact that the worldwide market for packet-based enterprise communications equipment is twice as big as that for service provider equipment has not been lost on Lucent and Nortel, which are rediscovering network religion after disengaging from the market to different degrees in recent years.

Juniper, meanwhile, is itching for a fight with Cisco, the runaway leader in the enterprise network market. Juniper has begun mounting its inaugural quest in this market, an effort that will consist of buying and building technology and market share.

"There is an up and downside for Juniper in the fact that Cisco owns 90% of the router market," industry analyst Nick Lippis said in a report on Juniper's enterprise aspirations. "On the up side, taking only 10% of this market would expand Juniper's revenue by nearly 50%. On the downside, Cisco does not only own 90% of the market share; it owns perhaps 100% of the mind share, and its customers are loyal."

But those customer loyalties could be broken, observers say. As the dominant supplier to corporations, Cisco commands premium pricing. And not all its products are best-in-breed, analysts say.

Recognizing this, Juniper made a forceful entry into the enterprise network market with February's acquisition of security vendor NetScreen Technologies, and followed with the launch of its J-Series access routers in June. Many expect Juniper to acquire a presence in Layer 3 Ethernet switching - perhaps via Extreme Networks.

Juniper had a rough third quarter in the enterprise, however. For the period that ended Sept. 30, Juniper posted security product sales of $63.4 million, about $25 million below analyst estimates and $32 million below the second quarter's results. Security products accounted for 17% of Juniper's third-quarter revenue.

Juniper has yet to recognize revenue for the J-series routers, which just began shipping.

But Juniper's not expected to stop its enterprise incursions at access routers or security. Observers say to look next year for the vendor to develop or acquire Layer 4-7 Ethernet switching and IP PBX capabilities, and and perhaps wireless LAN (WLAN) and storage networking technologies. These areas are hot in enterprise networks and targeted by rival Cisco as billion-dollar opportunities. Juniper has added 70 people to its R&D team, plus brought in 100 more sales and marketing people to help boost awareness of its efforts across all market segments.

"We see significant opportunity in expanding the corporate networking and security side of our business," Juniper CEO Scott Kriens said during a third quarter earnings conference call two weeks ago. "The opportunity is growing."

Analysts concur.

"Anything that Cisco might sell is something that [Juniper] might look at," says Zeus Kerravala of The Yankee Group.

Well, not everything, Juniper says.

"That wouldn't be a very smart strategy for this or any company," says Christine Heckart, Juniper's vice president of marketing. "For this company specifically, it would not be very consistent with what we're great at with our core competencies. Great companies build their growth strategy around their essence."

Juniper's essence is routing and intelligent packet processing. That can be applied in a lot of places, especially in some of the hotter areas of enterprise networking: IP PBXs, WLANs, storage-area networking, and Layer 3 and 4-7 Ethernet switching.

Some analysts say Juniper will move to enter some of these markets sooner rather than later.

"As we look to 2005, we expect Juniper to be more aggressive in the enterprise market, not only through the sales and marketing of the J-series products, but also the launch of a broader enterprise portfolio through internal development and through acquisitions," says Nikos Theodosopoulos, a UBS Warburg analyst, in a report on Juniper's recently ended third-quarter financials. "Technology areas we believe Juniper is working on or is seeking to acquire include Layer 3-7 switching and enterprise VoIP."

Kerravala says Layer 4-7 switching, although not a huge or exploding market, is an area where Juniper could make an immediate impact. He mentioned F5 Labs as a possible acquisition candidate.

"It's a relatively niche market, [and] Cisco's products aren't very strong," he says. "If you're looking for an area where you can go in and make some noise quickly, 4-7 would probably make sense."

As for enterprise VoIP, a few significant deals struck recently by Cisco - Bank of America and Ford Motor - must whet Juniper's appetite. The company's current enterprise VoIP strategy is to partner with IP PBX vendors such as Avaya, with which it is testing and demonstrating interoperability between the J-series routers, security software and packet PBXs.

But partnering might be a precursor to insertion. Juniper did not rule that out for enterprise VoIP or any growing market.

"We continually assess all market opportunities," Heckart says. "It's an ongoing, systemic process, which is what took us into the security space at the beginning of this year."

Lucent's plan

There's also serious growth opportunity for Juniper partner Lucent. Sales of Lucent's network management software, Ethernet/SONET transport systems, VPN firewalls and Accelerate VoIP products grew 30% to 40% over the past year, and are expected to exceed that this year, according to Mark Wilson, Lucent's enterprise sales vice president.

This is five years after Lucent jettisoned its enterprise business, spinning it out and into the independent company Avaya.

Lucent builds its enterprise presence through indirect channels and partnerships, such as those with Sun and IBM for VoIP and network management, respectively. Sales to corporations account for just more than 1% of Lucent's total revenue.

UBS Warburg's Theodosopoulos expects Lucent to tap Juniper to further its enterprise ambitions.

"We also believe Lucent is incorporating Juniper security products in its enterprise offer, as Lucent tries to increase its presence in the enterprise market," he says in his Juniper report.

Wilson says there is currently no arrangement with Juniper to sell enterprise products.

But Kriens says all Juniper's partners - which include Siemens and Ericsson, in addition to Lucent - are "in some stage of evaluation" of the low end of Juniper's router product line or its security products.

Nortel's enterprise aspirations

So perhaps Juniper and Lucent understood why rival Nortel retained its $2 billion enterprise operations after many expected the company to sell, spin off or otherwise detach it this summer to make up a profit shortfall. Nortel CEO Bill Owens considered that but held onto it because the enterprise market is driving convergence - and service provider business.

In an interview with Network World in August, Owens said he recognized that Nortel's enterprise business - a distant second to Cisco in Ethernet switching - is a "leader" in bundling packet switching systems for companies looking to integrate voice, video and security applications. He said these systems would be attractive to Nortel's service provider customers as customer premises equipment components of a managed service offering.

Owens also said the enterprise network market can springboard Nortel into the booming government vertical market, which he said is spending tens of billions of dollars per year in the U.S. alone. Enterprise network revenue accounted for 22% of Nortel's preliminary first half results of $5.1 billion, contributing more than the company's traditional markets of wireline (17.5%) and optical (10%).

Some enterprise network users say they are very comfortable buying their gear from telecom vendors.

"Some of the products we've seen coming out recently are things we've been looking for," says Howard Rubin, director of IS at healthcare network Care New England in Rhode Island, a Nortel shop.

"So they seem to be responding to their customers' requirements," he says.

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Copyright © 2004 IDG Communications, Inc.