FOOL PLATE SPECIAL: An Investment Opinion
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High-speed router maker Juniper Networks (Nasdaq: JNPR) got a leg up this morning after saying it has agreed to work with optical and wireless communication equipment vendor Nortel Networks (NYSE: NT) under what is being called a "joint marketing, network planning, and implementation" alliance.
The mandatory press release mumbo-jumbo aside, today's memorandum of understanding relates to basically one thing: Nortel's inability to meet its service provider customers' needs for a high speed Internet routing solution on its own. Now, Juniper's M40 and M160 routers will be used to fill that hole.
Juniper, which for its part gains valuable exposure to Nortel's large service provider customer base, gained some ground on the "news," if you can call it that. Nortel's development problems in the terabit routing space have provided fodder for networking reporters for months, and The Wall Street Journal had reported earlier this month that a deal with Juniper similar in nature to the one announced today was in the works. But even with the story moving from the realm of rumor to a seeming reality, a lack of details makes it hard for investors to sort out what it all means for the two firms.
Ever since Juniper went public around this time last year (although it may seem like ages ago to some), the company has been depicted as the David to networking Goliath Cisco Systems (Nasdaq: CSCO), at least in the area of heavyweight IP backbone routers. Cisco and Juniper are currently splitting the market 80-20, according to estimates. But more important than the absolute size of the market share gap has been its general direction over the past 12 months, with the split narrowing in Juniper's favor. With Nortel now routing its clients to the M40 and M160 for their IP backbone needs, one upshot may be that Juniper will have a better shot at closing the market share gap with Cisco even further.
For Nortel, the agreement, which still is not finalized, appears to be a setback of sorts for the backbone routing program of 1998 acquisition Bay Networks. The company had high hopes for its next-generation Versalar 25000 router, which was officially introduced a year ago. That announcement may have been successful in upstaging Juniper's IPO, but Nortel has been slow in shipping the product. The router was supposed to hit the market in Q1 of this year, but 60 Gbps and 120 Gbps versions now probably won't go out the door until later this year. That's no way for Nortel to placate its capacity-hungry carrier clients, most of whom are scurrying to install the beefiest backbone routers they can find to deal with the ongoing rapid worldwide growth in Internet traffic.
For investors, the high-speed routing wars are far from over. Product cycles in this area are lasting about as long as recent Tyson fights, with some large network operators reportedly already maxing out the Juniper M40s they installed just a year ago. That's good news for a vendor like Juniper, which may be able to ride a rising technology development wave to further market share gains against the likes of Cisco. Then again, with none of the parties involved sure what the carriers' routing needs will be only one or two years down the road, nothing is certain in this market. In investing, speed brings added risk -- as well as the chance to participate in one heck of a ride.
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