However, the good times appear to be rolling back over in the core router market. Researcher Dell'Oro now projects that the service provider router market will grow by more than 60% over the next five years, reaching $11.6 billion in 2014. That's great news for the players of the core routing industry: Cisco, Alcatel-Lucent
Core routers operate the "Internet backbone." They can route tremendous amounts of data at extremely fast rates. The need for faster backbone makes sense; more connected devices and use of media are straining the capacity of service providers across the world. AT&T
However, despite obvious growth catalysts in recent years, the industry isn't for the faint of heart. Competition is increasing, and the cost of creating next-generation routers is imposing. Cisco's recently unveiled core router, the CRS-3, took more than three years and $1.6 billion to develop. The technology lead Cisco worked so hard for may be short-lived; Juniper is planning a major core router upgrade of its own. Meanwhile, relative upstart Huawei has been rapidly expanding its mobile infrastructure market share and could be a wild card in the core routing market.
Rising competition seems to be the norm in the networking industry. Similar to virtualization and storage products, networking seems destined to capture a larger slice of the IT spending pie in recent years, so companies are crowding in. In Ethernet switches, Cisco doesn't need to worry only about traditional rivals Juniper and Brocade, but now also has fellow heavyweight Hewlett-Packard
Cisco's a resilient company that has significant competitive advantages. Cisco certification is a strong industry standard, Cisco proprietary protocols create further switching costs for companies thinking of migrating from the company, and Cisco's IOS networking operating system is close to industry standard.
However, rising competition nibbling away at the edge of Cisco's market share led fellow Fool Eric Jhonsa to wonder whether Cisco was the next Microsoft. At the same time, Cisco rivals that U.S. investors can easily invest in, like Alcatel-Lucent and Brocade, have struggled in recent quarters.
Still, opportunity knocks in many forms. Even if the larger players of the networking industry don't look attractive right now, there are other ways to play the trend of exploding data traffic. A couple of smaller players would be EZChip
For my money, I'm sticking with the big boy of the industry. I own Cisco, and even with the increasing threats, expect it to outperform in the coming years; though I don't expect it to put up world-beating numbers, either. There's immense growth in the future of data traffic. Just don't expect the resulting profits to flow down easily to investors.