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Cisco vs. Juniper: Punch, Counterpunch

By Peter Burrows For the past few years, Juniper Networks (JNPR) has done a bang-up job of riding on Cisco Systems' (CSCO) estimable coattails. While Cisco had long dominated the market for routers, the computer-like devices used to shunt digital traffic around the Internet, Juniper came into being because big phone companies found that Cisco's high-end wares weren't reliable enough to guarantee always-on phone service for their millions of customers.

In recent years, Juniper increased its share of this "core router" market to more than 30% -- an embarrassment to the outfit that invented the category back in the early 1980s. Adding insult to injury, six-year-old Juniper, located just a few miles down Route 237 from Cisco in San Jose, Calif., has been poking fun at Cisco in comic-style ads that run in The Wall Street Journal each Tuesday. "We're all for healthy competition, but I'd say they've done some things that lack class," says Carlos Dominguez, who runs Cisco's service-provider operation.

UTILITY PLAYERS. Earlier this year, the threat from Juniper got even more serious, at least on paper. Rather than concentrate strictly on the "big iron" used by phone companies and other carriers, Juniper announced on June 14 that it would start selling low-end "access routers" as well. These "J-series" models were aimed at Cisco's stronghold -- a $4 billion-a-year segment, in which Cisco enjoys a market share of roughly 90%.

Now, Cisco is fighting back. On Sept. 14, it unveiled three new models designed to maintain its lock on the access-router market and increase its share of some other faster-growing niches. That's because the new routers can also provide network security as well as offer voice services using the fast-growing voice over Internet protocol (VoIP) technology -- functions that in the past came in separate Cisco products.

While the core routing market draws far more attention, given the bragging rights that come with making the world's fastest networking gear, this announcement could be more important in the short term for Cisco. It gets far more revenue from access routers than from core routers. Indeed, Cisco sells 100 access routers for every core router that leaves its shelves, says Dominguez.

"NEW BUCKETS OF MONEY." Also, Cisco figures that by integrating popular new capabilities into its routers, it can increase overall demand for this important segment. "People talk about this being a slow-growth segment," says Executive Vice-President Mike Volpi. "But by integrating in all these other areas, we reach into new buckets of money that people were going to spend anyway. We think we can extend a 5% growth market into a double-digit growth market."

In the process, Cisco wants to use its 90% market share in access routers to increase its share of the booming security and VoIP markets, where it has less than 40% share, says Volpi.

Will it work? For the most part, it should, say analysts. While Juniper's J-series models won't begin shipping until October, most of Cisco's new products are available immediately. And the J-series machines will work for companies that use only the Internet internally, whereas Cisco's new models will work with many other networking standards commonly used at corporations, such as Novell's (NOVL) local-area networks.

STILL BUGGY. Also, Cisco's pricing is aggressive -- at $1,400 to $14,000. Even more important, corporate buyers can lower operating costs -- typically far more than the gear's initial purchase price -- if they can consolidate multiple types of hardware into one box.

The machines should also appeal to big Cisco partners such as AT&T (T), BellSouth (BLS), Sprint (FON), and SBC (SBC). These carriers have been trying to increase sales of business services, such as firewalls or virtual private networks, so telecommuters can log on when they're on the road. Until now, Cisco would have to sell or supply a box for each service the customer provided. With these jack-of-all-trade models, a carrier would be able to squeeze out more revenue without having to provide and manage all that hardware.

Still, Cisco's latest volley doesn't mean Juniper will turn and run. The latter is selling its low-end routers to rivals on the pitch that Cisco's products are outdated. Cisco says it will upgrade the buggy, decades-old software in most of its routers with lean, easy-to-manage new code that was unveiled with its top-of-the-line CRS-1 core router in late May. The new low-end models still run the original software, however.

AN ARMY BEHIND IT. Asks Juniper Marketing Vice-President Christine Heckart: "If you have an inherently unstable operating system, how can you deliver a stable hardware product on which to host all these [integrated] features?" She points out that Juniper's J-series will come with a "golden configuration" button that will restore the network if an IT staffer makes a coding mistake. That wouldn't be possible with Cisco's outdated gear, she argues.

Yet, beyond new technology or product reliability, Cisco maintains competitive advantages over Juniper. To survive the tech wreck, Juniper retrenched to the point that it now serves only a few dozen big carriers around the world. Cisco still has roughly 10,000 salespeople, thousands of field technicians, and thousands of reseller partners to help it reach corporations large and small, around the world. And with $22 billion in annual sales and $19 billion in cash and investments, Cisco has bulk that Juniper can only dream of.

Juniper took a step to beef up its presence when it spent $3.4 billion in February to buy Netscreen Technologies, which sells security gear to businesses. And Juniper has since announced plans to double the amount it spends on sales and marketing, to $300 million, says Executive Vice-President Jim Dolce. That means Juniper will have to keep coming up with new products to pay for a bigger corporate infrastructure. "You don't make the kind of investment we're making in distribution without backing it up with more products to sell."

For customers, the growing competition is probably a good thing. "Without Juniper as the innovator, Cisco doesn't have to improve its products," says Juniper's Heckart. Adds Cisco's Dominguez: "They're a good competitor. Companies like Juniper keep us on our toes."

At least they agree on something. Burrows is BusinessWeek's Computer editor in Silicon Valley

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