Juniper: The Upstart That's Eating Cisco's Lunch

Telephone companies and ISPs can't get enough of the superfast router-maker's gear

In early 1999, Chris J. DeMarche, chief technology officer at Internet service provider Verio Inc., was frantic. He desperately needed more capacity in smaller cities like Spokane, Wash., and Rochester, N.Y., but Net equipment giant Cisco Systems Inc. wouldn't make the gear he needed. DeMarche had to have routers--the equipment directing Net traffic--that would run on low power levels because his network centers were already overloaded. After months of waiting for Cisco, DeMarche turned to Juniper Networks Inc. The upstart offered him a Net router that was faster than Cisco's rival model and used about two-thirds the power. Just like that, Cisco was shoved aside as Verio's main supplier. "They weren't listening," DeMarche says.

Fast-forward to today: Little Juniper is suddenly on the cusp of smashing mighty Cisco's dominance over the market for big Internet routers. It seems Verio wasn't alone in its frustration. Juniper has been stealing one big-time account after another. The latest scores are stunning. Juniper's share of the high-end router market hit 22% at the end of June, up from 17% at the end of the March quarter, according to market researcher Dell'Oro Group. Over the same period, Cisco's share dropped to 75% from 80%. And pundits think the latest data are no fluke. "The only way Cisco is going to catch them is if Juniper screws up," says Brendan Hannigan of Forrester Research Inc.

Investors love the company. It's viewed as something of an "anti-dot-com," thanks to the outlook for real revenues and profits. Analyst Martin Pyykkonen of CIBC World Markets expects Juniper will grab at least 25% of the high-end router market by yearend. Sales are expected to reach $500 million this year, up from $100 million last year, and net income should come in at about $100 million. With such prospects, Juniper has seen its stock soar 245% this year, to $196, creating a market cap of $62 billion.

How has Juniper done it? After all, this is Cisco we're talking about, the company that has earned every penny of its $466 billion market cap by crushing competitors that cross its path. Juniper CEO Scott Kriens attributes his company's success to a simple philosophy: "survival of the focused." The company has always had the single goal of building high-end equipment that would route traffic across the largest Internet backbones. In other words, it makes gear for the giant phone companies and Internet service providers that handle the bulk of Net traffic. It doesn't worry about the data needs of corporations, which are the heart of Cisco's business. "We were the first and only company built from scratch to solve the problem of how to connect billions of users over the Internet," Kriens says.

That focus started from the very beginning. When co-founder and Chief Technology Officer Pradeep Sindhu started recruiting engineers in 1996, he grabbed industry veterans with the kind of expertise needed to attack the very top of the router market. Some, like Sindhu, had designed microprocessors at Sun Microsystems Inc. or Xerox Corp.'s famous Palo Alto Research Center. Others had built routers for Cisco and Bay Networks. Together, they made products with the processing power of big servers and the intelligence of Cisco's best routers.

SPEED MERCHANT. Juniper boasts faster machines in a more compact package. Its top router can process data at 10 gigabits a second, four times the speed of Cisco's best machine. So even though Juniper's biggest machine costs $400,000 on average--twice the price of Cisco's--customers can't get enough of them. That's a rude awakening for Cisco, which didn't need the fastest routers when it was zeroing in on just the corporate market. Whenever rivals like 3Com came along with more powerful boxes, Cisco just offered its customers deeper discounts on older, slower machines. That meant customers could get the same number of bits processed per buck--and kept them from switching suppliers. Cisco usually waited to introduce faster routers until it felt that a broad segment of the market was ready for them.

That approach, however, has hampered Cisco in selling to telephone companies and Internet service providers, a market it's trying to crack. For those kinds of companies, technology is everything. They're facing such a flood of Net traffic that they're adding capacity as fast as they can. Huge customers like Britain's Cable & Wireless PLC and WorldCom Inc. say that price is much less important than blazing speed. WorldCom's UUNET division, the largest Net backbone provider in the world, has switched to Juniper as the main supplier at the core of its network. "We have to buy the best of breed," says Michael O'Dell, UUNET senior vice-president of technology. "We put the boxes through their paces, and there was one clear winner."

Cisco has reason to worry: Juniper is taking share in the fastest-growing segment of the market. Router sales to phone companies and ISPs are projected to soar about 200% yearly, to $6 billion in 2001, according to Dell'Oro. By contrast, the corporate market is increasing about 30% annually, to $18 billion in 2001.

With that kind of money on the line, you can just imagine Cisco CEO John T. Chambers plotting to wipe out the upstart from Sunnyvale, only miles away from Cisco's own offices in San Jose, Calif. But to the outside world, Chambers is the picture of calm. "Juniper is the best thing that ever happened to us," he maintains. Without being pushed by Juniper, Cisco wouldn't have developed its most powerful router as fast as it did, he says. Cisco sold more than $1 billion worth of those machines during the past fiscal year, about 10 times more than Juniper.

Cisco execs say they won't let a rival drive their product-development plans, but they aren't dismissing the startup either. "We took them seriously when they got 1% of the market," says Larry Lang, Cisco's vice-president of service-provider marketing. In part because of pressure from Juniper, the company plans to begin trials of a 10-gigabit router by the fourth quarter.

For all its strengths, Juniper does face some big challenges. For one, Kriens recognizes that he must broaden Juniper's product line. The company is working on a more powerful version of both its core router and a smaller product, sources familiar with the company's plans say.

Juniper also is keeping the heat on Cisco by taking advantage of the Web. Cisco has used the Net to boost revenue per employee to $653,000, giving it a huge cost advantage over rivals such as Lucent Technologies Inc. that generate only about half as much per worker. Now, Cisco finally faces a rival that is equally Net-savvy. While Cisco gets more than 90% of its orders online and has contract manufacturers build most of its gear, Juniper builds none of its own. The result: Its revenue per employee is more than $695,000.

Customers, ever wary of being dependent on a single supplier, seem to relish their newfound choice. O'Dell of UUNET says that the first time he purchased Juniper gear, he did it because he "finally figured out that the only way to get Cisco's attention was to show them a purchase order with eight zeros and another company's name on it." Suffice it to say, Juniper has everyone's attention now.