Spending on Service Provider Routers Begins to Grow in EMEA

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1 Research Brief Spending on Service Provider Routers Begins to Grow in EMEA Abstract: 2Q03 brought the first rise in end-user spending on service provider routers in Europe, Middle East and Africa for a whole year. Although this growth was modest, it supports our view that the market will improve in By Sandra Artiach. Strategic Market Statements Cisco remains the dominant vendor in the region, followed by Juniper, which, with its acquisition of Unisphere, has been making significant headway in the broadband aggregation router market. Core routers accounted for 39 percent of end-user revenue for service provider routers in the first half of This percentage will decline slightly in the future, as demand for edge products increases and service providers continue to reduce the numbers of network elements in the core. Service provider routers will also face competition from multiservice switches that combine IP switching and routing. Publication Date: 12 December 2003

2 2 Spending on Service Provider Routers Begins to Grow in EMEA Introduction The market during 2002 was difficult for service providers and infrastructure vendors. But conditions started to improve in the first half of 2003 as service providers managed to steady or increase revenue. The economic situation is stabilizing and investors are showing more confidence in telecom companies, as plans for network evolution and expansion are being undertaken. There are signs of economic recovery, but business optimism and capital expenditure remain very cautious. Overall Market Environment The service provider router market in Europe, the Middle East and Africa (EMEA) generated end-user revenue of $363 million in the first half of 2003 adeclineof20 percent from the first half of But the second quarter of 2003 was the first quarter of positive growth for service provider routers in EMEA since the second quarter of And this is consistent with Gartner Dataquest's expectation of the service provider router market positioning itself for a recovery in We are starting to see more expenditure on new equipment, as opposed to maintenance and upgrading. From 2004, average selling prices will start to rise, as service providers require more functionality and faster backplanes. Prices will also increase owing to longer replacement cycles demanded by network service providers. This means the routers will have to be future-proofed for a much longer period, giving scope to increased capacity and functionality to a much greater degree than with present routers, all of which will cost more. In the first half of 2003, core routers accounted for about 39 percent of end-user revenue for service provider routers. This percentage will decline slightly through the forecast period as demand for edge products increases. Broadband aggregation is a subset of the edge router market and accounted for 24 percent of the total service provider router market. The edge is one of the most critical parts of the network, because it is where IP services are handled. It is where carriers and service providers roll out their intelligent, revenue-generating, managed services such as virtual private networks (VPNs), voice over IP and managed security. Devices at the edge of carrier networks allow service providers to customize the user experience and deliver new service models to help replace carriers' declining voice revenue. The service providers' task of migrating their exceedingly complex networks to a lower-cost, converged packet-switched core is not an easy one. The challenge is migrating to IP technology without destroying the legacy business models. There is evidence that carrier spending is picking up in the second half of 2003, as wireless and broadband are generating demand for edge routers. Carriers are gradually spending more on this kind of equipment. The first half of 2003 has been an exceptionally strong period for digital subscriber line (DSL) growth in Europe, as more major carriers are making broadband an important part of their future growth, implementing higher-value broadband services and applications. Deployment of DSL infrastructure is growing in countries outside the United Kingdom and Germany. Service providers are investing at the edge because they need to establish differentiation in a competitive environment as well as increase their respective revenues. This extra traffic requires an increase in service provider edge routers in the network that are capable of handling this new traffic.

3 Leading Vendors Cisco remains the dominant vendor in the region, followed by Juniper, which, with its acquisition of Unisphere, has been making significant headway in the broadband aggregation router market. Cisco Cisco is the dominant vendor in the service provider router market in EMEA, accounting for 66 percent of the end-user spending and 64 percent of the units shipped in the first half of 2003 (see Table 1). Cisco's biggest advantage is its huge installed base, financial stability and solid reputation. These attributes are of great importance to EMEA carriers, which place a premium on reputation and a proven track record. Cisco offers effective solutions for the growing broadband market. In 2003, it announced enhancements to its IP/Multiprotocol Label Switching (MPLS) edge portfolio to further develop its service portfolio with increased revenue-generating services for broadband, wireless, private line and metro Ethernet. For the quarter ended 25 October, Cisco's global service provider activity is facing good sequential and year-over-fiscal year growth in orders. Juniper Juniper's share of the EMEA service provider router market was 26 percent of enduser revenue and 28 percent of units. Overall, Juniper's top-line performance continues to show relative strength. With the acquisition of Unisphere in the second quarter of 2002, Juniper is the broadband aggregation router market leader, with 53 percent of end-user revenue in the first half of 2003, gaining presence in the edge router market. On 5 November 2003, Juniper announced the introduction of its M7I and M10I routing platforms to enhance its infranet-ready, service-built edge portfolio. These platforms present an attractive upgrade option for legacy infrastructure at the edge and enable customers and partners to expect and obtain more from their IP networks. The company also formed a partnership with Lucent, which gives it an edge in penetrating the large service provider accounts. It also has partnerships with Ericsson and Siemens, which should give it a huge advantage in EMEA. 3

4 4 Spending on Service Provider Routers Begins to Grow in EMEA Table 1 Service Provider Router Market Shares by Vendor: EMEA, 1H03 Total Market End-User Revenue ($M) Share Unit Shipments Share Cisco Systems % 1, % Juniper Networks % % Redback % % Nortel Networks % % CoSine % 6 0.3% Total % 1, % Core Cisco % % Juniper Networks % % Total % % Total Edge (Includes Broadband Aggregation) Cisco Systems % % Juniper Networks % % Redback % % Nortel % % CoSine % 6 0.4% Total % 1, % Broadband Aggregation Juniper Networks % % Redback % % Nortel % % CoSine % 6 1.6% Total % % Source: Gartner Dataquest (November 2003) Drivers and Inhibitors Drivers Service providers are beginning to invest in next-generation networks. Increasing demand for vendors to supply equipment for the provision of IP/MPLS services, such as tiered access, IP VPNs and metro Ethernet applications. Penetration of IP VPN services has increased. Deployment of DSL infrastructure is increasing in Europe, owing to demand from teleworkers and power users. Operators needing to differentiate service offerings to maintain and enhance their competitiveness. The need to converge legacy networks such as Frame Relay and ATM onto an IP packet-based infrastructure. Inhibitors Reduction of capital expenditure and operating expenditures continues, even though it is improving. Weak economic conditions in most country markets.

5 5 Carriers are cautious about the shift of profitable legacy services such as voice circuits and leased lines onto converged IP/MPLS networks. Migration to converged packet-switched networks is complicated and requires intelligent network redesign. Carriersmustbeabletogenerateadditionalrevenuetojustifynewequipment purchases. Definitions Service Provider Routers Routers capable of providing multigigabit bandwidth in support of high-speed WAN interfaces. These devices are typically designed for installation in the Internet and support only the IP suite. Supported media types include ATM (OC-3, OC-12 and OC-48), IP over SONET and high-speed serial interface. Future generations are expected to support wave division multiplexing interfaces. These devices also address the needs of fault tolerance, such as the provision of dual power supplies, hot swappable cards and redundant buses. Service provider routers are further segmented as follows: Service Provider Edge Routers Routers with less than 40-Gbps switching capacity, which can handle thousands of channelized time division multiplexing interfaces to DS0s. They handle broadband aggregation, leased line aggregation, advanced IP services and VPNs. They support the following service provider routing protocols: weighted fair queuing, BGP, IS-IS, WRED, ACLs, MPLS, VPN and IPSec. They also have subscriber management, bandwidth management, IP switching and VPN provisioning capabilities. Examples include: Cisco 7500, 7600, 7300, 6400; Juniper M5, M10, M20, M40e; Redback Smart Edge Router. Broadband Aggregation/IP Services Routers This is a subset of service provider edge routers. Aggregation and termination systems that accept a high concentration of data traffic from multiple digital subscriber line access multiplexers, cable modem termination systems, wireless headends, dial access concentrators and routers. In addition to aggregation and termination, these systems offer subscriber management services, including: differentiated classes of service; different priority levels for different classes of network users; dynamic selection and delivery of network services; quality of service for data, voice and video applications; usage-based billing; security and random authentication; troubleshooting and remote diagnostics; network management; managed firewalls; and secure VPNs. Examples include: CoSine IPSX, Nortel/Shasta BSN, Redback SMS, Juniper ERX, Cisco Service Provider Core Routers Routers with 40 Gbps or more of switching capacity and 40-Mbps forwarding capacity. They are designed to handle multiple OC 48s and OC 192s for operation in the service providers' IP core backbone. They also handle a subset of the edge routers routing protocols such as weighted fair queuing, BGP-4, IS-IS, WRED and MPLS. Examples include: Cisco 12000, Avici TSR and SSR, Charlotte's Web Aranea- 1, Juniper M160 and T640. New startups include Caspian Networks and Procket. Key Issue How will developments in switch technology affect network evolution?

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