Cisco (NASDAQ:CSCO), which competes with Juniper (NYSE:JNPR) in the networking equipment business, recently announced a new generation of core routers called CRS-3. Carrier Routing System 3 (CRS-3) will be able to offer data transmission speeds of up to 322 Terabits per second, much higher than existing core routers today.
Core Routers are for Internet Service Providers
Core routers like the CRS-3 are more advanced routers compared to the more widely used enterprise and edge routers. Core routers are designed to be used in the network backbone (or core), operated primarily by major internet service providers (AT&T (NYSE:T), Verizon (NYSE:VZ)), to direct internet data traffic towards edge routers that are closer to the point of data delivery (home, office).
Routers Business Only 15% of Cisco’s Stock
We estimate that the router business constitutes only 15% of the $23 Trefis price estimate for Cisco’s stock and that core routers are a small fraction of this contribution. For example, we estimate that Cisco will make about $1.4 billion from core routers (like the CRS-3) in 2010, compared to $3.2 billion from enterprise routers and $2.5 billion from edge routers.
Below we discuss how the CRS-3 is designed to help carrier networks (AT&T) manage exploding internet data volumes and how the success of CRS-3 can help Cisco maintain its market share lead within the $2.5 billion core router market.
Explosive Internet Data Growth Will Encourage Upgrading of Networks
Internet data, comprised of audio, video, images and text, has increased rapidly in recent years due to the increasing prevalence of broadband and greater use of connected devices like smartphones. For example:
1. AT&T’s network traffic increased by 40% in 2009 alone
Smartphone data usage will only increase creating pressure on existing networks. Cisco estimates that global mobile traffic will grow at an annualized rate of about 108% for next 5 years
2. Global IP traffic expected to grow at an annualized rate of about 40%
With increasing video traffic over the internet and 3-D content to be launched soon, the demand for bandwidth will continue to rise. Cisco estimates that global IP traffic will grow at an annualized rate of about 40% over the next 4 years.
New Router Technology Helps Cisco Retain Market Share Lead
New router technology like CRS-3 can help Cisco maintain its competitive edge in the router business. Cisco’s market share in the $2.5 billion core router market has increased from 40% in 2005 to over 50% in 2009.
We believe that market share gains will remain flat at 54% over the Trefis forecast period due to more competition from router-makers Juniper, Alcatel-Lucent and Huawei.
Despite our flat forecast, you can modify the forecast above to see how Cisco’s stock could be impacted if CRS-3 were to lead to increases in Cisco’s core router market share.