Core router spending to rise with demand for next-gen platforms

Carriers are investing in edge networks because that's where the profit is, but they have left core routers gathering dust. Demand for next-gen platforms will reignite the market.

Carriers are investing heavily in edge network equipment and services because that's where the profit is, but they have neglected their aging core routers. However, the growing volume and complexity of IP traffic will breathe new life into the core router market over the next few years, as operators seek out more efficient and scalable next-generation routing platforms.

"What's happened over the last few years is the core has been somewhat under-invested [in] because a lot of carriers realized they needed to put more intelligence in the [edge] network and develop more services," said Ray Mota, managing partner at ACG Research.  "But ... after you do that for some time, it puts stress on the core."

Next-gen core routers: 'It all goes back to silicon'

As operators' legacy core routing platforms reach the end of their lifecycles or no longer meet network demands, service providers will look to core router vendors for higher capacities, greater port density and improved scalability, according to Shin Umeda, vice president at Dell'Oro Group.

Over the years, carriers needed to get more innovative and develop more services ... but they've just invented so much on the edge [that] all those types of traffic are causing more [pressure] on the core.

Ray Mota
Managing Partner, ACG Research

Although hardware components such as 100 Gbps interfaces will be critical for carriers, they’re not the only features they'll be considering, he said. Software and silicon must be powerful enough to make routing decisions at those speeds, Umeda said.

"On paper, a vendor could have a product that has all the right interfaces and all the right hardware, but when you turn on the machine, it doesn't function to the theoretical capacity—and capacity is partly throughput, partly scalability," he said.  "It all goes back to silicon."

Service providers will also demand more integration between the optical and IP layers in core routing platforms as carriers look to consolidate network devices, Mota said.

Is core router spending going up in 2011?

Core router spending stays relatively flat but peaks every few years as carriers replace or upgrade hardware, Mota said. Quarterly core router spending fluctuated throughout 2010 but hovered around $600 million, according to ACG's recent report, 1Q11 Worldwide Carrier Routing & Switching. The market reached $651 million in the first quarter of 2011, up 9.5% year-over-year, according to ACG.

Dell'Oro Group, which reported 11% year-over-year growth in the core router market, provided a somewhat different snapshot of the market, noting that it has seen five quarters of consecutive growth. Researchers must make certain assumptions and estimates when calculating these numbers, which accounts for the difference in perspective, said Umeda, who recently published the Dell'Oro's core router quarterly report for Q1 2011.

Umeda declined to release revenue numbers but acknowledged that the market hasn't seen a lot of activity or any meaningful fluctuations in vendors' market share since the last spending spike between 2005 and 2008.

Core router spending will be reignited over the next few years by the "tremendous capacity requirements" of video and in-house content delivery network (CDN) services; network convergence with Long-Term Evolution (LTE) deployments; and growing consumer and enterprise adoption of cloud computing services, said ACG's Mota. 

"Over the years, carriers needed to get more innovative and develop more services ... but they've just invented so much on the edge [that] all those types of traffic are causing more [pressure] on the core," Mota said. "I do see [core router investments] picking up over the next few years."

Can Huawei's core router business penetrate North America?

Cisco Systems, Juniper Networks and Huawei have all released or at least announced their high-performance, next-generation core routing platforms—the CRS-3, T4000 and NetEngine 5000E (NE5000), respectively. Cisco currently holds a 57.9% share of the core router market, followed by Juniper (30.5%) and Huawei (9.9%), Umeda said.

But what those numbers will look like two or three years from now is anyone's guess, he said. Service providers tend to be incredibly loyal to their key suppliers, but that may change as the top three core router vendors introduce their next-generation platforms at the same time, Umeda said.

"[Carriers] usually stick to those vendors for at least a generation of the product [lifecycle]. It could be four or five years before they even open up to the idea of bringing in a new vendor," he said. "But as we get into the next year and a few years beyond that, we'll see much more competition."

At first blush, Huawei appeared to have made significant strides in the first quarter of this year, increasing core router revenue by 34%, according to Dell'Oro. Cisco grew its core router business by just 7% and Juniper by 13% in that same quarter, Dell'Oro reported.

But for Huawei, that year-over-year growth was not as meaningful as it appeared, Umeda said. Huawei's core router business had a "relatively low" quarter at this time last year, which artificially inflated its numbers this year, he said.

Huawei's core router business made $15.3 million in the first quarter of this year, whereas Cisco and Juniper respectively brought in $406.8 million and $214.2 million, according to ACG. However, even revenue numbers can also be misleading with Huawei, Mota said.

"Small is relative. If you look at Huawei from a revenue perspective and from a unit perspective, it's two different types of scenarios," he said. "They actually do have a lot of [core routers] deployed out there, but a lot of them have been given away for free or at a low cost because they're focused on penetrating the market."

Although Huawei has made strides in its native China and won some deals with carriers in emerging markets in Africa, the Middle East, Eastern Europe and Latin America, its ability to gain the trust of top Tier 1s in North America remains dim, according to analysts.

U.S.-based carriers have two concerns about Huawei's core routers: the quality of the equipment and the political baggage that comes with deploying the routers.

Huawei's optical equipment has done well in North America, but operators are squeamish about the political backlash associated with deploying any Layer 3 devices, which offer visibility into the traffic, Mota said. It remains unclear whether those concerns are real or unfounded, but Mota said they continue to overshadow the attractive pricing discounts Huawei offers over its competitors.

Both analysts agreed that Huawei has yet to match Cisco and Juniper in terms of performance for core routers.

"Even though they're cheaper ... they need to focus more on reliability," Mota said. "A lot of these [telecom network engineers] are saying, 'I don't care how cheap it is. I don't want it to cost me my job.'"

Huawei's silicon and software cannot deliver on the speeds that its core router interfaces suggest, but its recent research and development investments may push it closer to competing with Cisco and Juniper, Umeda said.

"In the case of Huawei, historically the prices of their products were not good enough [to justify the risk]. Even if they had extremely low prices, the [carriers] were not willing to sacrifice the functionality," he said. "At some point, if [Huawei gets] close enough, then price becomes more effective. The [carrier] may be willing to accept a little bit lower performance ... but they're not there today."

Let us know what you think about the story; email: Jessica Scarpati, News Writer.

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