Today, we believe the router is in a similar situation today as the personal computer was in the mid-80’s. While Cisco may have done an excellent job to date in the router business, never before has it faced competition in the router business as it does today. There are direct competitors, such as Juniper [: Nasdaq] and Avici [AVCI: Nasdaq], along with a host of startups, aiming to take away market share from the leader. However, the greater threat, we believe, will come from individual component suppliers.
With the success that the communication IC companies have had over the past year, more startups are focusing on the silicon content of the router than ever before. Cisco has historically done a good job of outsourcing many segments of the line card to other vendors. However, as we move forward, those same vendors are looking to control more of the real estate. This means control of the network processor, currently designed internally by Cisco. Also, the growing acceptance of foundries for manufacturing purposes and the subsequent improvements in process technology at the foundries has made fabless design a more competitive business model. As design cycles shrink with standard processors, along with an ever-increasing addressable market for individual components, we could see additional “strategic” components become markets in themselves.
For example, with the increasing size of the Internet, the Border Gateway Protocol (BGP) routing tables used for finding sites on the Internet, are growing much faster than the rate at which processors and memory speeds are increasing. Software applications addressing the BGP issue could spawn a new wave of startups, creating the opportunity for a new breed of millionaires.
To be fair, we think it will still be a few years before the router is totally disaggregated. For one, the Cisco operating system running the routers is still by far the industry norm. Displacing an embedded operating system is never easy. Also, Cisco has been actively investing in many of these startups, even buying them, so that it may participate more actively in the future evolution of the market.
Still we think the glory days for Cisco, particularly for the stock, are behind them. In fact, it may be impossible to prevent the next wave of startups from overthrowing Cisco. Natural business evolution usually moves faster than any one company can respond and Cisco is no exception. John Chambers, CEO of Cisco, is faced with one of the most difficult tasks in business these days.
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