Core revival

Not long ago, the IP core was universally celebrated as a meteoric wunderkind. Opinion soon soured as the industry did an about-face and fled from all things core and backbone, and instead, access, metro and edge were the places to be. After taking quite a battering in the past 18 months, the market for IP core routers is showing faint signs of recovery. The last two quarters of 2002 were the smallest declines in the market since there was a slight uptick in the third quarter of 2001. However, recovery does not mean a return to the outrageous growth of 1999 and 2000.

The fourth quarter of a calendar year is typically a strong quarter for network equipment sales, as service providers spend the remainder of their year’s budget then. In a year of overall deep capex cutbacks, “strong” means “small decline.” The IP core router market fell just 2% in the fourth quarter. Last year wasn’t pretty, declining 47% to $1.3 billion, following a sub-par 2001, which was down 4% over 2000.

We see a mediocre positive year in 2003, then growth through 2006, fueled by the following five major factors:

• Inexorable traffic growth

  due to increased corporate traffic and consumer broadband growth, and increasing bandwidth availability from faster services such as IP VPNs and Ethernet. Especially for incumbent telcos, IP growth will be significant; they are newcomers to transporting IP traffic and believe in the vision of advanced IP services as a growth engine. Voice traffic will move to IP networks as carriers adopt next-gen voice equipment. This will sustain router sales during this deployment period, which will continue for at least 10 years. Additionally, while MPLS VPNs are hot, and service providers are spending to build these new IP networks despite reduced capital expenditures, MPLS networks are not an end in themselves but an underlying service delivery mechanism for other services. The addition of VoIP traffic and MPLS traffic from the convergence of MPLS and legacy Layer 2 data services (frame relay and ATM) will drive more traffic to the IP core.

• After years of steep cuts in capex, service providers are focusing on smart capex, or the investment in new technology leading to increased operational efficiencies and reduction of operational expenditures, while allowing for new revenue. After years of steep cuts in capex, the future focus is on operational expenditures. There is a level of capex necessary for network maintenance, and many service providers are spending at this point. They are forced to look at opex, since they’ve gone about as far as they can go with capex. It's dangerous or potentially crippling in the long run to take it much lower. Service providers are showing growing concern to reduce operational expenditures, as it is the largest component of the cost of ownership, somewhere in the 55% to 60% range. The biggest bang for the buck is to reduce the number of networks (e.g., ATM and IP). Though today there is no technology ready for this major leap, at some point there will be a compelling need for smart capex to reduce the burgeoning opex of their data networks.

• Section 271 of the 1996 Telecommunications Act will be a key factor in the resurgence of IP core spending and will further the growth of edge router market. Through 271 relief, all four RBOCs are offering inter-LATA voice and data services in their states now, and perhaps will be in all states by the end of the year. Concurrent with this relief, RBOCs’ nationwide focus on data services will start slowly and will rely on leasing capacity where it makes economic sense. In 2002, BellSouth, SBC and Verizon launched new data service initiatives. This does not translate into a huge upfront buildout, but is tied to the state-by-state regulatory relief, and the real impact from RBOC efforts will be felt in starting in 2004.

• Traditional telecom equipment manufacturers have increased their interest in IP technologies. Relationships between traditional telecom equipment companies and IP-focused players are key to further IP adoption because the traditional telecom vendors have the ear and trust of major service providers around the globe. Siemens and Ericsson are channels for Juniper. Nokia sells Cisco core routers and Redback edge routers. Alcatel has built a core router and is exploring a solution for the IP edge. Lucent and, to a lesser degree, Nortel are sitting on the outside looking in, but we expect them to join the fray through partnerships, adding growth potential to the market. Acquisitions by established vendors are unlikely to occur, which is leading to a new wave of OEM deals and “big brother” approaches, in which the established vendors in a tangential market (e.g., voice switches or optical equipment) ink reseller or support contracts with start-ups. These approaches minimize risk for the established vendors, and have a positive long-term upside; growth is in data equipment sales as incumbents around the globe transition spending from legacy voice gear to data network equipment. 

• Service providers need a stable, reliable, and scalable IP network in place--which is a generation beyond the installed one--as the foundation on which to build the much-discussed, yet often-delayed IP services. Service providers will require more IP reliability as more services and revenue are derived from that protocol. IP OS reliability and resilient control planes are hot topics for routers, and vendors must have a solution now on the roadmap, as this will be an essential feature for the next wave of IP networks. To my knowledge, Alcatel, Avici, Chiaro, Cisco and Redback have announced routing resiliency, a key feature. Juniper is strangely quiet about this technology, perhaps to their long-term detriment. Another essential feature is scalability via distributed switch fabrics. This allows a single router to grow logically through additions of distinct physical chassis. As an added benefit, this should make the network less complex and increase equipment longevity.

In the next 18 months, most service providers will begin to upgrade to a next-gen IP core featuring distributed scalability via multiple chassis and a resilient control plane. Service providers are focused on making IP networks more resilient for two major reasons: to make IP a business-class service, and to eliminate the need for redundant IP core routers. To do so, service providers must invest in new technology. Due to some of the differences in needs for the next-gen core and the existing one, and despite the fact that Juniper and Cisco own more than 90% of the market, the technology change (i.e., forklift upgrade) for the next IP core creates a window of opportunity for other players.

Kevin Mitchell is Directing Analyst, Service Provider Networks and Next Gen Voice for Infonetics Research. He can be reached at Kevin@infonetics.com.