Cisco's Speedy New Router Will Take a While to Hit the Bottom Line

Michael Fitzhugh

Cisco Systems (CSCO) reclaimed bragging rights in the world of enterprise information technology on March 9 by unveiling one of the world's fastest routers, equipment that serves a crucial traffic-cop function on the Internet, directing data along its ever-more-congested main arteries.

The company's new CRS-3 router is likely to help Cisco protect and possibly gain market share in the high-end routing market. But despite the company's claims that the router would "forever change the Internet," it didn't even change Cisco's share price, which landed at $26.13 following the news, exactly where it had closed the evening before the announcement.

Still, the real impact of the CRS-3 on Cisco's bottom line may take a while to unfold.

"We believe demand for the product from large service provider customers will materialize due to unprecedented levels of video and mobile traffic on service provider networks," Rohit Chopra of Wedbush Securities told clients.

That growth may not come until fiscal 2011 or fiscal 2012, Chopra said. But the CRS-3, "given the breadth of capacity, speed, and network intelligence could (gradually) help Cisco regain some of the lost share," he said.

Aimed at Videoconferencing and Streaming Movies

The need for high-powered routing capacity is clearly growing. As part of Cisco's Tuesday announcement, AT&T (T) also said its data traffic grew by 40% between 2008 and 2009, due at least in part to the company's wildly successful data-intensive Apple (AAPL) iPhone franchise.

AT&T's Chief Technology Officer John Donovan called the company's successful trial of the CRS-3 "a key milestone in our ongoing effort to deliver the industry's most advanced and capable IP backbone network."

As consumers gradually adopt more network-taxing services, such as personal videoconferencing and on-demand video downloads using set-top boxes, telecommunications companies such as AT&T will need to upgrade their network infrastructures with speedier and more efficient routing equipment.

The CRS-3 can direct data from its source to its destination as much as 12 times faster than its aging predecessor, the CRS-1 (Cisco skipped over a CRS-2 label). It can also integrate with Cisco technology designed to improve the efficiency of data centers, an issue of growing concern for businesses that are reliant on such centralized facilities, but can't always maximize their utility.

Of course, Cisco isn't the only player in this market. Its rivals have already announced their own plans to meet those needs. Both Alcatel-Lucent (ALU) and Juniper Networks (JNPR) are developing routers that will compete with the new CRS-3.

Cleverly Creating Both Capacity and Demand

But Cisco, perhaps more than its competitors, has built its strategy on not only serving but also creating market demand for handling huge amounts of online video traffic. In the enterprise realm, the company announced plans in late 2009 to acquire the videoconferencing company Tandberg ASA, which claims to hold the highest global market share for business video infrastructure products. On the consumer end of the spectrum, it also owns Pure Digital Technologies, the pioneering maker of cheap and easy-to-use Flip video recorders.

Cisco has also worked to integrate technology for serving data-guzzling smartphones into its portfolio with the recent acquisition of Starent Networks.

In Cisco's favor, its new $90,000 CRS-3 router is aimed at an improving market. In January, new orders for communications equipment were up 3.1%, according to a U.S. government report.

Purchases That Are "Large and Sporadic"

Eventually, Cisco hopes the CRS-3 will replace a significant number of the nearly 5,000 current-generation routers worldwide. But the company relies for high-end router sales on the timing of capital spending by global communications service providers -- customers with a "tendency to make large and sporadic purchases," it said in a recent regulatory filing.

Whether or not Cisco's new router will really be the Internet-changing force the company promised in its PR hype remains to be seen. Zeus Kerravala, a distinguished research fellow at Yankee Group Research, said in a recent blog post that he doesn't think so. He also added: "But they did set a very high bar."