Juniper Close to Surpassing Brocade's Ethernet Revenue

By David Gross

There was speculation for years that Juniper would acquire someone like Extreme or Foundry to get into the Ethernet business.  But rather than hastily run into a deal, the router manufacturer took its time building its own products, releasing its EX series of switches in 2008.   At the same time, Brocade diversified into Ethernet by acquiring Foundry for $3 billion.  

When Brocade acquired Foundry, the Ethernet supplier was doing $165 million in revenue a quarter.   In the 3rd quarter of 2008, Foundry's last as an independent company, its rival Juniper sold just $18 million worth of Ethernet switches.   But during the 3rd quarter of 2010, Juniper sold over $100 million of its EX Series Ethernet switches, more than a five-fold increase in two years, while Brocade sold $122 million worth of Foundry-developed products in its quarter ended July 2010, a 25% decrease over the same period.

BRCD's 3rd Quarter Ends in July

Both Brocade and Juniper have strong relationships with IBM, which resells both company's products.   And Brocade has long had a dominant share of the Fibre Channel switch market.   But this is what has been interesting.   Selling Fibre Channel and Ethernet together under one company has resutled in stagnant Fibre Channel revenue, and declining Ethernet revenue.   Meanwhile, in an article at NetworksAsia, a Juniper exec reported in 2009 that over half of its EX switches were being sold with routers.   Essentially, just as Cisco has long been able to sell its routers and switches to the same customers, Juniper has been able to do the same, albeit in much lower volumes.   Yet, Cisco never needed Fibre Channel switches to sell Ethernet products, and Brocade never needed Ethernet switches to sell Fibre Channel switches.   In spite of all the "convergence" hype, SANs and LANs simply do not mix well.   The LAN/SAN integration we're supposed to get with Fibre Channel over Ethernet reminds me a lot of the LAN/WAN integration we were supposed to get with IP over ATM.

While Cisco probably scared Brocade a bit when it started developing SAN-OS, now NX-OS, companies like Juniper, F5, and Riverbed have had success against the networking giant by focusing on one product category at a time, not by trying to replicate much of its product line, as Brocade is now trying to do.   

Brocade really just needs to cut its losses in the Ethernet business.   The $122 million it booked last quarter in "Ethernet" actually includes the ServerIron load balancer.   More importantly, its gross margins for the acquired Foundry products have fallen into the mid-20s.   They were in the 60s when it bought the company two years ago.   Now I wouldn't count Brocade out as a company, it's been dominant for over a decade in storage networking, but while it thought it could take on Cisco, it has wound up losing to Juniper. 

Juniper Sags On Modest Revenue

By David Gross

Juniper (JNPR) reported quarterly revenue of $1.01 billion after yeserday's close.   While this was up over 20% from last year's third quarter revenue of $823 million, Wall Street was disappointed.   Catharine Trebnik of Avian Securities commented to Reuters that:

"I think the market was expecting more on the top line, people thought they were going to kill the number. And there was a lot of that built into the share price."

This pretty much summed up Wall Street's view, and the stock was down 2% after hours.   But while the top line might not have impressed, the bottom line was up significantly year-over-year, over 60%, to $134 million.    Much like we saw with VMWare, Juniper's been growing revenue significantly faster than its SG&A, or operating, costs.   The 20%+ growth in revenue was accompanied by SG&A's that rose from $224 million to just $248 million, or barely over 10%.   R&D expenses were up over 20%, so Juniper's been hiring more engineers while creating few new positions in marketing, sales or finance.


While the company has long depended on telecom carriers, it has been stepping up its presence in the data center, including an announcement last week that PEER 1 hosting was filling its data center with Juniper's EX-series Ethernet switches.   Additionally, it has OEM'd BLADE's Top-of-Rack RackSwitch G8124, and branded it the EX2500.     But it's been silent about 40 Gigabit ports for data center networks, where we've seen announcements in the last week from Mellanox (MLNX), BLADE, and Extreme (EXTR).


  

IBM's Acquisition of Blade Network Technologies a Smart Move

By David Gross

Rumors were flying last week that IBM (IBM) was about to buy Brocade (BRCD). Well, that still hasn't happened, but the large technology supplier is going to make a much more sensible deal - acquiring top-of-rack switch maker Blade Network Technologies.

Cisco's (CSCO) proprietary VLAN protocols have far less of an impact in the top-of-rack segment than they do elsewhere, which has made this small portion of the Ethernet market more friendly to alternate suppliers than the traditional corporate LAN market. Moreover, many vendors missed out on this segment because they were so focused on building massive carrier Ethernet boxes with overcooked operating systems, while Blade and Arista have kept things simple and straight forward by focusing on latency, not accommodating massive routing tables.

In addition to an existing sales relationship with IBM, Blade has an OEM arrangement with Juniper (JNPR), who was an investor in the company. Financial terms of the acquisition have not been disclosed.

Will 100 Gigabit Create New Data Center Networking Startups?

When MPLS (Multi-Protocol Label Switching) was released in the late 90s, Juniper (JNPR) entered the market with a proprietary packet forwarding ASIC, i.e. Application-Specific Integrated Circuit. When Gigabit Ethernet arrived around the same time, Extreme (EXTR) and Foundry (BRCD) introduced their proprietary packet forwarding ASICs. As 10 Gigabit Ethernet was being ratified in 2002, Force10 hit the scene with its proprietary packet forwarding ASIC. So who will develop a proprietary packet forwarding ASIC for 100 Gigabit? No one.

As process geometries in the semiconductor industry get smaller, the fixed design costs for each chip increase. Ten years ago, when 130 nanometer was still a state of the art technology, it cost around $10 million in R&D to develop an ASIC for forwarding packets. Today, at 40 nanometers, it costs well over $100 million.

Regardless of what happens with the economy, VCs fondness for the industry, or the development of the data center market, it is no longer financially possible for a startup equipment vendor to build a carrier-class forwarding architecture with its own ASIC, in addition to having to write an NMS, and sell a box. This is why startups like BLADE and Arista are focused on boxes that have LESS functionality than competing platforms from large vendors, but can also shoot frames across a network with less latency, as long as there aren't too many different places that traffic can go. In some respects, they're like the Model Ts of data networking, simple and inexpensive platforms with fewer configuration options but very strong price/performance.

In a follow up post, I'll look at what this means for programmable logic vendors like Xilinx (XLNX) and Altera (ALTR).

Router Vendors Need to Control Costs to Remain in the Data Center

The price gap between router ports and switch ports continues to grow, with 10GBASE-LR ports going now for about $4,000, compared to over $200,000 for OC-192 POS ports. And while short-reach products like 10GBASE- SR and 10GBASE-CX are anywhere from 30% to 70% cheaper than 10GBASE-LR, there is only about a 15% savings when putting a 1310nm transmitter on an OC-192 POS card in lieu of 1550 nm transmitter.


The impact of persistently high router port prices is that everyone outside the major telcos is looking to bypass them, either by pushing more traffic forwarding down to the optical layer, or by stretching point-to-point Ethernet networks to reduce the number of routing hops. While there is an operational benefit of containing IS-IS or OSPF tables, the cost of filling up a network with OC-192 or OC-768 router cards is simply prohibitive for many enterprise and research applications.


Router cards are not likely to get much cheaper, because many of their costs are tied to hardcoded features that can be done in software at lower line rates. The advent of 10 Gigabit networks has brought along heavy demand for TCAMs and network processors that speed up route lookups, but adding more electronics has only exacerbated the price gap relative to static connections. Add in a few load balancing features or the ability to forward on TCP port number and electronics costs really take off relative to standard Ethernet switches.

While Cisco (CSCO) has both switching and routing products it can put out there, Juniper (JNPR) arrived late to the top-of-rack switching market, and many of its efforts to beef up memory and operating system capabilities might impress telecom providers, but serve little purpose in the data center.