(T) The Mobile Internet is mostly driven by the new generation of mobile devices, faster wireless networks and all the new Web services that we are using every day. There are two types of wireless networks that enable the Mobile Internet: the present 3G cellular networks (migrating soon to 4G technology) and the Wireless LANs or commonly known as WiFi networks (and specified by the IEEE as the IEEE 802.11a/b/g/n standard).

Cisco Systems is unequivocally the leader in wireline IP networking with its revenues mostly in Ethernet switching and IP routing. But while Cisco is the leader in Wireless LAN switching, it has always left the cellular wireless infrastructure market to other vendors such as Nokia, Ericsson, and Motorola that have built over time the CDMA and GSM networks that we are using every day with our cell phones. And, that strategy seems to have been working quite well to Cisco which has always focused on the network infrastructure supporting the Internet Protocol (IP).

Like Microsoft, Cisco has been a fearsome competitor. But what it is worth noticing is that two out of the three networking start-ups namely Starent Networks, Aruba Networks and Riverbed Technologies that had IPOs in 2006 and 2007 before the 2008 financial crisis are leading in their respective markets ahead of Cisco. And, investors in those three companies have been quite rewarded by their financial performances. Jim Cramer in his Mad Money show has recommended many times those three stocks. So the question is now for those investors if any of those three companies could be the next Juniper Network.

Cisco’s Strategy is to Expand Beyond Networking

Cisco’s strategy is better illustrated as the opposite of Oracle’s strategy. Oracle’s Larry Ellison CEO has bought all major enterprise software companies (PeopleSoft, Siebel, Hyperion, BEA….) to the exception of Microsoft and even bought very recently a hardware company: Sun Microsystems mostly for its software: Java and Solaris!

Cisco’s John Chambers CEO strategy is diametrally opposed to Larry Ellison’s one. Cisco is focusing expanding beyond its core networking market and growing its revenues in particular into:

• Software with Cisco’s Application Networking (or previously known as Service Oriented Architecture (SOA))
• Web services through its WebEx acquisition
• Or more recently into the blade server market with its new Unified Computing product line and so competing with Dell, HP, and IBM in the datacenter.

For the last few years, Cisco has bought more non-networking start-ups than networking ones and hired more executives outside the networking industry than inside the networking industry.

However, Cisco leadership and revenues in those new markets are still not noticeable and it is still not obvious if Cisco will succeed expanding beyond networking. As well explained by James Collins in his book “Built to Last”, it always a difficult challenge for a $36 Billion company to “preserve its core” markets while at the same time “simulating progress” towards new markets. Cisco Q4 earning reports was good in particular on the profit side due to some significant reductions in operating costs that Cisco seems always able to master.

But, while Cisco is focusing on expanding beyond networking, this might leave a window of opportunity for the new network equipment providers such as Starent, Aruba and Riverbed.

No Competitor Except Juniper Has Taken any Meaningful Market Share from Cisco

In 1998, Juniper was the first routing vendor to deliver to worldwide service providers such as AT&T, BT, or NTT a high-end router with an OC-192 or 10 Gigabit/second interface for core Internet routing. Service Providers are always looking to have two suppliers. The ability of Juniper to build complex routing products that work led Juniper to take some market share from Cisco core service provider routing business. Later Juniper acquired NetScreen in 2003, a security firewall vendor, to expand its business in the enterprise networking marketing. But Juniper has never been able to take significant market share to Cisco in the enterprise networking market.

Among the 20 Ethernet switching start-ups of the 1995-1998 time frame, only Extreme Networks and Foundry Networks survived. But Extreme and Foundry switching revenues combined have never exceeded $1 billion – while Cisco switching revenue is beyond $15 billion (Foundry Networks was acquired by Brocade Communications for $2.6 billion in 2008).

The Starent – the leader in SGSN and GGSN Equipment for North America Wireless Data Networks

Starent Networks mainly supplies two types of network equipment: the SGSN and the GGSN that are required to build the General Packet Radio Services (GPRS) network that can support mobile device to access the Internet. Basically, the SGSN is responsible for the delivery of data packets from and to the mobile stations within its geographical service area while the GGSN converts the GPRS packets coming from the SGSN into the Internet Protocol (IP). So whenever you are using your iPhone or BlackBerry to check your e-mail, the chances are pretty high that you are connected to an SGSN and GGSN from Starent.

The target market for Starent is roughly $1.7 billion growing at 14%. Besides Cisco, Starent’s competitors include Ericsson, Nokia Siemens, Alcatel Lucent and Huawei. Starent is the market leader in North America while in foreign markets, legacy telecommunication equipment vendors lead depending on their geographical strengths.

Starent Q2 earnings report on July 23rd was $78.3 million in revenues, 28% up from a year ago, and $15.2 million in profits or 20 cents per share – while analysts were expected 17 cents per share. Starent market capitalization is $1.62 billion.

Aruba – the Challenger to Cisco for Wireless LAN Switching

Aruba Networks supplies all the equipment required to build Wireless LANs which include mainly the controller to tunnel the wireless data traffic to the LAN and the access points that connect the wireless devices such as notebooks WiFi-enabled to the controllers. And, Aruba has attempted to innovate on the technology side in securing the Wireless LAN. So whenever you are working in a Starbucks with your notebook, the probability is pretty high that you are connected to an Aruba switch.

The worldwide Ethernet switching market is roughly around $17 billion with Cisco owning most of that market. Over the years, most of the switches will be migrated to the exception of those in the data center to support wireless LANs. Aruba is the only challenger to Cisco for Wireless LAN switching.

Aruba Q4 earning report will be on August 27th. Its Q3 earnings report was $45.8 million in revenues, 7.5% up from a year ago, beating analyst expectations for $42.8 million and a loss of $5.8 million or 8 cents per share. The better than expected Q3 revenues have boosted the stock in the last few months. Aruba market capitalization is $750 million.

Riverbed – the leader in WAN Traffic Optimization for Enterprise Networks

Riverbed Technology provides networking equipment to optimize the traffic between remote business locations across any Wide Area Network (WAN) network. Basically, Riverbed technology improves the performance of transporting data and caching applications data in order to lower the bandwidth requirements. As a result, it decreases the number of remote servers and applications in enterprise networks. Using Riverbed equipment, IT departments can rely more on consolidating their IT resources because of fewer needs on distributing resources.

The target market for Riverbed is roughly $1.1 billion growing between 5 and 10%. Besides Cisco, Riverbed competitors include Blue Coat (which merged with Paketeer). In terms of leadership, it is a close race between Riverbed and Cisco with each of the company holding between 25% and 28% of the market shares. But according to Gartner, Riverbed is ahead of Cisco in terms of execution and vision.

Riverbed Q2 earnings report on July 24th was $91 million in revenues, up 12% up from a year ago but below the $93.6 million expected by the analysts and a loss of $290,000 or less than a penny per share. Riverbed market capitalization is $1.4 billion. Its stock was severely punished after its Q2 revenue miss.

What to Expect from Starent, Aruba, and Riverbed in the Future

If Starent, Aruba, and Riverbed continue to innovate and execute well, their stocks will likely be outperforming since all of them are in growing markets. However, if they let Cisco innovating faster than them or do execute poorly, their stocks will likely be punished by investors. Those three companies face different challenges. In the wireless markets, it is much easier for Starent to take the lead over Cisco but Starent will have to grow internationally. While in the enterprise networking, it much harder both for Riverbed and Aruba to compete with Cisco, in particular for Aruba which is competing to Cisco in its core product portfolio. Riverbed needs to leverage the application vendors and take market share from Blue Coat to grow – while Aruba has a lot of room to take a more significant market share from Cisco.

Note 1: The picture above is the Cisco CRS (Core Routing System) product.

Note 2: For full disclosure, I own both Aruba and Riverbed stocks.

Note 3: Content for this article is based on publicly available information.

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