Now that Alcatel-Lucent (NYSE: ALU) has secured a lifeline, I want to take a look at what I would call a secondary business for Alcatel-Lucent. The company is massive with tons of technological innovations so calling one thing secondary is not a useful descriptor. However, my favorite thing about Alcatel-Lucent is lightRadio, but now I want to look at its routers. The edge router is something that ALU has been in for a while. The company has started making some headlines with that router. I am interested in their core router, because I am reading that it is technologically impressive.
Comparing two products head to head is always tricky, because marketing plays such a heavy role. Alcatel-Lucent always attempts to be strong in the innovation department. I think their routers have some interesting technological innovations, but I would always defer to experts. There was an article on lightreading that was very interesting though. It discussed the sniping between different companies over, which one had the real edge. The ribbing between different companies is funny, and those direct quotes really show some level of hubris on the part of market leader Cisco Systems (Nasdaq: CSCO). It is not entirely undeserved.
It is Juniper Networks (NYSE: JNPR) that really has something to worry about from ALU rolling out an impressive core router. Core routing is where the money is. ALU has already made a space for itself with edge routing. It started with nothing and now has around 25% of the market share. The company is not really in a position to wait that long for success in core routing, but since the profit potential is higher it could go a long way to setting the company on a solid footing. Think about the last few weeks after ALU secured the loan from Goldman. If a life line is worth that much, what would real profitability be worth.
That really sets the stage for Alcatel-Lucent. I have talked about this before. The goal for ALU is profit, not more profit. It really does change things. The company can declare victory at the smallest of deals, and as long as it adds some profit it is worth it. I am not saying the company should be taking $500 contracts, because of general overhead costs. Any path is worth pursuing if it is profitable and has the potential for growth when a company is in Alcatel-Lucent’s position. Routers meet that mold.
Since routers are part of the internet I think there is an opening. This whole area from networking, the cloud, and mobile data is extremely interconnected so the attention the cloud and mobile data get also touches on networking.
I see three different levels for most things when it comes to providing a service through technology. There are the consumer who need, want, and demand more. This is true with data. As a collective consumers generally want and demand more than the technology can provide. With mobile data it is becoming a need as well. Sometimes it is annoying getting directions in traffic, because the network gets so slow.
The next level is what the technology can provide. This level incorporates some realities like not being able to use 100% of the spectrum for each carrier when talking about mobile data. Or having fiber bundles the size of bridge suspension cables running all over the place. Technology rarely gives us more than we want, and when it does needs change to quickly reestablish scarcity. Fast internet is not fast enough. The last level is what can be economically provided. This includes things like desire for a certain level of profit as well as standard things like manufacturing costs, development costs, and expertise.
These levels are not just separated uniformly, but also change at different rates. Consumer demand tends to accelerate the fastest, but unlike technology or economics there does not tend to be immediate jumps due to breakthroughs. The absolute technological edge generally moves faster than even normally available technology. The second two levels can be complicated. If technology stagnates for too long then the economics catch up, but generally the bleeding edge and what is economically friendly are further part with the gap growing until there is some breakthrough in processes that allows what is economical to take a big jump.
I think that consumer demand is growing at an even rapider pace now. The internet needs to be faster both for computers and for mobile phones. It is not just about the speed. It needs the capacity to keep the high speed, which I think is the real problem. It needs to be fast for everybody at the same time. So the core router for Alcatel-Lucent can have a market particularly since the company laid the groundwork with its edge routers. I do not imagine that the price is excessively higher than the competition, though I also do not think the technology is as much of an improvement as the marketing hype would suggest.
You can read about the technical specifications on your own. My focus is whether there is room in the duopoly for a third, which by definition there isn’t so we should stop calling it that. ALU really does not need much since its goals are more about survival instead of world conquest. If Alcatel-Lucent can deliver a high-end product at similar price levels then it will at least be detrimental to Juniper’s market share. If Cisco loses market share it has other businesses that are more important. For Juniper routers are the focus of the business. ALU just has to get its foot in the door, because once a customer buys 1 box more boxes are needed to meet demands so customers buy more and are generally stuck with the company they choose. So yes, between the industry, ALU’s position, and the technology there is a space for ALU. I hope they can turn themselves around before it’s too late.