Cisco Swallows Starent; Votes with Customers, Not Architecture

| Oct 14, 2009 | Wireless Infrastructure | Competitive Intelligence Report

| Analyst: Peter Jarich

Current Perspective: Slightly Positive
Vendor Importance: Moderate/High
Market Impact: Very High

Event Summary

October 13, 2009 -- Cisco announced a definitive agreement to acquire Starent Networks for approximately $2.9 billion. Expected to close in H1 2010, the deal is subject to all customary closing conditions and regulatory reviews. When closed, Starent will become the new Mobile Internet Technology Group (led by Starent President and CEO Ashraf Dahod) within Cisco’s Service Provider Business.

Analytical Summary

• Current Perspective: Slightly positive on Cisco’s plans to acquire Starent networks, because the move is in line with Cisco’s strategic focus on mobile broadband. More importantly, it should lend Cisco a strong set of products for building its momentum with mobile service providers as mobile Internet traffic continues to grow… without driving the company into a market it does not know well. Yet, while Starent will give Cisco products to meet a variety of mobile packet core demands (standalone and integrated), the deal comes with a hefty price tag (approximately $2.9 billion) and forces Cisco to explain why its previous strategy of building mobile network applications – such as data gateways – on routers does not work for all operators, suggesting a potentially tortuous integration process going forward.

• Vendor Importance: Moderate to high to Cisco, because while the mobile Internet is a strategic focus for Cisco, Starent’s products and customers are not critical to its success; without Starent, Cisco would continue to be a well-respected, financially stronger, leader in IP and enterprise communications. That said, the company has made a commitment to expanding its presence in the mobile broadband space. To the extent that Cisco has not been as successful in a key component of the mobile core (the packet core) as Starent, acquiring its products (including new capabilities in the control plane and new standalone architectures) and customers should help it to execute on the mobile broadband and mobile Internet opportunity.

• Market Impact: Very high on the wireless infrastructure and mobile packet core markets, because the deal improves the lot of both players. Cisco will gain new (and, in some cases, better) products. Starent will gain new service provider channels. The packet core solutions from each company should gain access to new R&D resources. At the same time, however, competitors just ramping up their EPC offers are set to face a much stronger competitor – one with an EPC platform that has already been proven and with significantly expanded support capabilities.

CLIENTS ONLY

Current Perspective

Competitive Positives and Concerns

Recommended Vendor Actions

| Client access - Full report in Wireless Infrastructure | More information

Recommended Competitor Actions

• Specialized network application vendors – SBCs, security, content inspection, etc. – need to position Cisco’s acquisition of Starent as a validation of their strategy. Cisco has long argued that most of these functionalities would logically be subsumed by routers. Picking up Starent argues that routers cannot do everything with the scale that operators demand and that standalone products have a role.

• Ericsson and Alcatel-Lucent need to get their EPC solutions into the market and live networks as soon as possible. Both companies have new – read, untested – EPC offers. Both can claim a win with Verizon and its LTE network. Both need to use that win and deployments with Verizon to prove the reliability of their EPC offers and validate their performance claims ahead of other EPC builds.

• Ericsson and Alcatel-Lucent also need to consider integrating 2G and 3G functionality into their EPC offers. To be clear, both companies can offer 2G and 3G support in the packet core – either thanks to partners or legacy solutions. They are, however, the only vendors leading with new EPC products that do not support 2G and 3G traffic as well, something that operators looking for network management and CapEx efficiencies will increasingly demand (particularly in light of converged RAN offers).

• NSN needs to get its new Flexi Network Server (NS) and Flexi Network Gateway (NG) into the market as soon as possible. The company has done an admirable job of explaining why ATCA is the best platform for bearer and control functionality. Still, it is a departure both from what NSN has done in the past and from what all of its competitors are doing, making it a strategy that is almost universally derided by the competition. Combined with the fact that it is still a new offer, NSN must work quickly to prove out the value of the NS and NG, even if it needs to leverage 3G deployments before LTE builds pick up.

• As the only standalone data gateway vendor in the market once the Cisco-Starent deal goes through, WiChorus needs to begin selling its capabilities. To be clear, the sole remaining mobile data gateway specialist should benefit from its independent status. It will also, however, need to prove its mettle to benefit from this status. Using Clearwire as a case study will be a good start, but that needs to be followed by additional WiMAX and EPC or 3G wins.

Recommended End User / Customer Actions

• Operators currently considering the deployment of Starent products should be encouraged to move forward. Cisco lends an endorsement of Starent’s products and capabilities. It also lends those products added sales and service support, which should ease operator concerns, unless they are simply waiting for newer solutions from vendors such as Ericsson and ALU to be market-proven.

• Current and would-be Starent customers need to look for Cisco to move on new ST40-based innovations and applications post-acquisition. While it is unlikely that Cisco would want to kill off Starent’s successful gateway offer, its commitment to the platform going forward will be evidenced by plans to take it forward and improve it with new features and functionality.

• There’s no shortage of places for Cisco to begin improving on Starent’s gateway offers: more capacity, more complex content inspection, new applications. One improvement customers need to demand is an improved set of form factors. With gateways built on a broad array of 7600 series routers, Cisco was always in a position to deliver capacities and forms in line with operator demands. Starent, however, stuck with a single form, giving operators an obvious place to push for innovation.

• Beyond the mobile data gateway, Cisco customers need to express their demands for other standalone product requirements. Again, Cisco’s decision to buy Starent may signal a willingness to move on network applications that reach beyond their routers. If the vendor begins to rethink its reliance on routers for network-based applications, operators need to make their demands known, if only to guide its thinking.

CLIENTS ONLY

Current Perspective

Competitive Positives and Concerns

Recommended Vendor Actions

| Client access - Full report in Wireless Infrastructure | More information

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