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Starent Both an Offensive and Defensive Move for Cisco

Two weeks after Cisco dropped $3 billion to buy Tandberg it shelled out another $2.9 billion to acquire Starent Networks, a hefty price tag for a company that did $254 million in revenue in 2008--but in the long term will be well worth it for Cisco. That's just under $6 billion in a three week period on two strategic acquisitions, something you can do when you build a war chest the size that Cisco has. The Tandberg purchase had been expected for a while and the value is pretty obvious but the Starent one has many different implications to the rest of the industry.In the carrier market right now, there is no better opportunity to sell layer 2/3 equipment than the opportunity that exists in the wireless markets for upgrades to existing networks and migration to LTE to get us to 4G eventually. This is a huge opportunity right now due to the incredible growth we're going to see in the uptake of mobile data services. At Yankee Group we're predicting that the mobile data market will create capacity expansion that is 29 times what it is now over the next six years, and all of these networks need both wireless equipment and wired infrastructure. Starent provides both a direct wireless opportunity for Cisco as well as a way to sell more of its layer 2/3 infrastructure, the big money maker at Cisco.

The go to market strategy for most of the large infrastructure vendors such as Alcatel Lucent, Huawei, Ericsson and Nokia Siemens has been to sell solutions that include both wireless and traditional wired equipment. Most of these companies have made significant investments on both sides of the business and have been able to get much more competitive with Cisco and Juniper in the router space. For all intents and purposes, that market is still a duopoly in the carrier space, but some vendors, most notably Alcatel Lucent have been closing ground quickly. For Cisco, they could talk the talk of the single network vision, it's an increasingly wireless world with traffic going up, etc but they really didn't have the product to fulfill this vision--so they bought Starent to help fill this hole and compete better with the likes of the vendors that are listed above. So, in this case the move was a defensive play to help keep the likes of hard charging Alcatel Lucent at bay.

However, this was also an offensive strike against Juniper. Juniper is Cisco's arch nemesis in the router market--a much smaller company than Cisco,but a formidable foe in the areas of carrier routing. In fact, Juniper probably did a better job of stealing market share from Cisco in an area that almost every one thought was unstealable than anyone else has done in the past couple of decades (second might be Procurve and switching). Now Juniper, like Cisco, is facing the same challenge: How does a layer 2/3 pure play take advantage of this explosion of traffic in the mobile markets when it has no mobile infrastructure to sell, and almost all of its competitors do? It does so through partnerships. Industry chatter had been that Juniper had been competing for a significant chunk of LTE business at one of the major mobile operators and the operator had told Juniper to go work with Starent and come back with a bundled offering.

Since then, I've heard all kinds of rumors about the relationship that Juniper had with Starent, including Juniper being a reseller, strategic partner and obviously, an acquisition target. In fact, over this past weekend I exchanged emails with an equity analyst friend of mine discussing who Juniper might buy next and Starent was at the top of both of our lists since it presents such a huge opportunity for Juniper. Then Monday morning I woke up to find out that Cisco had swooped in and bought Starent out from under Juniper, putting Juniper in a very tough position. So in this case, I see the acquisition as an offensive strike against Juniper. If this were a game of Monopoly (and it's rapidly becoming that), Juniper just pulled a card telling them to "return to go but not collect $200."

I'm not exactly sure where Juniper turns to from here. The joint venture with NSN hasn't borne fruit yet so they might have to put more emphasis on developing their own stuff. This would ensure that the Junos everywhere vision is fulfilled, but Juniper is a small company compared to the other vendors in this space and they're already working on building out their Ethernet switch line more, they're rumored to be building their own wireless LAN (go buy Aruba!) so I'm not sure how much more capacity they have. They're a great engineering organization but they do have limited resources.

Overall I think it's a great move for Cisco in that it makes them more competitive with many of its foes and keeps another one at bay.