Cisco remains at the forefront of internet infrastructure
Cisco’s newest generation router system, the CRS-3, “will forever change the internet” according to the company’s ebullient chief executive, John Chambers. While he is not shy about using superlatives about his company and its products, industry reaction was not as overwhelming.
Nonetheless, Cisco remains at the forefront of the internet infrastructure. Its products are crucial for telecommunications carriers to handle the massively increasing volume of data moving around the internet. In that context, the CRS-3 is another important cog in the global internet hardware market.
Cisco’s share price has halved since 2007, bottoming out in 2009, as seen on the chart below. The stock has recently managed to breakout above the long term resistance found at the $25 level. We would now expect this level to provide support for any pullback before the share price drives higher.
Mr Chambers decided that announcing the CRS-3 had a capacity to handle 322 Terabits per second was a little dry. So he spiced it up a little with a hypothetical application. If 72 of the new routers were connected together, they could deliver every movie ever made in four minutes over the internet, or deliver the entire Library of Congress (the world’s largest library) in just over 1 second.
The point he was trying to emphasise, in our view, was that the volume of data is increasing massively due to the increased use of video data files and devices. Live and near-live video data consume far greater amounts of internet capacity because the data files are so much bigger. For example, while the complete works of William Shakespeare totals approximately 5 megabytes (MB), a typical pop song occupies 4MB and a two-hour movie can be compressed into 1-2 gigabytes (1-2,000 MB).
This is why telecommunications carrier such as AT&T and Verizon are already trialling such routing devices in 100 gigabit per second field tests. AT&T expects to begin deploying such devices in the next few years.
Some commentators said the devices represent only a small part of Cisco’s total sales, around 4% of Cisco’s total sales each year. The suggestion is that the new device will not contribute meaningfully to Cisco’s future earnings.
In a nominal sense this may be correct, but it ignores the larger picture about how such devices improve the overall utility of the internet. The downstream effect is multiplied many times over by the ability of users to transfer more and more data. It also overlooks the unheralded advance in data usage between machines without human intervention. Such database-to-database communication has the potential to swamp the amount of data consumed by humans.
The critical factor to recognise in Cisco’s announcement is that the CRS-3 is the latest in its long list of devices that facilitate the growth of the internet. The more the internet grows, the more it depends on Cisco’s infrastructure.
Cisco already predicts the amount of data flowing over the internet each year will reach 667 exabytes (or 1 billion gigabytes). Importantly, the company believes the ability of the network to carry all this data is not keeping pace with the data growth. “If we don’t provide this type of foundation for the future of the internet, we actually become the constricting factor on the ability for it to grow”, said Mr Chambers.
