ATandT Upgrades with Cisco

The telecom giant will upgrade its Internet backbone with Cisco routers and connect Internet hubs in 25 U.S cities to the upgraded network.

NEW YORK (Reuters)-Top phone company AT&T Inc will buy core routers from Cisco Systems Inc to upgrade its Internet backbone network, helping to ease fears that slower economic growth will hurt network equipment sales.

The companies did not reveal the price or size of the order for Ciscos CRS-1 core routers, which direct massive amounts of Internet traffic for service providers, but AT&T said on Monday it plans to connect Internet hubs in 25 major U.S. cities with the upgraded network in the coming months.

The announcement comes amid concern about weaker spending by U.S. companies after Cisco reported a fall in orders from banks and automakers last quarter.

Investors have also pointed to competition from smaller rival Juniper Networks Inc, which recently launched a new core router called the T1600 to rival the CRS-1.

Lehman Brothers analyst Inder Singh said news of the order, as well as an announcement that Cisco now has 100 customers for its high-end video conference system called TelePresence, showed the company was benefiting from a strategy of broadening revenue sources.

"Overall, these announcements support our belief that Ciscos diversified strength, led by carrier, commercial, emerging markets and advanced technology, could offset potentially slower spending by U.S. companies," he said.

While Cisco is the worlds biggest manufacturer of routers, it has recently been expanding into a wider array of products including software and video. It has also been broadening its geographic reach, investing heavily in China and India.

The CRS-1 sells for $500,000 to more than $1 million, depending on the configuration. Most buyers are large phone and cable service providers such as Comcast Corp, Deutsche Telekom AG and Sprint Nextel Corp.

Cisco shares rose 1.3 percent, or 36 cents, to $27.81 in early-afternoon trade. Juniper shares rose 2.6 percent, or 80 cents, to $31.70.

Growing Traffic

AT&T said the network upgrade was in response to growing Internet traffic as more consumers use the Web to make phone calls and to watch online videos, activities requiring higher connection speeds. The new network will also be used to deliver AT&Ts advanced Web and video service, called U-verse.

"As the demand for Internet and IP-based applications continues to explode, IP traffic on the AT&T network has doubled throughout the past two years, and we fully expect this substantial growth to continue in the future," said John Stankey, AT&Ts group president of telecoms operations.

AT&T said it chose the CRS-1 after comparing it with similar equipment from other vendors. The upgrade helps to quadruple the speed of the backbone network to 40 gigabits per second.

Analysts forecasts on Internet traffic growth vary, but Cisco expects Internet protocol (IP), or Web-based, traffic to nearly double every two years through 2011.

Cisco says Web-based video, including webcam traffic and advanced video services like U-verse, is expected to lead the traffic growth, supporting demand for its network equipment.

Kelly Ahuja, vice president and general manager of Ciscos core routing business unit, said one key advantage of the CRS-1 over competing products is its ability to gradually expand without disrupting the network.

"One of the things we talk about with the CRS-1 is the unprecedented scalability. The system is designed to scale in capacity ... you dont need to rip it out for a very long time," he said.

Analysts said the CRS-1 was likely replacing routers by Avici Systems Inc. Avici announced in April that it was discontinuing its core router development.

Lehmans Singh said Avici typically generated between $30 million and $50 million a year in revenue, with a majority coming from AT&T.

(Reporting by Ritsuko Ando; editing by Maureen Bavdek)