Networking challengers are prospering, though the longtime leader is hardly down for the count.

Juniper Networks

(JNPR) - Get Report

is continuing to chomp into

Cisco Systems'

(CSCO) - Get Report

lead in the Internet router market, though not quite as much as some observers had expected, according to figures from a leading market researcher. Meanwhile,

Redback Network's

(RBAK)

edge-of-the-Internet router is knocking the wind out of

Nortel Networks'

(NT)

sails, just as the big telco gear maker tacks upstream.

Juniper amassed 34% of the core router market in the fourth quarter, up 4 points from third-quarter levels, while Cisco's share fell to 65% from 69%, according to the

Dell'Oro Group

. Core routers are networking gear that sit inside the Internet and act like mail sorters, sending info to addressed destinations. The total core router market in the fourth quarter was valued at $836 million, a 23% increase over the previous quarter.

Meanwhile, in the edge router market, Redback swiped a whopping 7.5 points last quarter, raising its share to 45% from 37%. Nortel lost 11 percentage points of business, falling to a 23% share from 34% in the third quarter. Edge routers are considered aggregators or on-ramps to the Internet, generally at the point where local traffic meets the long-distance or "backbone" routes. The edge router market was $177 million in the fourth quarter, a 7% increase sequentially.

Challenges

What is notable about these figures is how quickly Juniper has risen in the 2 1/2 years since it introduced a product to compete against Cisco, which had the market to itself for some time.

Core Routers

Source: Dell'Oro

While Cisco has said that losing 40% market share was unacceptable and that holding 70% is its goal, the core router business accounts for only 6% to 8% of Cisco's total revenue, according to

SG Cowen's

Michael Jung, who has a strong buy on Juniper and a buy on Cisco. Jung adds that Juniper's gains don't pose a serious threat to Cisco's health.

Juniper may also be greatly challenged in taking more of Cisco's business. Cisco introduced its

Juniper-killer router last month and says it has already signed on big customers such as

AT&T

(T) - Get Report

,

AOL

(AOL)

,

Sprint

(FON)

and

360Networks

(TSIX)

.

Edge Routers

Source: Dell'Oro

And as Juniper's chairman and CEO, Scott Kriens,

suggested last week, the rivalry between his company and Cisco may yet escalate into a price war, since neither company is keen on giving ground.

Also notable in the Dell'Oro report is the debut of

Avici

(AVCI)

as the distant third-place player in the core router market, with about 1% of the business. Avici has made

inroads with big telco and investor AT&T this quarter, so its numbers are likely to improve at the expense of Cisco and, to a lesser extent, Juniper.

This Is the Edge

In the edge router category, Redback dealt Nortel a significant blow, which falls on the heals of a rather troubling indications on the optical networking front where Nortel has

missed a product cycle in optical switches and watches idly as

Ciena

(CIEN) - Get Report

takes a dominant lead in the field.

Cisco managed to hold on to its 16.5-point market share in edge routers last quarter.