Enterprise Network Highlights
- Cisco’s market leadership, poor market growth during the downturn and specialisation makes this a key battleground
- Cisco launching UCS products in 2009 sees it playing in the systems market
- Major acquisition activity will continue in 2010, especially among network suppliers
- Systems suppliers are unlikely to become network vendors unless they already have technical expertise
- Switches are unlikely to be ‘commoditised’ in the way PBX were with software on standard x86 servers
- Convergence between switches, systems and storage will continue apace
- Cloud Computing developments will place a stronger emphasis on enterprise networks
When I had published my last article on the networking market I received some very interesting market observations from Pim Bilderbeek. Pim (like me a Henry Fellow) is a renowned expert on the subject and so I’m very pleased to have used his guidance in shoring up my market coverage and ideas in this post. For me it’s important to study and report on networking and telecoms – it puts the ‘C’ in ‘ITC’.
Cisco’s Dominance, The ITC Downturn And Specialisation Makes Enterprise Networking A Battleground
I take Enterprise Networking to be the provision of networking products (gateways, routers, VoIP equipment, etc.) to end-user organisations (as opposed to equipment for Telecoms companies). It is a highly specialised part of the ITC industry from both a technical development and marketing point of view. Although there is a large market for this equipment, it has not been an easy ride for some of the major players over the last few years. In fact I believe we’re in the middle of a network war. It’s been caused by a number of factors. In particular:
- Cisco has a significant lead in the equipment market (48.3% on a worldwide basis according to my estimates for 2009) – especially for core switches. As usual the recession has increased competitive activities. Cisco introduction of its Unified Computing System (UCS) in March was seen as a direct attack on server suppliers, who are trying to hit back by launching their own network equipment strategies.
- The ITC down turn has badly affected all hardware. We seen a major decline in the networking area, especially as these devices are sold to business and enterprise customers. My forecast for the equipment market is that it will drop by 16% to $49b worldwide in 2009 (see Figure 1).
- Because most players are very small in comparison with the market leader they have been acquisition targets for the systems suppliers. HP’s proposed acquisition of 3Com is perhaps just the first of a number of similar moves by systems companies looking to expand in this area.
Historically high revenue growth rates in the network area have made it even harder for suppliers to adjust to declining sales in the last year. I’ve shown the quarterly growth rates for the leading suppliers in Figure 2. Chinese suppliers ZTE and Huawei have managed to outperform other suppliers, reinforcing HP’s move to acquire 3Com, whose long-term joint venture with Huawei gives it good access to this fast growing region. Of the smaller vendors Brocade has also managed growth this year. Unlike the PC market there has not been much of an up-tick in revenues in Q3 2009, with the market falling by 16% versus the 17% drop in Q2.
Enterprise Network Suppliers Increase Acquisition, Competitive And Alliance Activities
Enterprise networks are important they provide essential components for the development of modern data centres and help form a necessary backbone for Cloud Computing, telecommuting and other key areas. From a vendor perspective there have been interesting recent developments. In particular:
- Cisco’s launch of its UCS products in March was a shot across the bows of the system vendors. It demonstrated the company’s intention to compete for the first time in the server market and has made most decide to update their approach to networking – an area previously de-emphasised. It has also decided to partner with EMC and its subsidiary VMWare to form Acadia, which will help in the development of data centre Virtualisation.
- HP enhanced its Procurve offerings by buying Colubris Networks in August 2008. It has also recently announced its intention to acquire 3Com, which managed positive net profits in the last 5 quarters following years of losses. More important than opening up China, 3Com produces core network devices, allowing HP to compete more effectively with Cisco.
- IBM has reacted by firming up its network offerings, which it provides through partnership. It has OEM agreements with Brocade and Juniper networks and a reseller partnership with Cisco. There are no signs yet that it wants to design and manufacture its own switches, although I wouldn’t be surprised if it decided to in the future.
- Nortel filed for Chapter 11 bankruptcy in January this year, following significant losses over the last 3. While it has sold some of its Telecom businesses to Ericsson (specifically its CDMA and LTE Access businesses along with 2,500 employees), it has just announced the acquisition of its Enterprise Solutions business to Avaya for $475m along with 6,000 staff.
- Private equity firms TPG Capital and Silver Lake Partners acquired Avaya for $8.2b in October 2007. Frustratingly for me (and probably its competitors) its revenues and profits can now only be estimated.
- Siemens enterprise networks is now owned by private equity investors, while Nokia Siemens Networks continues to be reported in Nokia’s financial results.
The Enterprise Network Squeeze – Headcount Increases, Profit Per Head Goes Down
The specialisation of the technology in the enterprise network area is demonstrated by the changes in profitability and headcount over time. While the total headcount of suppliers has increased to reach a plateau of around 135,000, net profit per employee has declined from around $85k in 2004 to around $55k per head in 2009.
Cisco has a larger market share of profits in the enterprise network area than it has in revenues, demonstrating the significant advantages of a market leader. Unless the market picks up dramatically it looks as if winners and losers in this sector will be decided by competitive actions for the foreseeable future.
Some Conclusions – Bilderbeek On The Convergence Between Networking And Systems
Pim reminds me that the networking area is still about convergence. There are a number of ways in which this will affect the enterprise network wars. In particular:
- Microsoft is claiming its stake in the Unified Comms market with OCS and other products. As a result of its activities network companies have seen their PBX hardware revenues erode, with traditional products replaced by software solutions running on standard x86 servers. He thinks it’s unlikely that we’ll see the same trend happening with routers and switches, but it is a sign of continued convergence.
- He does believe that we’ll see further integration of switching with server and storage and this is likely to be where systems vendors react. By and large he believes the current trends are being driven more by Cisco’s desire to gain IT revenues than by companies such as IBM wanting to get back into networking.
Poor market demand, specialised technology and a dominant market leader – all of this makes the enterprise network market exciting to watch. I expect a whole number of acquisition announcements during 2010 between networking companies. In addition those systems and storage vendors with networking expertise will join the hunt for acquisition targets. It is likely that those systems vendors without networking expertise will continue to partner with Cisco and others – perhaps forming strong go-to-market approaches in a way similar to Fujitsu Technology Solutions’ recently announced ‘Tight Alliance’ with NetApp. Systems companies with a strong business in supplying technology to Cloud Computing data centres will want to beef up their networking expertise, but do not yet need to acquire companies to do so.
Do you – like Pim – have observations on the enterprise network market? Please let me know by commenting on this article.
Filed under: Networking Tagged: | 3Com, Alcatel Lucent, Avaya, Brocade, Cisco, EMC, HP, Huawei, IBM, Juniper, Nokia, Nortel, Pim Bilderbeek, Siemens, ZTE
