Networking: the recession’s over

Promising technologies and new opportunities are ensuring that the market for networking gear is looking up, says SHIPRA ARORA

THE networking hardware market comprising the Local and Wide Area Network (LAN & WAN) equipment markets forms the core of the networking industry. After reeling from negative growth in Q4 2003, 2004 has brought not only some much-needed relief for the LAN market but also indications of a positive year ahead. As the year opens to rapid growth in the Indian networking device market, especially LAN, the feel-good sentiment is likely to spread to the entire networking market. With India figuring among the top three growth markets in the APAC region for Q1 2004 in the two largest segments of the devices market, LAN switches and routers, the year will see a lot of international vendor attention directed towards the country. Trends like price wars, increasing commoditisation of LAN and WAN equipment, and an aggressive push towards next generation technology will further drive the market.

A good beginning

As per IDC, 2004 began on a good note for the Indian LAN market. The segment improved greatly in Q1 CY 2004, registering a robust 35.1 percent quarter-on-quarter growth. The market was valued at $91.4 million during the quarter, up from $68 million in Q4 2003. The first quarter of 2004 holds significance because it marks a huge rebound after a 11.5 percent downfall in the previous quarter.

Can this growth be sustained throughout the year? Over the last one-and-half year, growth trends in the Indian LAN equipment market have been topsy-turvy. According to IDC, while the market grew 25.5 percent in Q1 2003 over Q4 2002, it went down by 15.7 percent in the next quarter, then bounced back with 26.6 percent growth in Q3 2003 before plunging again in Q4 2003. However, the fact that India has emerged as the fastest-growing market in LAN switches with 40.2 percent growth, and is the third-fastest growing market in routers with 28.6 percent growth in the APAC region during 2003, lends credibility to the expectation that growth will continue for the entire year.

During Q1 2004, 3Com won some big deals from the Andhra Pradesh (AP) state government, Parliament House, ONGC and Persistent Systems. Nortel made significant gains in the services sector, bagging wins from Transworks, Accenture, Vcustomer and Daksh. D-Link’s successes included State Bank of India, BSNL, Karvy Consultants and the National Institute of Technology, Jamshedpur. Dax won contracts from BSNL, the AP government’s eSeva project, and ITC’s e-Choupal project. Alcatel secured an education sector contract worth $5,00,000-$1 million from the National Institute of Technology, Hamirpur, for switches and IP telephony.

Steady-state WAN

The WAN equipment segment is pegged at around 30-35 percent of the total market. This share has been more or less stable for quite a while. According to Anand Mehta, marketing manager, D-Link India, the reason for this is that most enterprises that require a WAN already have one. “Here the constraint is that of available bandwidth, which ranges from a 64 Kbps ISDN or Leased Line to a 2 Mbps Leased Line.”

Within this market, the WAN and MAN switch segment has grown, driven by installations coming up in cities to establish MANs to provide broadband to homes and SMEs. Compared to this, the growth in the WAN switch market during 2001 was largely driven by call centres; IDC expects the market to grow at a CAGR of 27 percent to reach $40.81 million by the end of 2006. According to Ranga Balaji, manager, Products and Alliances, Ramco Systems, for the next couple of years it will be the service provider WAN equipment sub-segment which will account for most of the growth. Even today, the RAS and WAN switch segment growth is heavily dependent on certain factors such as business expansion beyond the geographical limits of the country. Unlike LAN equipment, WAN gear remains costly, leaving little room for market expansion. Emerging growth sub-segments within the WAN segment are wireless WANs and MANs. Leased lines are also growing while the ISDN market is slowly being supplanted by DSL. An emerging trend in the WAN segment is the use of leased line infrastructure to connect and establish multi-city WANs as the cost of a basic 64 Kbps leased line is now less than Rs 1,00,000 annually. Wireless is the best option for intra-city WANs provided the locations to be hooked up are within line of sight. Enterprises have the option of using public or private telecom operators’ networks, or going in for VPNs.

Carrier commitment to Multi Protocol Label Switching (MPLS) marks a fundamental shift in vendor selection criteria used for multi-service WAN switches. According to the Yankee Group, a new competitive landscape is also emerging as vendors of carrier routers and multi-service WAN switches strive to establish their products as the foundation of a converged IP/MPLS core network.

LAN Switches—facts & figures

JAVA GIRDHAR feels that it will take another two to three years for Layer 3 switching to have an impact on the router segment

IDC data indicates that LAN switches in the APAC region registered a 9.9 percent growth in 2003 after declining 3.2 percent in the previous year. Meanwhile, the Indian LAN switch market leapt from $40 million in Q4 2003 to $57 million in Q1 2004, registering an uptick of 42.6 percent. This came after an almost stagnant Q4 2003. In 2004, the Fixed Port Layer 2 Switch and the Modular Port Layer 3 Switch segments are expected to grow robustly.

Both the Modular Layer 3 and the Fixed Port Layer 3 switch markets declined during Q1 2004. The Fixed Port and the Modular Port Layer 4-7 switch market showed marginal growth.

What’s driving the re-bound in the Indian LAN switch market and making it the fastest-growing in the APAC? Balaji points out that there are a lot of greenfield projects, especially in the IT and ITeS sectors. Also, many companies are upgrading their networks to a gigabit backbone. Other factors driving the market have been the deployment of WLANs, availability of low-cost LAN switches, and wider availability of gigabit Ethernet.

Although dwarfed by the Fast Ethernet market, Gigabit Ethernet was the star performer in the APAC region, with a growth of 26.9 percent in 2003; organisations are migrating more rapidly than expected to it. While the overall effect is rubbing off on the Indian market, it is still in an early stage as far as 10 G switching is concerned. This market is likely to pick up in the next 1-2 years. According to Balaji, “10 G is still at a nascent stage. It will take another year or so for mass deployment, by which time prices would have fallen. In another couple of years 10 G will have good growth.” With data bandwidth requirements from enterprise users growing, and comparative costs for equipment coming down, the market will start transitioning from the phase of niche to rapid deployment. Also, with the arrival of new 10 G gear, analysts say that corporations have more options for lessening data centre and LAN bottlenecks. A Hellosoft official believes that India will have the advantage of a late start: “Within a year 10 G equipment will be priced comparably with 1 G. So a new company will be more likely to choose 10 G, and this will probably happen sooner than in the rest of the world.”

According to Sanjay Jotshi, director, Channel Sales, Nortel Networks, the 10 G market is young, and products are still being tested in high-end research and enterprise networks, with some organisations—such as hospitals with digitised radiology images stored on servers, and financial firms with compute-intensive applications—turning to 10 G. It will however take some time to see gigabit switching on the desktop. “1 G switching to the desktop will be a reality only when the prices of unmanaged 1 G switches fall to within 35 percent of the 100 Mbps version. This is still some time off,” opines Anand Mehta, marketing manager, D-Link India.

IDC states that during Q1 2004, market leader Cisco gained 11 points to close the quarter at 69 percent. The company achieved this by strengthening its position in the Layer 2 switch segment. It grew from 71.9 percent in Q4 2003 to around 84.9 percent in Q1 2004 in the Modular Layer 2 segment, and from 40.6 percent in Q4 2003 to 54.3 percent in Q1 2004 in the Fixed Port Layer 2 segment. Other significant gains for Cisco came in the Fixed Port Layer 3 and Modular Layer 4-7 segments, where it recorded around 9 percent and 16 percent growth respectively. D-Link emerged as the second largest vendor in the Ethernet Switch segment with 8 percent, followed by Nortel and 3Com each with 7 percent. However, the market share of Enterasys dropped significantly from 9 percent in Q4 2003 to 3 percent in Q1 2004.

Growing commoditisation

Due to an aggressive price war led by vendors such as D-Link, commoditisation is growing. Layer 2 switching equipment is getting commoditised with plunging per port prices. As a result—according to IDC’s APAC (excluding Japan) LAN Switch forecast by form factors for 2002-2007—2003 saw the breakthrough of Layer 3 switching, since, for the first time, Layer 3 overtook Layer 2 in the region. According to Balaji, cost is an important factor, so Layer 3 product availability at affordable prices is driving this apart from the fact that customers have seen value in deploying Layer 3 switches.

Experts believe that the trend is gradually emerging in the Indian market as well. According to Mehta, LAN switches shipped today are 100 Mbps Unmanaged Layer 2 types for the greater part. Layer 2 Managed and Layer 3 Managed follow, with chassis switches coming after that. Managed Switches however account for the greater part of the value in this segment. Layer 2 will transition to Layer 3, not due to a need (in terms of use, Layer 2 serves the need fully in almost 95 percent of applications) but due to the decreasing difference in the pricing between these two.

2004 will see further commoditisation of the LAN switching equipment, especially in Layer 2, with competition from mid- to lower-end vendors such as D-Link forcing big players to reduce their prices in order to stay competitive.

Routers—facts and figures

IDC figures reveal that in 2002, the overall router market in APAC registered a sequential drop of around 13 percent. Coming on the heels of a 11.5 percent drop in 2001, it was alarming. However in 2003 the market grew 3.5 percent, with India being the third-fastest growing market at 28.6 percent, the top two being Malaysia and Taiwan.

Commenting on the slowdown in the routing business from the Indian perspective, Java Girdhar, country manager, India & SAARC, Juniper Networks India said, “There was a dip in IT spending in the country during FY 01-02, which affected the setting-up of networks. But 02-03 saw positive growth in IT spending over the previous financial year. With the boom in the economy, companies invested in scaling up their infrastructure…verticals such as the government, telecom, pharmaceuticals and BFSI led the way.”

After the Indian market plunged by 22 percent in Q4 2003, 2004 began on a positive note with the routing segment bouncing back; it grew 29.4 percent in Q1 2004, grossing $34.5 million. “Enterprises will increasingly deploy WAN equipment as bandwidth costs are coming down, and with MPLS services being offered by xSPs we will see rapid deployment of this equipment,” believes Balaji. Apart from the push that the Indian market is receiving from key verticals like BFSI and telecom, state governments are increasingly getting into the e-governance mode. Export-oriented units such as BPO and IT services companies are also playing a significant role. Meanwhile, routers are getting commoditised, with deployments on the rise in the SME segment as prices fall and bandwidth providers extend their services to remote locations.

Dax won some significant deals in the SOHO segment. Cisco’s market share fell by a marginal 1 percent in Q1 2004; it suffered a sharp decline in the SOHO router segment, where its market share fell by almost 10 percent.

The mid- and high-end router sub-segments emerged as the star performers with around 30 percent and 50 percent quarter-on-quarter growth respectively in Q1 2004. According to Balaji, these sub-segments will enjoy phenomenal growth this year since carriers are on an investment spree. Jotshi feels that with increasing investments in telecom infrastructure, router deployments by telcos are growing. Besides telecom, the ITeS, BFSI, SME and government sectors are key buyers of mid-range routers. After losing their shine towards the middle of last year, when their marketshare dipped to around $4 million, high-end routers are back in the reckoning. The Gigabit or Terabit router, low-end router and SOHO router segments were stagnant. The low-end router market has declined over the last few quarters. IDC says it totted up $9 million for Q2 2003 and Q3 2003 before falling steeply to $2 million in Q4 2003 and stagnating there in Q1 2004.

Considering the market’s traction in mid-range and high-end routers, expect vendors to focus their promotions and programmes on these two segments, especially the mid-range that accounts for the biggest chunk of the market with almost $12 million followed by the SOHO segment at $8 million in Q1 2004.

Impact of Layer 3 on routing market

While Layer 3 switching has not yet had an impact on the router segment, it is expected to in future; Girdhar feels that it will take another two to three years. Router vendors are diverting their R&D towards shaping and enhancing switching architectures. “In future, when fibre-to-enterprise takes the lead, it will affect the overall router segment as the routing switch will do the job of a router,” explains Balaji. Service providers in developing countries which have legacy telecom infrastructure-based PSTN, PSDN, x.25 and frame relay will still need routers. The intelligence and high-speed silicon-based switching and routing in Layer 3 switches will let them replace software-based multi-technology routers. Nevertheless, Mehta points out that a Layer 3 switch and a router have quite a few dynamics that are different. The router is a device that caters to WAN ports with a limited number of LAN ports, while in the case of switches it is the reverse that is true. Also, WAN traffic varies between 64 Kbps and 2 Mbps per port, while LANs work at 100 Mbps. These fundamental (and a few advanced) differences will ensure a market for both kinds of products for a long time, while the gap between them will be bridged by MAN applications.

Hubs and NICs

The 10 G market is young, notes SANJAY JOTSHI, and products are still being tested

These two segments of the LAN equipment market have been more or less relegated to the background. With network users moving towards multiple services such as content delivery and audio-visual applications, hubs will have an insignificant role in future networks. Further, with the prices of unmanaged switches falling sharply, hubs are likely to gradually disappear from the market. According to an official from Hellosoft, hubs are the extra equipment introduced to solve multi-user problems. Today, a Layer 2 switch does the job better. Mehta says that D-Link encourages all its customers to go for unmanaged switches that, in effect, cost the same.

While hubs will decline and disappear over time, NICs will continue to grow, though at a moderate rate. NICs are now being integrated onto motherboards by most manufacturers. Further, to push computer sales, PC, PDA and laptop vendors are integrating NICs in their systems at attractive prices, which is why the NIC market will not grow at a very high rate. WLAN and Wi-MAX 802.16 WMAN will drive the NIC market, even though the total market may not increase significantly as competition is high and prices are dropping sharply.

Mehta believes that the future here is likely to mirror that of graphics cards, so one is likely to see NICs as a separate segment for certain high performance applications and server boards.