Article from Computer Reseller News is a good supplement to our discussion this morning on the status of Gigabit Ethernet.
The Networking Squeeze
By Kimberly Caisse
Boston
..............
There is no question about it: The boom times are over in the networking
hardware market. New industry reports for the first part of this year show an
industry that has plummeted from consistent growth rates of 35 percent to 12
percent or even less.
To make matters worse for VARs, prices and margins are dropping lower than
the floor in some traditional product areas such as hubs and routers.
But there is hope in this networking squeeze. VARs that invest in selling new
higher-end switch technology and emerging voice products not only can survive,
they can thrive in the new environment.
The Asian economic crisis, new technology and the fact that the networking
hardware market is maturing all are dragging down the overall revenue of
networking companies, analysts said.
"There's been a slowdown for about a year, but it has accelerated in the first half
of [this] year," said Craig Johnson, principal of PITA Group Co., a Portland,
Ore.-based research firm. The first half is typically "soft," but the third quarter
does not hold much promise because it is one of the slowest quarters, given the
August vacation time in Europe, he said.
In its year-to-year comparison of the first six months of revenue, PITA Group
reported the revenue growth rate of the networking industry's top 10 companies
declined from 24 percent in 1997 to 12 percent this year. And if Cisco Systems
Inc. is taken out of PITA Group's report, Johnson said, the revenue of the top
nine companies would have been 19 percent in the first half of 1997 and only 1
percent during the first half of this year.
Other analysts are more optimistic about the second half. "We should see
things picking up again" in the third and fourth quarters, said John Armstrong, an
analyst at Dataquest, San Jose, Calif.
In any case, the days of 30 percent growth are gone, analysts said. "To double
the size of a billion-dollar market is much more difficult to grow [at that rate] than
a $100 million market," said Michael Speyer, an analyst at The Yankee Group,
Boston.
The worldwide LAN hardware market growth rate slipped to 21.4 percent in 1997
from 35.9 percent in 1996, according to Dataquest, which also reported last
week that LAN switches drove the growth in the worldwide networking industry in
the second quarter with a revenue increase of 77.6 percent. Worldwide router
revenue grew by 23.2 percent, while worldwide shared-hub revenue declined 33.5
percent, Dataquest reported.
Industry executives are confirming what the analysts already know. "The router
business overall is . . . growing in a single-digit kind of level, so clearly the
movement is toward routing switches, and we expect that trend to accelerate,"
said David House, chief executive of Santa Clara, Calif.-based Bay Networks
Inc., during a recent conference call with financial analysts.
The introduction of new technology that is "viewed as more revolutionary than
evolutionary" by IT managers usually slows growth, Dataquest's Armstrong said.
In the first half, Layer 3 switches started displacing routers, and Gigabit Ethernet
products began to emerge as an alternative to ATM switches, he said.
Two companies that are particularly taking a hit as they adjust to the latest
market shift are 3Com Corp., Santa Clara, and Cabletron Systems Inc.,
Rochester, N.H.
3Com really has two businesses,client access and systems integration,and is
having difficulty in both, PITA Group's Johnson said, adding that 3Com should
spin off its client-access side. It is challenging for 3Com to operate the
client-access business now because it entails high volumes and channel
penetration, he said.
3Com saw its client-access revenue,generated by network interface card and
modem sales,decline 8 percent in fiscal 1998, ended May 31, according to its
consolidated financial results.
"The V.90 transition has occurred more slowly than originally planned," said
3Com Chief Executive Eric Benhamou during a conference call with analysts. "It
is occurring, but not at an exponential rate. . . . We think we will see an
acceleration before the end of the year."
The slowdown in the PC industry also has affected 3Com's client-access
business because its NICs and modems are standard components in many
PCs, said Ralph Godfrey, senior vice president of sales for the Americas.
Meanwhile, 3Com's system sales,switches, hubs, remote-access concentrators,
routers and network-management software,were up 8 percent year to year for the
fourth quarter, which also ended on May 31, and 3 percent for the year.
Cabletron is in a particularly precarious position because it is going through its
"problem cycle" when the market is shifting in another direction, Johnson said.
Most other networking companies, except Cisco, went through their difficult
times several years ago before the shift toward a commodity market and
combining data and voice traffic on networks began to take hold.
Cabletron is pinning its hopes on channel sales to get it through its tough times,
analysts said.
The one exception to the trend is Cisco, which continues to see healthy 35
percent growth rates.
"It [the fourth quarter] is the best I have ever seen," said John Chambers, Cisco's
chief executive, during the company's conference call with financial analysts. "It
was almost like clockwork. . . . Service providers played a key role for us in
terms of consistency and momentum."
VARs are feeling the pressure on margins in many ways.
In some instances, networking VARs managing to get products directly from
vendors in the past are feeling a bit of pain as these companies use distributors
to expand their market presence.
Some VARs are making up for it in volume. "Our margins are lower, but we're
moving more product than we were last year," said Patrick Snead, vice president
of sales at InfoSys Services Inc., a networking reseller in Jessup, Md. Originally,
InfoSys bought product through the vendors but now is forced to go through
distributors.
These companies' decision to sell through the channel has changed the pricing
structure, Snead said.
Companies are seeing prices decline in the low-end and midtier product
segments and in NICs, said PITA Group's Johnson. And the latest boxing match
between the networking companies,in the small- and midsize-business market,is
where the low-priced products are being pushed, he said.
While VARs are feeling the squeeze in the networking hardware space, many
simply are selling smarter. Several years ago, the market was so hot VARs were
struggling to keep up with orders. Now, VARs are finding that directing
customers to enterprise products can turn a bust into a boon.
For example, Ethernet and Token Ring hubs may be vanishing from order slips,
but they can be replaced by requests for workstation and backbone switches,
VARs said. This is good news for VARs because the ASP of the higher-end
products is rising.
"Shared technology, be it Ethernet or Token Ring, is definitely disappearing,"
said Peter Stavropoulous, technology director at Infostream Cables & Systems
Ltd., a VAR in North York, Ontario. But 10-Mbit-per-second workstation and
100-Mbps backbone switches as well as Layer 3 and 4 switch routers are hot
sellers, he said.
Customers gain value from Layer 3 and 4 switches because they are 100 times
faster and 10 times less expensive than the software-based routers companies
were using, Stavropoulous said. "It's something the end users have been waiting
for for a long time."
Looming on the horizon are voice/data integrated products, which promise higher
margins and more integration/consulting opportunities for VARs. That is a
technology set to which vendors and VARs are struggling to move.
But like any transition period, the strong and innovative vendors and VARs will
survive.
STEVEN BURKE & SHAWN WILLETT contributed to this story. |
