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Revenues cool off<but the boom in services should help make '98 a
scorcher
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Smart Money
Maybe it can be called a correction. That's one way to look at the
networking year that was. Sure, sales hit $142 billion globally and $80
billion in the U.S. And while those numbers translate into growth rates
of 18 percent and 17 percent, they're not inspiring the cigar-lighting
and back-slapping that had emerged as annual rites. This time around
analysts, vendors, and users are wondering what went wrong<and hoping
(more than usual) that the forecast calls for gain. "Most other
industries would kill for the kind of growth this industry has," says
David Passmore, president of Decisys Inc. (Sterling, Va.). "We've been
spoiled in the networking industry." What kept U.S. and worldwide sales
of networking products from growing at the 23 percent clip analysts
predicted? Actually, there's a variety of factors. Start with everyone's
favorite phrase: paradigm shift.
New trends in technology spawned new (and unforeseen) patterns of
buying. Then figure in the spate of mergers and acquisitions that opened
the year: Vendor consolidation muddied the waters for customers, who
reacted with puzzlement over where<or whether<to spend their money. The
shift from products toward services also played a role, as did the move
away from collapsed router backbones and a price war at the low end of
the LAN market. And IT execs point out that there are now other factors
competing for the networking dollar<like the high cost of personnel and
Year 2000 upgrades.
But don't call it a downturn. Most analysts and vendors say 1997 stands
as simply a brief cooling-off in what promises to be a scorcher of a
market through the end of the decade. And some familiar segments will
continue to sizzle: services, anything to do with the Internet and
intranets, high-speed LAN switching, wide-area connectivity, and network
management.
Still, clouds are gathering on some fronts. Yesteryear technologies like
multiplexing and packet switching are fading. And 1998 looks to be a
rough year for modems as well.
Services Score
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The U.S. Data Communications Market
In an industry that emphasizes the unprecedented, 1997 will be
remembered for a notable first: Sales of network services grew faster
than those of products. Blame it on market deregulation and technology
maturation. With barriers coming down all over the world, and with such
technologies as frame relay on the rise, customers are finding it easier
(and more attractive) to purchase services rather than roll their own
networks. "When a new technology is introduced, people don't trust third
parties for rollout," says Eric Andrews, assistant vice president of
marketing at Newbridge Networks Inc. (Herndon, Va.). "But over time,
technology matures and service providers come up with creative ways to
offer it."
One of the largest segments in the network data service category is
frame relay. Sales soared in 1997, both in the U.S. (doubling to $2.3
billion) and worldwide (increasing to $3.8 billion). And even though it
repeatedly weathers price reductions, it should continue to grow: U.S.
frame relay sales are expected to double again in 1998. "It's a
commodity-like growth for frame relay," says Ray Kang, director of
enterprise services marketing at MCI Communications Corp. (Washington,
D.C.). "Previously, few people were switching their entire network to
frame relay. But now the technology and understanding of it are mature
enough that customers are implementing it for their whole network."
"There's enough confidence in frame relay that enterprise customers are
migrating from leased lines en masse," says Stanley Kramer, director of
marketing for the WAN business unit at Cisco Systems Inc. (San Jose,
Calif.). Confidence is part of it, but there's something more
fundamental at work too: In many cases, customers are looking to replace
their costly leased lines. "That's prevalent in 80 percent of the
decisions that we see for frame relay," says Rick Malone, principal at
Vertical Systems Group (Dedham, Mass.), a consultancy.
Vendors see a similar pattern for ATM services, which started to show in
1997. That's because disparate data and voice networks are more and more
often being run over one infrastructure. "By late 1996, ATM stopped
being a trial technology," says Lawrence Gasman, president of
Communications Industry Researchers Inc. (Charlottesville, Va.), a
market research firm. "There were enough end-users for it to be
considered seriously as a service."
Other analysts point out that carriers are becoming more savvy in their
marketing of ATM services. "It's becoming a more application-specific
technology," says Melanie Posie, analyst at International Data Corp.
(IDC, Framingham, Mass.). For example, carriers are implementing frame
relay service interworking for an easier migration path to ATM. "Much of
the growth is coming from large frame relay customers that need higher
speed connections at their central offices," says Devid Ittycheria, ATM
product manager at Teleport Communications Group (TCG, Staten Island,
N.Y.).
eATM service sales right now are where frame relay's were four years
ago. But there are differences between what happened in the U.S. and
what's currently happening globally. "In developing countries, customers
don't have the existing base of large frame relay networks, and they're
leapfrogging directly from X.25 to managed ATM services," says Cisco's
Kramer.
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The Global Data Communications Market
Despite the rising popularity of frame- and cell-based services, leased
lines still make up the largest portion of the data services market<by
far. And while revenues aren't eye-popping, sales remain robust. That's
because prices are coming down as bandwidths go up. "As transmission
speed increases, leased lines decrease in price," explains Kang. "So the
revenue isn't growing as fast as the bandwidth."
As for the fastest growing market segments, Internet/intranet access and
content hosting are the hands-down winners worldwide. Vendors and
analysts expect growth to snowball through the end of the decade, as
corporations continue to mine 'Net applications like electronic mail and
document collaboration. Internet fax/telephony and security services
also will see greater use.
ISPs (Internet service providers) also are seeing huge growth in
packaged solutions. Carl Showalter, director of product management for
ANS Communications Inc. (Purchase, N.Y.), says that companies are
seeking turnkey intranet solutions, wrapping access, hosting,
e-commerce, and security into one tidy package. "Suddenly, customers are
recognizing that they can't do everything by themselves," he says.
What's more, those companies that have already taken the intranet plunge
are continuing to add bandwidth. Showalter says he receives very few
requests for anything under T1 (1.544-Mbit/s) speeds. John Scarborough,
director of Internet marketing at MCI, says he's already fielding
requests for 155-Mbit/s Internet access.
In short, there appears to be no end in sight to Internet/intranet
demand. "No matter what number you look at, it suggests that the
industry hasn't even hit its stride yet," Scarborough says. "We've just
left the block."
Rising Tide
Of course, the intranet and Internet developments aren't occurring in a
vacuum: They're also driving other aspects of the networking industry.
One of the first priorities in building an intranet, for instance, is to
furnish security. And that explains why the demand for all types of
security products<firewalls, authentication, encryption, and other
applications<is soaring. The worldwide market grew 72 percent in 1997,
with revenues hitting $877 million. That's expected to climb to $1.49
billion in 1998, with firewalls<at $512 million<leading the way in total
revenues. But authentication and encryption will be the fastest growing
segments (see "Inside Jobs").
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Inside Jobs
The 'Net/intranet effect won't end there. Web servers, groupware,
electronic mail packages, and e-commerce apps also should see major
growth.
And don't forget about the need for companies to link legacy apps to the
Web. The Gartner Group (Stamford, Conn.) says that by 2000, 80 percent
of legacy access will occur via Web browsers.
The continued rise of intranets is even affecting the NOS (network
operating system) battle between Microsoft Corp. (Redmond, Wash.) and
Novell Inc. (Orem, Utah). Bill & Co. has bundled its Internet
Information Server with NT, which analysts will say will drive down the
cost of low-end HTTP (hypertext transfer protocol) servers. Microsoft
already has dropped NT prices and staged an aggressive marketing
campaign<much to Novell's disadvantage.
Speed's the Need
Of course, added apps and the traffic they generate call for higher
bandwidth on the backbone. That simple fact is borne out by the move to
higher LAN speeds and switching.
Sales of LAN switches are now outpacing sales of all infrastructure
hardware (with the possible exception of servers and PBXs). Worldwide
revenues were $6.9 billion in 1997<and they're expected to soar to $9.4
billion in 1998.
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Making the Switch
Various types of Ethernet boxes lead the way, with 10 Mbit/s to the
desktop and fast Ethernet still scoring big. But even gigabit Ethernet
is seeing some sales now (see "Making the Switch").
But where there's a winner there's necessarily a loser. Or losers<in
this case routers and hubs. As LAN switches become the enterprise
workhorse, routers are looking like the old gray mare: Revenues just
aren't what they used to be, with a growth rate of 14 percent worldwide
in 1997 and only 12 percent in the U.S. "The [traditional collapsed
backbone] router market is definitely flattening, and we're seeing a
decline in sales," says Ron Sege, senior vice president of enterprise
systems at 3Com Corp. (Santa Clara, Calif.). "Router sales to ISPs are
growing faster than router sales to the enterprise," according to
Richard Palmer, director of marketing with Cisco's services provider
line of business. And keep in mind that high-end routers are what ISPs
want<which means sales of midrange routers are stagnating.
While the hub market also declined overall, low-end devices managed a
respectable showing. "A fast Ethernet hub is $101," says Sege. "It's for
small to midsized companies that aren't yet thinking of switched nets."
Meanwhile, multilayer switches should only hasten the trend away from
collapsed backbones in 1998. "At 10 times the performance and one-tenth
the price of traditional routers, routing switches will definitely move
into the switch core," says Esmeralda Silva, industry analyst with IDC.
Boosting bandwidth on the backbone would normally mean big revenues for
NICs. And while sales of 10/100 Ethernet cards are now outrunning those
of simple Ethernet adapters, 1997 revenues actually dropped, by 20
percent in the U.S. and 15 percent overseas. That was due to a bitter
price war between the two major vendors of NICs, 3Com and Intel Corp.
(Santa Clara, Calif.). Intel opened the year by reducing prices on its
10/100 Ethernet cards by 40 percent, to about $80. 3Com then did the
same. Both vendors now are preaching peace<and they say they'll focus on
such value-added features as management.
The Wide View
So, if there's big growth in bandwidth on the campus backbone, has there
been a commensurate jump in demand for WAN bandwidth? Yes<but not all
WAN segments are universally booming, and the growth is not necessarily
occurring in the corporate market.
As customers around the world sign up for frame relay, FRADs and frame
relay switches are the biggest benefactors. The worldwide market for
these devices went up 36 percent in 1997, to $2.05 billion<in line with
what Data Comm forecast. The numbers were similar in the U.S.
Another factor contributing to climbing revenues in this segment is the
buildout of ISP networks. "ISPs tell us they can't get enough
bandwidth," says Vertical's Malone. "They're buying switches as fast as
they can."
But there are some clouds on this horizon. Growth in worldwide frame
relay equipment revenues should dip by the end of 1998, to around 20
percent<mainly because carriers are finding that ATM lets them handle
higher speeds. Enterprise switches also should contribute to this drop,
especially in the U.S., as many users stop building private frame relay
networks and switch to public services.
Remote access hardware also enjoyed a booming 1997, but in this case the
good news is relative. Worldwide revenue grew by just 35 percent<not the
projected 100 percent<to $2.92 billion.
MESSAGE SERVER
Analysts cite a combination of factors, including increased competition
on price. As heavy hitters like Advanced Computer Communications (ACC,
Santa Barbara, Calif.), Bay Networks Inc. (Santa Clara, Calif.), and
Cisco trotted out new products to compete against market leaders Ascend
Communications Inc. (Alameda, Calif.) and U.S. Robotics Inc. (Skokie,
Ill.), prices spiraled downward. Analysts also say that these two
vendors might have been distracted by the mergers they entered
into<Ascend with Cascade Communications Corp. (Westford, Mass.) and U.S.
Robotics with 3Com.
But maybe the biggest factor in the downturn is the year-long struggle
between two competing 56-kbit/s modem specs. Confused by the choice,
users simply chose not to decide<deferring purchases to avoid getting
stuck with obsolete technology. "How can these companies be so stupid?"
says Brad Baldwin, director of remote access at IDC. "Right in the
middle of this high-growth market they had to introduce a new modem
protocol."
The good news? Many of the factors that caused the market to stall this
year should be cleared up in the coming months. Vendors are hoping to
agree on a modem standard by February, and low prices could trigger
larger volumes, especially outside the U.S.
Following 1997 trends, analysts expect most of the growth to come in
large-scale concentrators, purchased mainly by ISPs. Revenue from
smaller-scale remote access servers will remain flat, as corporate
customers outsource their remote access needs to carriers. Overall,
growth will remain relatively low, at 27 percent worldwide.
CTI Surprise
Probably the biggest surprise of 1997 was the explosion of the CTI
(computer telephony integration) market. Anyone who thinks that
combining voice and data is merely wishful thinking might want to chew
over these numbers: 196 percent growth worldwide in 1997, with revenues
of $1.29 billion. Revenues are expected to more than double again next
year.
What's behind the bang-up performance? For one thing, companies have
discovered they can save huge amounts of money by creating call
centers<improving operator efficiency and reducing call duration. For
another, the applications are getting cheaper and easier to use, as
evidenced by new CTI APIs (application program interfaces) like
Telephony Services API (TSAPI) from Novell, which allows for greater
interoperability between phone switches.
And even though prices are coming down, CTI vendors benefit from the
fact that their gear is a big-ticket purchase. Powerhouse Consulting
(Bedford, N.H.) says a 150-agent call center costs about $115,000, and
that doesn't include equipment like the PBX.
Speaking of PBXs: Sales of these devices were disappointing in 1997,
falling 10 percent from 1996. But analysts expect a better 1998, as
corporations replace older PBXs with those that handle Year 2000 issues.
Managed Cares
As networks become more strategic, and as mergers and acquisitions force
companies to unite disparate networks and systems, the tools required to
build and maintain them are in greater demand. That's giving the lie to
the old notion that even though everyone wants net management, no one is
willing to pay for it. The new reality? Someone must be shelling
out<since worldwide growth was 20 percent, with revenues reaching $5.4
billion.
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The SLA Way
Most organizations now juggle a range of management applications,
platforms, probes, and administration tools. Net managers are using SLAs
(service-level agreements) for more than proving they can deliver
agreed-on levels of uptime and availability to different parts of the
organization. They're also deploying them in order to unify the
information gathered from many different kinds of management systems and
applications<and make better business use of it (see "The SLA Way").
It doesn't stop there. Applications that manage storage, security, and
user desktop configurations also are proliferating. Growth in this
segment is up by 45 percent, says Rick Villars, director of network
architectures and management at IDC. "People have been spending a lot on
[desktop management]," he notes. And that spending should continue, as
PCs that bundle DMI (desktop management interface) code begin to ship.
This will make them easier to manage right out of the box. And a
migration to larger networks and new operating systems also is fueling
expenditures on desktop management and administration.
Then figure in the element management systems from such vendors as Bay,
Cisco, Newbridge, and 3Com, which account for about 10 percent of
worldwide management revenues: Growth in this segment is over 30
percent. There are several reasons for this. Routers, switches, and
other internetworking gear form the basis of the global IP
infrastructure being implemented by most carriers and corporate users,
so software that manages it is in demand. And many element managers come
equipped almost as mini-platforms, with such capabilities as IP
autodiscovery and the ability to monitor other vendors' SNMP-based
devices. They thus stand as cheaper, easier-to-use alternatives to
costly management systems like Openview from Hewlett-Packard Co. (HP,
Palo Alto, Calif.).
And sales of those traditional platforms reflect the popularity of these
new products. In 1997, platform sales grew by 10 percent<half the rate
of the net management market as a whole.
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Helping Hands
But this isn't to say that platforms are falling by the wayside. A large
installed base, lots of giveaway software, and lucrative support
contracts have helped HP keep Openview growth rates high from year to
year. "From 1992 through 1997, Openview sales sustained growth of 50
percent or better," says Karen Cunningham, Openview program manager.
Meanwhile, vendors like Cabletron Systems Inc. (Rochester, N.H.) and HP
are beefing up the systems management features of their products. Their
targets? Telcos and ISPs that need complex network management
functionality.
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