Networking: Blowing Hot, Blowing Cold



A year of reckoning would sum it up nicely. For the
networking industry, challenges popped up unexpectedly, but these were managed quite emphatically. Internet service providers (ISPs) continued to scale
up their infrastructure, but the excitement seen in the beginning of the year
faded as the year went by. The global slowdown had its impact, and those
depending heavily on the ISP and the Internet data center segments found their
targets were running away from them. The more seasoned and mature players
reacted by reworking their targets–this helped them tackle the situation, with
the top five growing at an impressive 89%.

New entrants with fresh ideas also brought enthusiasm into
the market. Stable enterprise sectors–banking, insurance and telecom–contributed
significantly to the overall growth of 50%, a jump of 15% over the previous
year. The resulting surge in market size: to Rs 1,851 crore, from Rs 1,234 crore
last year.

Caution ruled the moods

After the chaotic buying of networking products last year, a
result of the Internet madness, this year turned out to be somewhat somber. Not
many in the industry were expecting this sudden drop in the buoyancy in customer
mood, and were dismayed by the fact that selling was suddenly more challenging.
Network infrastructure providers were the most affected.

Top
Five : Shrugging off the Slowdown
Company Revenue (Rs crore) Growth
1999-00 2000-01 (%)
Cisco 360 765 125
Enterasys Networks 119 268 126
63D-Links India 160 250 63
3C50om 140 210 50
Nortel Networks 110 201 83
Average (Top Five) 889 1694 89
Total networking industry 1,234 1,851 50
*DQ Estimates
The slowdown began to pinch in Q3 and Q4,
but overall growth wasn’t  affected.
Industry grew upwards of 50%, and the Top Five notched up 89% growth.

The flurry of demand remained undiminished in the first half
of the year, but dark clouds loomed large in the second half. Even leaders like
Cisco Systems and Nortel Networks had to wade through some rough waters. The
global economic conditions, coupled with a continually low agricultural output
at home, had a negative bearing on the economy. The resultant southward swing in
demand for industrial goods forced corporates to lower expectations. To contain
outflows, corporates reacted by slashing infotech budgets, and networking deals
weren’t spared the hatchet. Gradually, a cautious mood set in–it was time
for introspection and return to reality.

Cisco’s business in India remained robust, even as the
parent company cut costs and downsized its workforce by 17% in other parts.
India remained a thrust and growth area for most of the larger players, with
Cisco, Lucent and Nortel setting up huge development centers for outsourcing
activities. Lower development costs and overheads in India should see them
remain bullish in the country, especially given the changed economic scenario.

Exploring new options

The impressive growth in routers was due to the deployment of high-end products for gigabit routing. As networks shifted to switched architecture, there was a spurt in demand for LAN equipment , but this also pulled down the market for hubsAs activity in the ISP and data center arena slowed down,
players in these segments were hit hard. Network vendors started rethinking and
strategizing on options that would be more sustainable in the long term. New
players began emerging as challengers, with their focus specifically on the
traditional enterprise segment.

After its difficult years, Cabletron, which had split its
business into four companies, came into the market with a fresh zeal and a new
avtaar–Enterasys. Its long experience as infrastructure provider added to its
advantage. Extreme Networks also made a move towards the large-enterprise
market. However, it is yet to reach a critical mass to become a sound long-term
player. Among other promising companies debuting, the notable ones are Juniper
and Unisphere, both of which are testing their products with service providers.

Many service providers are currently using legacy systems
based on outdated software and microprocessors, and will have to adopt newer
technologies to align themselves with the global market. Therefore, networking
vendors expect India to be a big potential market.

India was certainly growing in its importance as a major
growth area in the networking segment–the best equivocation of this trend were
the visits by Cisco’s John Chambers, Nortel’s Clarence Chandran and Juniper’s
Scott Kriens, among others. All expressed confidence in the market, lauded the
country’s talent pool of tech professionals, and underlined the significance
in their development projects. Cisco went a step further–it invested in tech
education and outlined plans to set up network academies across the country.

Market scenario

The tech-crash and the IT-led slowdown did have its fallout,
but it did not impact noticeably on overall market growth. When ISP activity
slowed down, software houses entered the picture, setting up development centers
to handle increased offshore activity and making good purchases. Investments
also poured in from banks and old economy sectors like manufacturing and
insurance, which emerged as heavy buyers of routers and switches in their
ramp-up quest.

Another area of steady growth was in LAN switches, which
showed an increase of 57% in unit terms, notching up sales of Rs 612 crore,
against 55% growth and Rs 389 crore revenues in the previous year. Routers too
grew by an impressive 86%, touching Rs 408 crore. The shipment in volume terms
during the fiscal was 24,337 units, compared to 17,000 in the previous fiscal–a
growth of 29%. But value-wise, the growth was far higher due to better
deployment of high-end routers, of which some were capable of gigabit routing.

Prices of basic networking products declined, affecting the
network integration card (NIC) and hub segments. As switches penetrated the hubs
market, the segment saw a huge drop of 35% and ended up being a market of Rs 49
crore by the end of the fiscal. The NIC market, worth Rs 92.4 crore in 1999-00,
was also down by 11% to Rs 82.9 crore. D-Link, with a market share of 47%,
remained the leader in the NIC segment, though Intel and Dax also made a mark.
3Com decided to move away from a mass-market product range to feature-rich
products–stirring up a battle with Intel in the high-range fast Ethernet and
gigabit Ethernet NIC market.

Leased-line modems and remote access servers (RAS) picked up
well in the beginning of the year with ISPs coming in, but as things slowed
down, there was only a moderate growth of 27% and 21% in the two segments,
respectively. In the VSAT space too, nothing phenomenal happened. Although costs
were brought down with the advent of the Ku band, implementation did not surge
as expected. The total market size, estimated at Rs 214.74 crore, did not grow
at all in terms of revenues. In terms of number of VSATs installed, the industry
registered an average growth of 39%, far below the 49% registered in 1999-00.

This slackening can be attributed to lack of transponder
capacity in the first half, while also contributing were the putting on hold of
government tenders, and the lack of performance by e-commerce businesses like
Skumars.com and others. Also, while the use of VSATs for village telephony was
not allowed, accessing of the Internet using VSATs also remained a non-affair
due to unclear regulatory norms. The wait-and-watch policy adopted by corporates
only deflated demand further.

The network integration market grew at 64%, registering total
revenues of Rs 1,675 crore. The industry matured as the top integrators moved
from core products to value-added services like consultancy and network
planning, segments that fetched more revenues than previous years.

Who Drove the Growth?

  • ISPs like BSNL, VSNL and Satyam ramped up their
    infrastructure. New players like Tata ISP, HCL Infinet and Hughes
    Tele.com were also doing the same
  • Call centers and IP contact centers contributed to a sudden
    spurt in the demand for networking products
  • The traditional enterprise sector was active setting up
    wide area networks. Manufacturing, transport, utility, government
    and insurance led the spending chart
  • New technologies such as SAN and NAS were adopted on a
    large scale. Large integrators also deployed wireless LANs at
    corporate sites
  • The banking and finance sector spent crores on largescale
    networking projects across the country. Dena Bank, RBI, AmEx, Global
    Trust Bank, and financial institutions like BSE, LIC and UTI were
    the top spenders
  • SW development centers also contributed to the runaway
    growth, especially with large software houses setting up new
    development centers.
    R&D activities also fuelled networking growth
  • SMEs displayed great interest in networking their setups.
    About 15-20% Cisco’s revenues came from this segment

Outlook

The networking projects that began this year will continue as
large enterprises enter the second round of implementation. Among the
traditional segments, banking and finance will remain on top, with ATMs and
online banking expansion raging at the forefront. The IT and telecom sectors are
also expected to be key drivers of networking this year, with outsourcing
expected to pick up in a big way. As networks become mature, corporate buying
decisions will no longer be product-based. End-to-end solutions that also take
care of security issues will find favor.

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