NETWORKING: The Growing Pie

Networking, it seems, is on a warpath. This is one segment
which is showing no signs of slowing down in the coming few years. In FY
2004-05, while the big corporates were investing more on the higher-end
networking solutions and services, a buoyant economy and more awareness led to
further proliferation of networking in the small and medium business (SMB)
space.

The year saw the enterprise management looking at networking
and communications as a strategic investment. The number, size and complexity of
deals throughout the financial year reflected this. Though the adoption of
technology was driven by customers, it was propelled specially by the Telecom,
BPO, BFSI, manufacturing and education sectors. Though with smaller deals, the
SMBs, along with the niche market segments, were gaining more equipment and
service vendor focus.

The Money Came From...

Routers: Growing at a steady 36% YoY growth as last year, the router market
touched a high of Rs 860.5 crore as against Rs 634 crore in the year before.
While the market for high end routers grew on account of major broadband and
MPLS network deployments by leading service providers, the market for the mid
and low range routers was driven by small, medium and large enterprises across
all verticals.

MPLS deployments were enhanced or added. BSNL, which was the
first to roll out MPLS in FY 2002-03 further stretched out to cover almost the
entire country. Also Bharti, which had earlier deployed MPLS backbone solutions
based on Cisco routers, is now deploying new IP/MPLS next generation service
networks. Reliance Infocomm launched MPLS global VPN service in association with
MCI. Many large companies either migrated to an MPLS VPN or took steps in that
direction.

Cisco led the router market with 84% market share. Juniper,
D-Link, DAX networks, Nortel, Multitech, Huawei and 3Com followed at a far
distance. The growth came from both service providers and enterprises.

One of the major deals was Cisco's Metro Ethernet solution
for Tata Indicom Broadband services. Juniper bagged orders from Railtel and BSNL.
Railtel's project involved the installation of Juniper's M series platforms
in 38 cities. In a major jump, DAX, after its tie up with Maipu Communications,
grew its router business by 100% during the year. BSNL, Railways and HDFC bank
were among the leading DAX customers.

The router market is poised for further growth, on account of
the growing network and communications market. Juniper, despite offering rich
features and scalability, will have to work harder on its brand building in the
Indian market to compete with Cisco.

Switches: Overall, the enterprise switch market revenue
totaled Rs 1,302 crore, fuelled by an increase in the average selling price
(ASP) and strong demand for Fast Ethernet and Gigabit Ethernet LAN switches.

With a 70% market share, Cisco is the leader in this space,
followed by D-Link, Nortel, 3Com and Enterasys. While Cisco registered a 79%
growth with Rs 911 crore in FY 2004-05, Enterasys saw a decline of 84%, with its
revenues dropping from Rs 170 crore in FY 2003-04 to Rs 27 crore in 2004-05.
Both Nortel and 3Com showed a dip in their revenues. The Foundry alliance with
D-Link has been gaining traction and is ramping up the market share.

Cisco garnered further momentum in the Telecom and BPO space.
The key win for Cisco were Tata group, SBI,

 Mahindra & Mahindra, Wipro BPO
and BITS. Cisco, with the Linksys acquisition made a strong entry into the SOHO
and home network market, thereby more than doubling the business in the
unmanaged switches segment.

Increase in the total number of endpoints connected to the
LAN, increasing diversity of traffic flows on the LAN through network
convergence and more awareness regarding security caused an underlying
technology shift in the Ethernet switch market as LANs became more intelligent
and offered increased bandwidth. Gigabit Ethernet and Layer 3 switches are
expected to fuel the switching demand further in the coming few years.

WLAN: The Wireless LAN segment registered the highest growth
of 60% as compared to the average datacom market growth of 33%. According to
Voice&Data estimates, the WLAN equipment market was valued at Rs 82.5 crore
in FY 2004-05 as compared to Rs 51.5 crore in 2003-04. It entered the mainstream
with both enterprise and SOHO users.

The drop in equipment prices resulted in the per user cost of
deploying WLAN in enterprises slipping to 50% of the cost of FY 2003-04. The
fall in Laptop prices and Internet bandwidth, and the expanding networking
complemented the low prices.

While Cisco continued to lead the market in terms of value,
D-Link reigned in terms of volumes. The WLAN market was primarily driven by
ISPs, Telcos and SOHOs in FY 2004-05, and they promise to continue being the key
drivers in FY 2005-06.

Modem: The high growth modem industry saw a 43% growth
resulting in revenues crossing the Rs 200 crore mark. Dial-up was phasing out,
and leased line modems registered high unit sales with ADSL broadband showing
strong growth. While D-link, Atrie and Bharti Teletech were big players, MRO-Tek
and DAX lost market share.

VSATs continued the march despite stiff competition from MPLS
on the wireline side and CDMA or GPRS-Edge on the wireless. India had a total
estimated installed base of 53,000 terminals by the end of financial year FY
2004-'05.Viasat, HNS, Gila, ND Satcom and Comtech were the top 5 in the VSAT
space. Here ISRO's EduSat project and other e-gov initiatives were growth
boosters.

Vendors like Trend Micro, Symantec, Network Associates,
MacAfee, Cisco and Juniper were the leading security product vendors. Anti-virus
solutions, Firewalls, intrusion detection and prevention, Patch management were
major network security products contributing to a Rs 299 crore market segment.

In the Rs 405 crore structured cabling market, Systimax and
Tyco formed more than 50% of the market. Cat 6 continued to be the dominant
standard, with an estimated 48% market share.

Shifting to NI Services

Network integration (NI) services, including network management services,
grew by 19% to reach Rs 1,041 crore.

Network Integration: Last year saw a major shift towards services and
management. Integrators added or expanded their service offerings. Even smaller
players who had started jumping onto the services bandwagon found a foothold and
made their presence felt in the market. The larger integrators differentiated
themselves with end-to-end offerings, which held preference by bigger corporates.
Enterprises have started investing in building new or ramping up their old
network infrastructure.

As a general trend, companies are now realizing the pros of
staying focused on their core competencies and leaving the networks to be
handled by experts. Network integrator service revenues have gone up from 12% to
25% and managed Network operating center (NOC) services are now finding
increasing preference among customers. As the size and complexity of networks
increased, enterprises' dependence on integrators rose too resulting in a huge
market demand for managed services. Here the network integrator takes full
responsibility for operating the network of the customer on an ongoing basis.

FY 2004-05 saw emergence of partnerships between telecom
service providers and companies like IBM and HP, wherein the Telco brought
connectivity strengths and integrators contributed with their networking
expertise.

Wipro Infotech took the largest share of the NI pie recording
a turnover of Rs 486 crore, closely followed by Datacraft at Rs 466 crore. HCL
Comnet, Tulip, HCL Infosystems, CMC, GTL, Network Solutions, HECL and 3D Network
followed.

Most integrators had their revenue flows generating from the
BFSI sector, which drove NI growth in FY 2004-005. HCL Comnet had almost 17
banking clients, Datacraft closed a $1 mn deal with SBI, Wipro Infotech had
Overseas Bank and Union Bank of India in its clientele and a Rs 35 crore PNB
deal was concluded by Tulip. Wipro Infotech, HCL Comnet, Tata Infotech, HECL and
GTL worked on Bharti, Reliance, Tata Indicom, BSNL, and MTNL integration
projects. Wireless held strong frontiers for companies like Tulip (Mallapuram
implementation) and Gemini which executed a Rs 8 crore MTNL Garuda network-Delhi
deal.

Network Management: As networks became bigger and more
complex, Indian businesses continued to outsource their network management needs
to Network Management Service (NMS) providers. The NMS market in the past fiscal
registered a 33% growth to reach a size of Rs 311 crore. Enterprises started
looking for end-to-end service, which would provide all pieces under a unified
SLA.

HCL Comnet led the race with revenues of Rs 112 crore with
key projects from Tata AIG, LIC, NIC, HLL and Ford. The other top 4 management
companies were Datacraft, GTL, Network Solutions and Wipro Infotech. Vendors
like IBM, HP, Telcos like Reliance, Bharti (with IBM) and VSNL, besides Wipro
Infotech, Infosys, HCLT and HCL Comnet joined in to get their share in the
expanding pie.

Manufacturing, BFSI and Telecom were in the forefront with
the potential of spending more than Rs 4,000 crore over the next 4 years.
Managed services like IP-VPN, managed IP-telephony, and managed security found
acceptance among both large enterprises and the SMBs.

Core Buyers

BFSI and BPO sectors were among the large buyers of networking equipment last
fiscal, together totaling 50% of the total demand. Competitive pressures in BFSI
compelled public sector banks to continue investments towards expansion of their
ICT infrastructure.

In the switching space, the market saw large deals coming
from Telcos like Reliance, Bharti, Tata Indicom, BSNL and MTNL. Also verticals
like Defence, government, BFSI, ITeS and BPO made huge purchases.

State Bank of India, United Bank of India, and Bank of India
drove VPN deployment in the Banking sector.

SOHO: The New Link

Small businesses have emerged as networking customers as well as solution
providers in a big way. The SMB market also contributed to the growth of the
network integration market spreading across tier2 and tier3 cities.

The traction here was a direct result of cost of equipment,
which kept coming down. On the installation side, PC dealers could support small
companies by providing networking services. Wireless networking gained traction
in the SOHO segment last year. While more small companies started investing in
the low-end routers, Medium businesses are now demanding more features in their
routers.

Cisco's increasingly aggressive positioning in the SMB
space is corroborated by the fact that about a quarter of Cisco's India
revenues came from the SMB segment. Cisco's plans focused and tapped the Small
and Medium businesses in auto component manufacturing, retail, textile and
government sectors. It launched its set of SMB class solutions in Nov 2004.
Integration and Management companies too will continue to remain bullish over
this segment. Players like HECL profited by servicing niche segments like
digital cinema and television.

Jasmine Kaur