BFSI, telecom hold key to growth in networking

After four years of not-too-impressive performance, the networking hardware sector has finally something to cheer about. The positive outlook is largely due to demand uptake from the government, telecom and finance sectors, coupled with the encouraging adoption of wireless. Rahul Neel Mani tracks the performance of the networking sector

The good news is that the IT market in Asia-Pacific is expected to witness great days in 2004. Two large developing economies in the region—China and India—are steaming ahead on the economic front and driving recovery in the overall regional IT market. This has been substantiated by rock-solid observations from IDC’s ‘Asia Pacific Predictions 2004’ report released recently. It says that 2004 is not only the year of resurrection but the choices made this year will also determine the major market share shifts leading up to 2008.

The going, however, was not the same for the networking segment a couple of years ago. The outlook was bleak with a 16 percent growth in 2001 and an even worse 6 percent in 2002. The outlook improved in 2003 and revenues for the first three quarters of the calendar year already equalled revenues for the whole of 2002. The industry is expected to post a healthy year-on-year revenue growth in excess of 25 percent for the calendar year 2003.

Analysts are bullish about the prospects for 2004. Enterprise buying, which was very fragile in the first half of 2003, has reportedly improved in the second half. Banking, financial services and insurance (BFSI), government and telecom service providers, who were among the key contributors to the market in 2003, are expected to contribute to growth significantly in 2004 as well.

As we move into 2004, there will be a larger spread of wireless in India. The major regulatory hurdles around WLL (using CDMA) have been resolved and GSM and CDMA will provide feasible solutions in the year 2004. The public WLAN services market however will continue to remain tiny due to regulations on the out door use of radio frequencies. But the market scenario will improve with falling hardware prices, both at the service provider and customer premise ends, and the number of total hotspots will grow at a steady pace as compared to 2003.

Research and advisory firm Gartner has also pinned down some healthy and forward-looking facts. According to Mike Harris, vice president Gartner Worldwide, 2003 saw the start of the voice and data LAN convergence. By the 2005-06 timeframe, data and voice convergence on WAN will be accomplished. “Finally, 2007-onwards till 2009, we will see a scenario where network and security convergence will be evident and the industry will witness an ‘IP/Ethernet everywhere’ scenario,” says Harris.

The key issues mentioned by Gartner are:

• How should enterprises prepare for converged networks?
• Which technologies should be used to successfully build a converged network?
• Which services will be essential components of next generation converged networks?

Technologies of the future

When we talk of networking, the first thing that comes to mind is the convergence that has hit the industry and is catching up fast.

IP/MPLS in the enterprise: Any takers?

The technology first off the blocks to have a positive impact on vendors selling networking gear will be IP-based Multi-Protocol Label Switching (MPLS). ‘User-to-Network’ Interface (UNI) is much talked about. It is now possible to push the MPLS from mere core service provider backbones into access networks and enterprise networks. MPLS UNI could finally end the battle between Frame Relay, ATM and IP-based interfaces because it incorporates support for all of these technologies in a single interface. Using the MPLS UNI would make it straightforward to bridge the WAN capabilities of MPLS-based transport networks with local and campus networks. S V Ramana, vice president-Systems Engineering, Cisco India & SAARC, says that India will experience real convergence in 2004. “Significant new technologies that will be accepted by the industry are high-speed core networks with a MPLS backbone,” he says. G Rao, director-VoIP, D-Link India feels that a Core Backbone and a Aggregation Backbone can be built on technologies like MPLS with 10 Gigabit support. We can deliver all the products that support broadband needs, including MPLS-based high-end Metro Switches (Layer 4 to 7 devices),” says Rao. But if we take users into account then shared services like MPLS will get more popular. “Dedicated networks will be history, with companies preferring to deliver solutions rather than wasting time on maintaining infrastructure,” says S R Balasubramanian, senior vice president-IS, Hero Honda.

MPLS is in a unique position to offer consistent quality-of-service (QoS) markings for converged networks. The UNI is designed to be compatible with network infrastructure. Without it, we’re back to mapping marked IP type-of-services and differentiated services bits into MPLS QoS. It’s time for the industry-service providers, equipment providers, and users-to get serious about this spec.

10G Copper: It’s a steal

Last month the IEEE approved the standard for 10 Gigabit Ethernet over Copper, opening the way for short-reach, high-speed data centre links that are more affordable for enterprises. The 802.3ak standard will be implemented as 10GBASE-CX4, providing 10G bit/sec over dual twin-axial cables, similar to the cabling used in InfiniBand networking. The new standard provides an economical way for Ethernet switches and server clusters located within 15 metres of each other in equipment rooms and data centres to be interconnected at 10 Gbit/sec. The top three vendors—Cisco, Foundry and Extreme Networks—saw at least double-digit growth for their products in the fourth quarter of 2003 (Dell’Oro Group).

The availability of 10GBASE-CX4 copper-based interface should accelerate the deployment of 10G Ethernet this year. “10G is slowly catching up worldwide with most customers opting to future-proof their networks. Indian telecom service providers and high bandwidth consuming enterprises are opting for 10G,” says Shridhar

Kadam, general manager- Development & Product Support, D-Link. Says Ramana, “10G Ethernet connectivity in campus switch interconnects is a reality.” In agreement with this view, Punit Mohan, national marketing manager, Tata Telecom says that with the reduction in costs 10G Ethernet can find its place in campus networks in the near future. “However 10G should make more of its presence felt in Metropolitan Area Networks (MANs),” says Mohan.

Metro Ethernet: Here and How?

The immediate consumer of Ethernet technology will be Metro Ethernets. According to one research firm, the metropolitan area is a place that will see tremendous growth in Ethernet in the next few years. Infonetics Research predicts that the Metro Ethernet market will grow to the tune of $5.9 billion by 2006. The same research firm expects numbers to be at 3.6 million by 2006. “We expect tremendous growth in the Metro Ethernet market in the coming year because service providers are reaching out to the masses and consumers want more value-added services,” says Ranajoy Punja, vice president, Marketing, Cisco India & SAARC.

Ethernet is becoming more popular as a metro-area technology for some of the same reasons it is popular in the LAN—low cost and simplicity. Interestingly, the Asia-Pacific region leads spending in this area, at 42 percent of the market, followed by North America at 35 percent. But negating this hype, Bala says, “It is certainly nice talking about them, but great technologies, without practical application, fade away over time. Vendors are guilty of creating hype without demonstrating appropriate value to the customer.”

Mobility: Wireless spreading wings

Mobility and wireless features in IDC’s Asia Pacific Predictions 2004 top ten trends list. Wireless LANs have mushroomed in Asian public places and have gained a foothold in enterprises. The applications continue to multiply beyond e-mail, SMS and remote access. In 2004, IDC predicts public WiFi hotspots will continue to proliferate, growing by 55 percent in APAC from 27,000 in 2003, to almost 43,000 in 2004. IDC predicts healthy WLL services and Enhanced Data Services for Global Evolution (EDGE) rollouts in the region.

Says Kadam, “The new wireless technology trends in the industry are definitely addressing speed and security concerns of users. “D-Link has been working closely with Atheros to develop chipsets that would extend the range of a WLAN network and still be interoperable and compatible with traditional 802.11b and 802.11g networks,” adds Kadam. Says Prasad Kulkarni, executive director, KPMG Advisory Services, “Internationally WiFi hardware equipment sales jumped 40 percent in 2003. In value terms, sales are not significant at $2.5 billion, compared to the networking industry’s statistics and corporate WiFi deployment lags behind consumer purchases.” Says Ramana of Cisco, “Wireless networking was pioneered by Cisco. Today, it is the hottest technology in the world and is driving tremendous acceptance.”

According to Meta Group, 95 percent of corporate notebooks will ship with wireless capability by 2005. So, IT organisations will need to move beyond providing WLANs in spot locations such as conference rooms and develop enterprise WLAN strategies. Cisco’s approach is to distribute various functions to the appropriate device, whether it’s an access point, a WLAN switch or a wired switch.

A new wireless LAN access point is now designed to connect remote offices and can be managed by a wireless switch at a central site. The new product is called the Airespace 1200R Remote Edge Access Point (REAP). Even Microsoft has introduced 802.11g-based wireless networking gear, catching up with rivals Cisco, Netgear and D-Link Systems. New in Microsoft’s wireless LAN line are an 802.11g access point with four-port Ethernet switch, the Microsoft Wireless Base Station MN-700, and wireless cards.

IP telephony: Get, set, go

Yet another breakthrough technology, IP telephony, looks all set to finally gain traction in the enterprise market in India. IDC APAC anticipates strong growth in the market for 2004, which will also be fuelled by aggressive vendor positioning and a proliferation of IP-PBX product offerings. Harris of Gartner also feels that IP Telephony (i.e. IP PBX) will have a dramatic impact on the existing information flows and business processes.

Mohan says that VoIP, the convergence technology, is already being deployed in many enterprises. “Once the multi-service network is in place, applications for VoIP can be deployed to deliver convergence for the enterprise,” he says. Says Punja, “We are seeing growth across all market segments and geographies across India leading to increased deployments for routing and switching as well as advanced technologies like IP telephony.” Standardising protocols is another key

in the progress of IP Telephony/VoIP in India. Says Rao, “D-Link VoIP devices shall follow H.323 as well SIP protocols which are well defined IETF standards. It is obvious that soon VoIP technology shall become the de-facto standard for the voice transport on the converged networks.”

VPN: service par excellence

Leased lines are passe and the new mantra for secured WAN/remote connectivity are Virtual Private Networks (VPN). While a private network may be an ideal solution, the exorbitant cost and the associated complexity of maintaining and managing the same makes it difficult. IDC India currently forecasts revenues for VPN will grow from Rs 2,303.23 million in 2003 to Rs 11,411.8 million in 2008—a CAGR of about 26 percent. In the face of impressive technology, revenue compression and cost consciousness amidst weak regional economic conditions, many network managers in Asia-Pacific are considering using IP-VPNs (Internet protocol virtual private network) as enhancements to or even replacements for conventional Frame Relay or ATM WAN services. IP-VPNs are the new trend. They also cost 20 to 40 percent less to operate and maintain than traditional VPNs.

the problem areas

Until the year 2002, things were shaky and the industry had not looked up after the Internet burst. Thanks to the telecom boom and major expansion plans of corporates, the networking sector is now looking up. Convergence of voice and data is another big factor giving the industry the required bucks. Rapid expansion of telecom networks and their push towards offering more data services will be a good development, fuelling demand for equipment both on the head-end or the service provider side and as well as on the CPE side. But that doesn’t mean the industry has fully come out of the doldrums.

The networking industry is passing through a phase of transition. Customers are demanding more from vendors. “Quality of service is one major issue that is getting increased importance nowadays. All these factors may lead to increase in pressures and low margins for vendors/service providers,” says Partha S Banerjee, senior principal consultant, PricewaterhouseCoopers India. “There are concerns over replacement costs, eg making a transition from wired LAN to wireless LAN will not be easy for large organisations. The industry, as a whole, has to drive the case for newer technology through a valid ‘business case’,” says Kulkarni.

P Vyas, director Sales, D-Link India feels that the government and PSUs are still the largest buyers of networking and communication equipment, contributing to about 50 percent of the market and the potential is still huge. “It has to be noted that decision-making here is much slower than in the private sector, and this causes revenue loss in a sales cycle,” says Vyas.

The domestic IT industry has not been able to take off largely due to the restrictive nature of regulations and policies. Says Punja, “The government needs to champion the acceleration of network adoption which will be the cornerstone of our success in the Internet economy.” Punja mentions that there are two key areas where the government needs to proactively drive policy:

Further relief in tariffs for import of networking equipment. The government needs to bring down the cumulative duties on networking equipment, currently between 27-30 percent, to between 0-15 percent. Secondly, regulatory environment on closed user groups and convergence limiting deployment of IP telephony has to be eased. “Across the world, CUG-PSTN interconnect has been a key driver to fuelling the growth of converged voice & data communications. India remains one of the very few nations, which still do not allow this interconnection,” says Punja.

silver linings

Enterprise buying sentiment, which was quite weak in H1-2003, improved in H2 and is expected to grow stronger in 2004, riding on the general feel good factor in the economy. Companies are now looking for solutions that deliver cost optimisation and higher revenues. Globally, as well as in India, companies are keen to partner with vendors who offer an end-to-end solution. Says Punja, “IDC says that in the last three quarters the networking segment has shown a 30 percent growth over corresponding quarters in the previous year. At Cisco we are seeing growth faster than that.”

Businesses are now investing in intelligent IP-based converged networks that enable the deployment of advanced solutions such as IP telephony, VPNs, wireless, and online storage. These solutions provide the framework for deploying productivity and competitiveness-enhancing applications. “In Cisco, we believe that we will continue to lead the market—by growing at rates faster than the market,” says Punja.

Corporate IT budgets are now witnessing an upward trend and this will continue in the year 2004 as well. The largest growth will be witnessed in the small and medium enterprises (SME) segment, which has already realised the benefits of IT deployments. “The SME segment has woken up to the need to automate itself so as to remain competitive,” says Vyas. He further adds that the industry is poised to grow at a rate of 20-25 percent if not more. “The government, financial and educational verticals would be the verticals to watch out for in the year 2004. Technologies that would hog the limelight in the coming year would be wireless, broadband and convergence,” says Vyas.

Kulkarni of KPMG says that networking hardware vendors have done well in recent times in India due to the explosion of the telecom business, requirements of the ITeS/BPO sector etc. “If we take the enterprise sector overall, the performance may not be that good. In the near future, we believe that telecom and BPO will provide the largest boost to networking vendors, says Kulkarni.

Feels Banerjee of PwC, “The networking industry in the year 2002-03 showed a marked improvement as compared to the previous year. Major categories in networking like network interface cards; hubs and switches have grown while the modem market has declined. The growth in the networking segment can be attributed to increased IT spending by major sectors like telecom, banking and IT-enabled services.”

India’s emergence on the global map in the ITeS sector can be a big opportunity for networking hardware vendors and service providers. Banking and finance is another sector where opportunities rest. We are seeing lot of activity going on in the banking sector as far as network management services are concerned. As discussed earlier, networking hardware vendors would have to emphasise on providing complete end-to-end solutions to enterprises. They would have to align their strategies according to customer requirements—and customers want all kinds of services from a single service provider. The network consulting segment would have to be given due importance, and this includes areas such as assessment, design, facilities management, security management and the like.

rahul@expresscomputeronline.com