Routing through choppy waters

Unfazed by the slow rate of growth of the networking market, equipment makers have rolled out a slew of new offerings, which they hope would give sales a much needed fillip. By Venkatesh Ganesh

This November, Juniper Networks made headlines in the core routing market by unveiling the T4000 (which will hit the markets in the second half of 2011)—a core router that boasts of an industry leading 240 Gbps per slot capacity, good for 4 Tbps per half-rack chassis optimized as it is to handle increased video and other kinds of network traffic. However, Juniper was not the first to hit the headlines. Cisco announced its next generation of routers, the CRS 3 in March, six years after the first CRS came to market.

After four consecutive quarters of year-on-year declines, revenues from the router market increased 15.1% in Q1 2010, as compared to the first quarter of 2009. This comes as music to makers of networking gear who were bogged down for months due to dismal global macroeconomic conditions.

Some industry watchers call it the lifecycle of technology that comes into play and others call it a desperate attempt in tough times. The announcements by Cisco and Juniper were not unusual in that router vendors continuously upgrade and update products. “Juniper’s announcement may have been faster than many expected, but it remains to be seen what features will be included when the product becomes available,” commented Shin Umeda, Vice President Dell'Oro Group, Inc. Advances in core routing are tied to the development of custom ASICS, something that usually takes four to six years, he added.

According to Nareshchandra Singh, Principal Research Analyst, Gartner, 2009 was a bad year for the enterprise networking industry. India mirrored global trends as companies from across verticals preferred to put projects on hold.

Data from Springboard Research estimates that the market for enterprise networking equipment in India, was around $1.2 billion in 2009 as against $1 billion in 2008. This is expected to grow to $1.7 billion by 2012, a CAGR of 15%.

Apart from analyst data, company numbers tell a similar story. Take the case of Cisco and Juniper who together hold in excess of 75% of the market for routing and switching. For Cisco, revenue from routing equipment was up 13% year-on-year, with high-end routing growing 16%. That's a far cry from the time when CRS first hit the market.

Similarly, Juniper reported revenue growth of 23% year-on-year and the company feels that its addressable market would grow in the 12-18% range in 2011 and it expects to grow faster than the market. Cisco CEO John Chambers said in an analyst call that, in 2011, the company is set to grow its revenues in the 9-12% range.

For Cisco, mid and low range routing revenues were up 7 and 8% respectively.

The enterprise router market, which was flat over the year, continues to be soft from the record levels seen in 2007 and 2008.

Sailing rough seas

The Indian enterprise market has been much more conservative in terms of its spends and this, in turn, has affected the fortunes of networking equipment makers. When asked about new customer wins in India, both Cisco and Juniper declined to name names. In other words, there have been minor upgrades of networking equipment but no enterprise has committed to large networking spends. This is witnessed in the Indian IT spends (refer table) in verticals like telecom, which saw a de-growth of 1% in 2009 and grew by 13% in 2010, according to data from Gartner. Dell’Oro Group forecasts that the core router market will amount to $2.6 billion, representing a 14% increase over 2009.

“For the first nine months of 2010, Cisco held a 58% share, Juniper 30%, and Huawei 10% globally,” said Umeda. He added that sales of core routers declined significantly in 2009 due to the global recession as service providers reduced their spending to minimum levels to sustain traffic growth and did not embark on major upgrade projects.

“In 2010, this market was affected by the economic recession,” said Lavanya Palani Batcha, Senior Research Analyst, ICT Practice, South Asia & Middle East, Frost & Sullivan. Carriers in India and China, especially, had made huge investments in those technologies before last year. Millions of first-time mobile users are now going onto those networks, as many as eight million per month in India.

Despite a tough couple of years, industry leaders are bullish about the Indian market. The growth, according to industry leader Cisco, is bound to come from India, China and Russia. “We continue to see growth in the Indian market as corporates are upgrading their IT infrastructure,” said Anand Patil, VP, System Engineering, India and SAARC, Cisco. Patil's optimism stems largely from the fact that India's GDP is set to grow by 8.9% in the coming quarters

“We have a strong base in the Indian telecom market; we will build on that and expect more deals in 2011,” said Sridhar Sarathy, Vice President, India operation, Juniper Networks.

Another unspoken trend that is emerging from the background is the rise of Chinese equipment vendors like Huawei and ZTE. “Huawei and ZTE have products that compete with the traditional vendors in the core routing market,” said Umeda. He went on to add that vendors such as Cisco, Juniper, and Alcatel-Lucent viewed the Chinese manufacturers as a long term threat. A recent 2010 ranking of the World’s Most Innovative Companies by FastCompany.com listed Huawei at number 5, ahead of Cisco which was number 17 and is indicative of Huawei’s ambitions in the router business. However, according to analysts, neither Huawei nor ZTE have won significant market share with the top tier service providers outside of the Chinese market.

Some bright spots

There are a few bright spots and these are mostly coming from emerging markets like India. Internet traffic growth will be the ongoing demand driver for core routing. Mobile data will be a factor, but video content over broadband networks will likely be the most prolific driver, pointed out Umeda. Add to that the fact that the total addressable market for switching, routing, security, wireless, and WAN optimization is expected to be worth $40 billion in three years, growing at a CAGR of 12%, according to Dell’Oro.

Research firm Ovum has projected an upbeat long-term forecast for sales of optical networking (ON) equipment, driven by the continuing need for bandwidth. It expects the ON market to reach $20 billion by 2015 with a CAGR of 5%.

LAN switching, WLAN and video are the CIO's spending priorities in 2010 according to Morgan Stanley’s CIO Survey published in January 2010. In the same report, 35% of IT professionals said that they expected to increase LAN switching investments over the next 12 months. According to a recent Infonetics report, the router market is expected to grow by 12% in 2011.

In an analyst call, Chambers announced that service provider router revenue, which now accounts for 72.7% of the router market and included both core and edge routers, grew at 21.9% over 2009, with multi-service edge routers growing at 38.6% year-on-year.

Cisco accounted for the biggest gain in Ethernet switch revenue and its market share increased to 68.5%, up from 64.5% in the first quarter of 2009. Also, globally, in the service provider market, Cisco grew 41.3% as compared to 2009. Cisco now accounts for 52.9% of this market, up from 45.6% in the first quarter of 2009.

“Before coming up with CRS 3, we undertook a networking index study to assess the kind of IP traffic that you see at present and are likely to witness in the future,” said Patil. This assessment threw up an interesting result that, by 2010, 40% of Net traffic would consist of video. Competitor Juniper agreed. “If you see the pattern of IP traffic, Youtube and other forms of video are proliferating on the Net in a big way and, if companies don't build their backbone in anticipation of this traffic, they would be found wanting,” averred Sarathy.

It is in this backdrop that both Cisco and Juniper are gearing up for the next round of growth.

Accelerated IT infrastructure spending with 3G

India has 680 million mobile phone subscribers. Add to that research firm Evalueserve's report which predicts that the Indian market is likely to have 395 million 3G handsets by 2013 and about 20 million Indians currently use 3G-enabled handsets and the demand for data services is apparent.

With telcos rolling out 3G, there is a push to upgrade their existing infrastructure that is built to meet 2G needs. “Telcos will have to look at a unified platform or a converged system (whether it is for billing of fixed or mobile lines) and providing different applications such as live video services from a single platform,” according to Sarathy.

Also, mobile data traffic is set to double and huge capacity is required to manage this load, opined Patil. Shiv Putcha, Principal Analyst, Emerging Markets, Ovum felt that telcos would not upgrade their infrastructure overnight but would have to go for common software delivery, billing platforms etc. that would necessitate the need for additional investment in routers and other networking equipment. This view was echoed by Patil, who said that telcos asked him about ways in which they could keep their investments low and justify their return on investment to the management.

“The killer app is clearly broadband Internet access. Mobile Internet access in India, in large part has been relatively highly priced due to the limited availability of bandwidth and many of those connecting are doing so over GPRS networks, which are extremely slow,” said Windsor Holden, Principal Analyst, Juniper Research.

It is at this point that networking equipment makers reason out that their routers and switches can be added to existing ones, without any downtime. Sarathy equates it to a car tire being changed when it is in motion. This, hope the networking equipment players, would result in the increased sales of CRS 3 or T4000. Additionally, there are the Cloud-based services that give a whole new meaning to IT infrastructure implementation. “Indian telcos have the option of modernizing their infrastructure by offering the first generation Cloud-based services that other telcos can learn from,” said Klaus Oestermann, Group VP and General Manager, Networking and Cloud Product Group, Citrix.

Juniper is in talks with all of the major telcos to sell their networking gear. We have learned that Reliance Communication has already bought equipment from Huawei for its 3G requirements and Tata Docomo has gone with Cisco.

Indian carriers should heed the lessons learned abroad in markets like Japan and the US. “3G data services will have to be pretty compelling in any language in order to encourage subscribers to spend more on their monthly bills,” reasoned Putcha.

Further, Cisco is pushing the ASR 9000 edge routers, which grew 200% globally in 2010. Video will be a key player and Cisco has estimated that 91% of Internet traffic will be video by 2013, and overall IP traffic will grow 40% per year. “The CRS-3 will not only be a good tool for handling that, but it will also play a significant role in future data centers,” said Patil.

One of the things that Juniper has done is that it has designed the T-4000 from the ground up out of India. Mukul Golash, Senior Staff Engineer, Juniper India said that designing the T-4000—right from doing alterations within the existing chassis, upgrading network operating systems to still run in 4 Tbps per half-rack chassis—was considered a tough task given the time lines and the complexity of the work involved. He added that even the ASIC conceptualization was done out of India. This, hopes the company, would give it an edge over competitors.

Hopes of networking vendors are placed on the coming year. These players cannot bank on 3G alone. India is a conservative and price sensitive market, which believes in under investing till the growth is actually seen. Hopefully, the new router avatars would bring in some cheer.

venkatesh.ganesh@expressindia.com