Latest Market Data Prompts Questions on Cisco Dominance

New data on the state of the Ethernet-switching market surfaced yesterday and today.

First, Dell’Oro Group reported that the Ethernet-switching market grew sequentially at a 20-percent clip in the fourth quarter of 2009. As a result, Cisco, HP, and Juniper were said to have added $600 million in incremental revenue.

Said Alan Weckel, director of research at Dell’Oro:

“Year-end budget spending and supply constraints from the previous quarter helped propel market growth in the fourth quarter. We expect the market to continue to expand in 2010, especially as 10-Gigabit Ethernet continues to grow not only as a server connectivity technology but also as an aggregation technology within the data center.”

Indeed, growth in the Ethernet-switch market is being driven exclusively by adoption of 10-GbE in data centers.

The next piece of market data came from Nikos Theodosopoulos, research analyst with UBS Research. Om Malik reports that Theodosopoulos combed through the Dell’Oro data, did some analysis, and made a few observations of his own. Salient among them is that Cisco is suffering market-share erosion — albeit not of the vertiginous sort — across many of its core switching and routing product groups, among both carrier and enterprise customers.

As reported by Jim Duffy of Network World, Theodosopoulos found that, while Cisco lost share in 2009, vendors such as HP, 3Com, Juniper, Brocade gained ground in the market for Layer 2 and 3 switches. Higher up the stack, F5 Networks and Citrix captured share in the Layer 4-7 segment.

On the routing side of house, Alcatel-Lucent and Juniper advanced relative to Cisco in carrier edge routing. In core routing, Huawei increased its share by nearly two percent while Cisco lost a touch of ground. Meanwhile, Cisco’s share was unchanged in 2009 in enterprise routing.

So, is this the beginning of a steady decline in Cisco’s mainstay businesses? It’s far too early to say. It could be nothing more than a short-term anomaly conditioned by severe recessionary conditions (though Cisco has gained share in previous downturns). Besides, Cisco’s switching and routing franchises are so entrenched that meaningful deterioration in the company’s business fundamentals would be unlikely to occur for some time.

Steady commoditization is the biggest threat CIsco faces in its switching and routing redoubts, and the company saw that threat coming long before now. Confronting low-priced, good-quality, standardized gear from Huawei and 3Com (among others), Cisco knew it had to diversity its product portfolio, not just into higher-end hardware — where it hasn’t done as well against F5, for example, as it might like — but also into software and services.

Just take a look at all the emerging market adjacencies Cisco has entered, including (but not limited to) forays into home networks and home-network management; telepresence, videoconferencing, and video-based collaboration; web-based collaboration and unified communications; mobile video cameras (the Flip); networked digital signage and video-based surveillance; and smart-grid infrastructure. Cisco isn’t stopping there, either. It will continue to push into other markets where data networking confers a feasible mandate.

The challenge for Cisco comes in growing these emerging markets, with their sustainable margins, while coming under mounting commodity pricing pressure in its established switch and router markets. Analysts should closely monitor how quickly these emerging spaces gain substantive traction for Cisco.

Now, you might reasonably ask, where does Cisco’s Unified Computing System (USC) fit? Some people think it was a mistake for Cisco to move into blade servers, that the networking giant made an ill-considered move when it encroached on the territory of erstwhile partner HP and others, such as IBM and Dell.

However, I think Cisco felt it had no choice. The future vendor value in data centers will derive from convergence and integration, which means software and services will be essential to success. The hardware, whether represented by servers or switches, will become commoditized.

Today, that hardware still provides revenue and some margin, but it can also serve as a platform for account consolidation. Fist, though, it’s essential to consolidate the hardware, which is exactly what Cisco and HP are doing. They’re using consolidated hardware to create integrated data-center solution stacks, effectively trying to lock out other players and manage account presence. They’re using hardware for initial leverage, but that’s not the end game.

IBM is taking a different tack, having made the transition to relatively sophisticated data-center software and accompanying services well before its two big rivals altered their courses. Some think IBM will buy a networking vendor, such as Juniper, but I’m not so sure. I think IBM views the underlying hardware as an interchangeable commodity, just the underlying plumbing above which orchestration and management software will run the show.

This battle is just beginning, though, so the vendors — and this humble observer — reserve the right to change tack.

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