Network industry rearranged

Hardware hit hardest by economic woes; post-attack environment raises uncertainties.

Part Two: Slim budgets test users' creativity
Part Three: Net innovation gets squeezed

A seemingly endless parade of layoffs, bankruptcies and cutbacks has rearranged the vendor playing field, leaving it a much different place than it was just 18 months ago.

The result is that vendors that were strong are getting stronger relative to their competitors, while the weak are being weeded out. Compounding the situation is the belt-tightening expected in the wake of the recent terrorist attacks, which have already made their mark on the stock market and the economic forecasts of companies from 3Com to Oracle. Those attacks prompted research firm IDC to scale back its estimates of IT spending this year to its "worst-case scenario": a growth of 7.9% over last year.

This is the first in a series of three stories that will look at how the economic struggle is reshaping the landscape, how enterprise network executives are changing their buying strategies in response, and how the industry's potential for innovation may be affected in the long run.

All segments are feeling the pain, but the hardest hit by far is hardware. Research firm Dell'Oro Group predicts that the Ethernet switch market will decline 7% in 2001 from the previous year - the first backslide this market has seen.

The firm says a slowdown in desktop switch port upgrades are to blame for the decline, as most large companies have already upgraded to 10/100 Ethernet, and Gigabit Ethernet in the core. Dell'Oro doesn't expect the market to pick up again until 2003, when 10G Ethernet in the backbone and Gigabit Ethernet to the desktop begin the next enterprise upgrade cycle.

Hit hard

Meanwhile, the total router market shrank 9% from the first quarter to the second quarter of this year, according to Cahners In-Stat.

The resulting layoff numbers among network hardware makers have been astounding. Nortel has become the poster child for layoffs, announcing 30,000 employee cuts this year. 3Com has let go 41% of its workforce since November. Even Cisco said last March that it would trim its staff by several thousand.

Other changes have contributed to the industry's transformation. 3Com axed its large gear for enterprise networks last year, then reduced its consumer efforts earlier this year. Cabletron splintered into four companies and then finally ceased to exist last month.

"You don't see a lot of 3Com anymore," says John Burgess, vice president of network design engineering for Predictive Systems, a network integrator and consultancy that serves large businesses. "Cabletron isn't what it used to be. It's really a different market now. There are not a lot of new companies out there, either."

Burgess says most users he has dealt with have followed the same path.

"They've changed from one vendor or another to Cisco," he says. "I haven't seen it any other way."

Cisco has not been immune to the economic downturn after several years of strong growth. The company may not be as mighty as it once was, but its position in the enterprise network equipment market has actually improved by knocking many competitors further down (see graphic, right).

In the first quarter this year, Cisco held the top revenue spot in Layer 2-Layer 7 Ethernet switches, with 57% of the $3.3 billion worldwide market, according to Dell'Oro. In distant second was Nortel, with 8% of the market, followed by Cabletron spinoff Enterasys, with 5%.

One industry analyst from Gartner estimates that 90% of the large enterprise switch business that 3Com once held is now in Cisco's hands.

Server hardware is another area that has been affected, with IDC data on the worldwide PC and server markets also looking grim. Like the LAN switch market, IDC says the PC market will see its first-ever decrease this year, dropping 6% from last year. As for servers, the U.S. market saw total revenue drop from $5.5 billion in the first quarter of 2000 to $4.4 billion in this year's first quarter.

This is also resulting in cutbacks and consolidation in that industry. The most prominent example is last month's announcement that Hewlett-Packard would buy Compaq. That move was made in part to cut costs, and the companies said they would eliminate 15,000 jobs in the deal.

In the area of WAN services, DSL providers have been the highest-profile failures, with Rhythms NetConnections and Covad Communications filing for bankruptcy protection last month. NorthPoint Communications went bankrupt earlier in the year, with AT&T picking up the company's assets. Competitive local exchange carriers are also feeling the crunch, with companies such as Winstar and Teligent also filing for bankruptcy protection earlier this year.

All this has prompted the big carriers, such as WorldCom and AT&T, to use their relative stability as a marketing weapon against smaller competitors.

By contrast, IT services and software, and storage (to some extent) are weathering the storm. The IT services market, which includes consulting, support and training, is expected to grow 10.5% this year, IDC says. The total software market is expected to grow 12.9%.

"Software has been more resilient [than hardware], as companies continue to invest in applications that optimize the use of their existing hardware," says Kevin White, senior economic analyst at IDC. And while certain types of IT services have been affected, he adds, "other areas like IT outsourcing receive a bit of a boost as companies seek new ways to cut costs."

To some degree, storage is also hanging in there, although slower-than-usual growth of 3.4% is expected this year by IDC. However, observers have seen an uptick in demand for storage capacity in the immediate wake of the terrorist attacks. Along the same lines, some expect to see an increased demand for IT consulting services in the areas of disaster recovery and security planning for sensitive corporate data.

Users cautious

The effect of the industrywide shakeup has made companies purchasing IT equipment more cautious, which is bound to delay any recovery.

"There's generally a go-slow mentality right now," Predictive's Burgess says.

A year ago, with Y2K fears abated, and IT spending budgets fatter, companies spent a lot on IT infrastructure, especially in LAN switching technologies. This level of spending, it seems, will not be duplicated this year, as the poor economy has cut into enterprise IT budgets.

"Our network is only a year old," says Tony Crognale, network technician with Scottsdale Insurance, a subsidiary of Nationwide Insurance in Arizona. "When we originally put in place the infrastructure we have, the economy wasn't the way it is now."

With Layer 3 switching and Gigabit Ethernet in place, the company won't put its dollars toward new network infrastructure for a while, Crognale says.

Research from IDC indicates other companies are following the same strategy. IDC surveyed 100 U.S. companies about trends in their network infrastructure spending, and found that 85% of them purchased Gigabit Ethernet switches last year. With all that bandwidth in place, only 36% of businesses said they would add more Gigabit switches to their networks this year, while even less (30%) indicated they would make initial installments of Gigabit Ethernet this year.

Layer 3 switch technology followed the same route, according to the study. While 81% of respondents said they installed Layer 3 switches last year, only 24% said they would buy them this year.

Meanwhile, as the economy takes its toll on vendors, their long-term viability becomes a bigger issue for buyers - but only with some kinds of gear.

"With Layer 2 switches, pretty much either they work or they don't," says John Lauro, systems administrator at the University of Michigan at Flint. "If something happened to one of our vendors in that area . . . that doesn't really matter because they're such a commodity item. You can get them from any vendor, and they're all interoperable."

While Layer 2 switches mostly perform the relatively simple act of bridging LANs, Layer 3 switches handle different protocols and route traffic, so Lauro says that the added complexity caused more trepidation about what vendor to pick for Layer 3 switching.

"When we went with Foundry [Networks], they were a relatively young company," he says. "That was one of the concerns when settling between Foundry and Cisco, Lucent and Nortel when trying to pick a Layer 3 vendor. Who would most likely be around over the next few years was one of the points we considered."

Opinions differ on how market and economic conditions should affect spending decisions. Gene Rekos, vice president of technology at Teen.com, says he's saving money by buying used and remanufactured equipment.

"We were buying newer equipment, so we were buying it from, say, Compaq and Dell and Sun, and now we've shifted to value-added-type companies that also sell remanufactured and used equipment," he says. He buys from companies such as Circular Technologies and Computech Systems.

Brian Rust, communications director of the University of Wisconsin's Department of Information Technology, takes the opposite view. He says the university isn't changing its view of vendors because of increased competition.

"We don't go for cut-rate things or, more importantly, things that may be incompatible with what we're already using regarding the network. So just because a particular company comes to us and says we have a great deal going right now on routers, that doesn't mean that we suddenly shift gears and buy another product.

Jennifer Mears and Linda Leung contributed to this story.

Network industry rearranged

Users cautious

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