Extreme doesn’t share bigger, broader ambitions of Ethernet competitors such as Cisco, Juniper
With the recessionary feel of the current economic environment, punctuated by a deceleration in IT spending, what are the chances for an Ethernet switching company with flat to declining market share and increasing competition in an already crowded market?
Pretty good, at least according to the president and CEO of Extreme Networks.
Despite expectations of consolidation in the Ethernet switching industry and a need for players to attain expertise in Web 2.0, collaboration, video and other trendy new software applications, Extreme says the time is ripe to be small, nimble and one of the best at what it initially set out to do – build Ethernet networks.
“We’re focused on Ethernet and the network, and we stay there,” says Extreme CEO Mark Canepa. “We should stay focused to those things that we are really good at. And then to go create the right set of partnerships.”
But thus far, Extreme has had little success in growing market share from that strategy. The company had but 1.6% of the $18 billion Ethernet switching market in 2007, down from 1.7% in 2006 and 2.2% in 2005, according to Dell’Oro Group.
The company’s share has declined slightly in recent quarters as well, with 1.5% in the first quarter of 2008, compared with 1.7% in the first quarter of 2007 and 1.6% in the fourth quarter of 2007, according to Dell’Oro.
Cisco owns over 70% of the market, Dell’Oro states.
“What you have are 10 or 11 major players all vying for 30% of the market,” says Steve Schuchart of Current Analysis. “A company like Extreme needs to be able to concentrate and do what they do very well. If there’s any weakness in their platform it’s going to translate into a loss of market and a loss of sales.”
“The market for Ethernet switching has matured and evolved,” says Zeus Kerravala of The Yankee Group. “What exactly does Extreme offer that you can’t get from one of the vendors that have done a really good job of branding themselves in that space? They never created any kind of market identity.”
Away from the network, Extreme has been the focal point of acquisition rumors. A longstanding one was Juniper Networks sizing up the company as it prepared for its entry into Ethernet LAN switching.
But Juniper developed its own switches (see results of our tests on Juniper’s new switches). So the most recent speculation shifted to competitor Enterasys Networks possibly eyeing rival Extreme as Enterasys looks to approach $1 billion in annual revenue in order to better compete with the incumbent dominance of Cisco and the entry of Juniper.
Canepa downplays industry consolidation as a way to grow to better compete in a changing marketplace. He seems to favor more organic avenues to grow Extreme beyond its current $350 million to $400 million in annual revenue.
“We’re focused on growth by selecting the markets where we’re going to compete and by focusing on solving the kinds of problems our customers have,” Canepa says. “If we do that right and if we stay focused on our vision and our strategy, then we’re going to continue to grow and we’ll see where that will take us.”
Talk about the Ethernet switching market consolidating has been going on “for quite some time,” Canepa notes. But instead of fearing Juniper’s entry into the market by scrambling to find a merger partner, Extreme is encouraged and likes its chances.
“The fact that Juniper’s been talking about this space at the very highest level is actually pretty good,” Canepa says. “The fact that there is an entrant like that saying that there are legitimate alternatives to Cisco out there is pretty good. It causes a lot of customers to really begin to look at other alternatives.”
But Juniper’s just getting started, Canepa notes, while Extreme has been at this for over a decade.
“We have dozens of products in this space,” he says. “I feel pretty good that we’ve got the product line, the capabilities, the technology to compete very, very effectively. We’ve been developing channel organization for the last decade, we have a very loyal channel, we’re getting integrated into a number of solutions, we have a lot of really good strategic partners – Avaya, Nokia Siemens, Ericsson – we’ve been cooperating for many years at a pretty deep level. I feel pretty good about where we are. Any help that’s out there that is able to articulate the fact that there’s an alternative to Cisco that are legitimate and viable is actually good for us and for the industry.”
Extreme’s differentiator is one that Juniper’s also touting as its own: a single operating system environment from the sub-$1,000 Summit switches in the enterprise wiring closet through the $250,000 BlackDiamond enterprise core switch, and out to the carrier’s BlackDiamond 12800 metro Ethernet platform. Canepa says these attributes of ExtremeXOS help save customers money in capital and operating expense.
“That is the primary driver that the industry is facing today,” Canepa says. “If you look at the uncertain macroeconomic environment . . . the ability to deliver excellent solutions that save money is where [customers are] at today.
“Customers really like the fact there’s a lot less training involved when you only have to learn one set of [operating system] procedures,” Canepa says. “It’s easier to add features and the customer sees a lot of consistency. That, to them, translates into a lot of cost savings.”
Even more than the consistency, Kerravala feels the application development environment of XOS is a uniqueness that Extreme can exploit.
“The initiative they have under widgets is kind of interesting,” he says, referring to a recent XOS enhancement called Widget Central that serves as a Web resource for company and community-sponsored network operating system extensions.
“That’s an interesting differentiator for them,” Kerravala says. “The widget stuff can be pretty cool and they should be really pushing hard – even if they have to give it away — to get some good lighthouse customer wins to demonstrate what it can do.”
But Current Analysis’ Schuchart says this will not be enough to allow the company to stand out in a crowded and increasingly competitive field.
“They need to create some excitement about the company and have a competitive differentiator that’s more than just XOS,” he says.
And like Canepa, Schuchart feels acquisition may not be a panacea in the current market.
“What you’re doing is buying market share,” he says. “If you buy another competitor, you’d get market share but no guarantees that any of those customers stay” with the acquirer or acquired.
That may be why Extreme’s priority is to remain small, nimble and focused.
“What customers really like about us is that we’re flexible,” Canepa says. “We’re able to adapt to our customers’ problems. Complexity continues to increase, which is right at bulls eye of Extreme’s core competencies. We focus on converged and triple-play networks. That’s what our customers want from us.”
