Looming Fiscal Cliff and Europe Uncertainties Continue to Undercut Router Market Growth

In addition to economic uncertainty, vendors in the router and switching market are dealing with more intensive competition, diminishing service provider’s profit margins, and their largest customers cutting spending and delaying purchases of new equipment.

Against a backdrop of global economic instability and political unrest, the Worldwide Carrier Routing & Switching markets reflected typical cyclical performance, remaining slightly flat in Q3. ACG Research anticipates global economic uncertainty, a challenging market and aggressive competition will continue to put pressure on vendors’ pricing and margins. “Enterprise CEOs will, most likely, remain conservative and more focused in their IT spending and hiring for the remainder of the year,” states Ray Mota, managing partner. “These factors will continue to force vendors to innovate and develop technology that can deliver significant operational savings as well as address market demands for new and cutting-edge services that are application focused. Despite some vendors providing low guidance for Q4, AT&T announced a CapEx increase of $2.5 billion per year.”

Q3 Total Worldwide Carrier Routing & Switching market posted revenue of $2.75B. The global market decreased 1.7% q/q and 2.5% y/y. Core Routing revenues were down 1.9% q/q and 9.6% y/y. Edge Routing and Switching revenues were down 1.7% q/q and down 0.4% y/y.

Cisco posted a total worldwide decline of 0.3% q/q and a decrease of 0.8% y/y. In spite of the decrease Cisco reports that its CRS and ASR series continue to demonstrate strong traction. Alcatel-Lucent decreased 2.16% q/q but was solidly up 8.2% y/y. ALU’s 100 Gig is a big differentiator for the company, and the company continues to see more sales traction with this port for core solutions, edge and metro. Juniper increased worldwide routing revenue 1.2%, q/q but was down 7.7% y/y. The company cited the reduction in service providers purchasing high-end networking equipment, difficulty penetrating new markets with new products and strong competition from Cisco as factors influencing its quarterly results. 

Vendor	Q-Q MS Point +/-	Y-Y MS Point +/-
Cisco	+0.8	+1.0
Alcatel-Lucent	-0.1	+1.8
Juniper	+0.5	-1.0
Tellabs	-0.1	-0.4
Huawei	-0.2	-0.2

In the US the threat of the “fiscal cliff” is creating a tremendous uncertainty and service providers are monitoring it closely in order to get some visibility on what kind of impact it will have on consumer, small, mid and enterprise business spending. The threat of another recession could potentially extend service providers’ build-out of new services that, in turn, could impact their CapEx spending. ACG plans to monitor this closely in 2013 with our service provider capacity index service, which tracks the rate of change in capacity and how “hot” SPs are running their networks.

QUARTERLY TREND and DRIVER HIGHLIGHTS

• Core network traffic is growing in excess of 50% per year and new services such as content-rich digital media, cloud and mobile placing new requirements on the network.
• Competitive factors such as lower pricing and reduced margins are putting pressure on the routing segment.
• Interest in mobility and cloud computing continues to grow, especially with SPs that recognize that to have a cost-effective, scalable, automated data center that enables them to offer new services/products they need technology that can deliver significant operational savings.
• In a recent ACG survey, 78% of respondents reported that they have SDN plans that were either under discussion or were planned deployment. Interest in SDN has increased in momentum for two primary reasons: 1) a less than positive macroeconomic environment and 2) providers are searching for a new way to deliver new services and realize significant operational savings while increasing service velocity.

For more information about ACG Research's Router and Switching service, click here or contact sales@acgresearch.net.

Ray Mota

rmota@acgresearch.net

www.acgresearch.net

Some Takeaways from the Tellabs Analyst Conference

I just got back from the Tellabs analyst conference. Being an access person and a data nerd, the two areas that I found most interesting were the optical LAN offerings and Tellabs’ analytics service. 

Optical LAN (or fiber to the desk) is a concept that has been around for almost as long as optical fiber, though the business case has been tenuous and adoption has been low. Tellabs has taken the approach of adding enterprise functionality to its residential GPON technology, which may have changed the economics sufficiently to improve the business case.

Tellabs has gotten some traction in the optical LAN business with mostly government customers. Based on these customers’ installations, the company is showing a business case with 70 percent CapEx savings, 80 percent lower power consumption and space savings of 90 percent. Additionally, Tellabs claim that the reduced weight loading from eliminating long runs of copper cables along with the power reduction and space savings allowed a customer to reduce the cost of new building construction by 21 percent. Unfortunately, we could not see any hard data to back up these numbers.

If these two claims of cost savings can be proven in a broad base of installations, we could see some momentum for the optical LAN market. The challenges to greater market acceptance will be 1) the inertia of active Ethernet switching being the de facto standard for LANs and 2) persuading architects, general contractors and higher level decision makers that optical LAN is a bona fide option. Both challenges are daunting but not insurmountable, and seeing how the market reacts to this new approach will be interesting. The stakes are high; growing this market would be a big shot in the arm for Tellabs and a potential hit for the incumbent enterprise Ethernet switch vendors. 

Additionally, Tellabs mentioned the traction it was gaining with its Insight Analytics. Insight Analytics collects data from the network elements from the RAN to the packet core and can correlate the data to individual flows and devices. As a result, Tellabs can give a unified view of the network and how it impacts services. For example, Insight Analytics can provide information on shared node risk or unprotected paths in the backhaul network, bandwidth consumption by application or subscriber, and measure the subscriber’s experience (for example, page load time). 

Tellabs has several testimonial quotes from customers that attest to the value of analytics, and it is easy to understand how customers are excited about having more data available to help make smart decisions about network operations and planning. The challenge Tellabs faces is selling the value of an integrated view into a highly stove-piped operator. 

While these two areas are only a small part of Tellabs’ business, they may be important contributors over the longer term if the company successfully brings these products to market.

David Dines
ddines@acgresearch.net
www.acgresearch.net

Second Half of 2012 Poised for CapEx Spend

Although there is instability in global economies, demand fundamentals remain intact and network traffic continues to rapidly increase, adding more performance pressure on service providers’ networks. The outlook for the second half of the year is for SPs to spend, invest, and upgrade networks and launch new projects.

The European debt crisis as well as a reduction in service providers’ CapEx spend continues to affect the global router and switching markets. Vendors cited the turbulence in Greece, Spain, and Portugal and decreased demand from service providers as factors that contributed to their weak revenues in Q2. ACG Research still anticipates growth in the Worldwide Carrier Routing and Switching markets by the end of 2012. One factor that will affect growth is the surplus of CapEx, with some operators reporting having spent less than 50 percent of their CapEx thus far. “Growth in network traffic continues to rapidly expand and add more stress on SPs’ networks. Service providers have to make the investments and upgrades in their networks to meet capacity requirements; it’s that simple,” states Ray Mota, managing partner. “In the long term, this bodes well for vendors, and if SPs remain true to being flat or slightly up then the spend in the second half of the year should be positive.”

Q1 Total Worldwide Carrier Routing & Switching market posted revenue of $2.8B. The global market increased 2.7% q/q but decreased 5.1% y/y. Core Routing revenues were down 0.6% q/q and down 11.4% y/y. Edge Routing and Switching revenues were up 3.6% q/q but down 3.3% y/y.

Cisco posted a total worldwide decline of 2.1% q/q but an increase of 2.3 y/y. Cisco reports macroeconomic conditions contributed to the decrease in its Q2 revenues. Brocade posted a significant decrease, 23% q/q but a solid increase of 1.8% y/y. Juniper increased worldwide routing revenue 4.6% q/q but decreased 20.2% y/y; the company stated cautious purchasing prioritization by service providers, which is 64% of Juniper’s revenue, and some large enterprises as factors influencing their quarterly results. Alcatel-Lucent, which continues to institute more cost cutting measures, staff reductions and management restructuring, increased 6.6% q/q but decreased 2.2% y/y. 

Vendor	Rank	Market Share ($)	Q-Q MS Point +/-
Cisco	1	54.7%	-2.6
ALU	2	18.4%	0.7
Juniper	3	16.7%	0.3
Tellabs	4	2.5%	0.5
Huawei	5	1.9%	0.2

QUARTERLY TRENDS and DRIVERS HIGHLIGHTS

• Service providers and enterprises are looking at networks that are flatter, that reduce complexity and OpEx, while delivering greater performance and scale.

• Core network traffic is growing in excess of 50% per year, and new services such as content-rich digital media, cloud and mobile broadband place new requirements on the network for optimal distribution and delivery. Core routers, consequently, must scale rapidly and meet demanding network performance objectives with the lowest possible total cost of ownership.

• A key driver contributing to service provider router and switching market growth is the increasing demand for mobile broadband and providers investing in wireless networks to meet that demand.

Click here for more information about ACG Research's router and switching service.

Ray Mota

rmota@acgresearch.net

www.acgresearch.net

Packet Optical Market Reflects Seasonality: Q3/11: ACG Research Optical Networking Market Share Report

The Worldwide Packet Optical Transport Market has seen typical 3Q seasonality, declining 16.1% sequentially but growing 21.0% year over year, according to ACG Research. The total Worldwide Optical Networking market declined 9.3% sequentially but grew 5.4% year over year in Q3 2011.

Cisco has regained the number one position with 22.7% of total market share in Packet Optical Transport; Fujitsu is still strong at the #2 spot. Tellabs, which had the #1 share in POT systems for the last 2 quarters has now fallen to third place with 16.1% market share. Of note, Infinera captured the number one spot in Long haul DWDM segment for North America.

According to Eve Griliches, "Despite weak economies and lackluster employment trends, financial investment firms are still investing in optical networking products, albeit at a slower rate this quarter. Content providers are deploying 100G as planned, and in fairly high numbers. We are in a fairly different market now, which is changing faster than previous generations. Demand from content providers is growing and spending by top tier providers is being constrained.”

Top Vendors-Worldwide Packet Optical Transport Systems (POTS) Market
Vendor	Rank	Q-Q Revenue Growth	Y-Y Revenue Growth
Cisco	1	16.7%	35.8%
Fujitsu	2	22.0%	49.1%
Tellabs	3	-24.2%	-15.2%
Huawei	4	5.3%	54.9%
Alcatel-Lucent	5	-17.6%	-31.6%
Total		-4.4%	12.9%

QUARTERLY TREND and DRIVER HIGHLIGHTS

• This quarter has been marked by headwinds, strikes, hurricanes and floods. Overlay that with a climate that has a "hesitation to spend" and "continued focus on fiscal control" and you would assume that it was a lousy quarter. It is not. OTN architecture is clearly resonating with operators, but adoption of OTN standalone platforms within major carriers involves a long selling and new certification cycle.

• It turns out the headwinds, strikes and floods had little disruption for most vendors in what is a typically soft quarter. Effects of the floods in Thailand are likely to be felt next quarter and possibly into Q1 2012, although not by significant percentages.

For more information about ACG Research's Packet Optical Transport Market Share Report contact sales@acgresearch.net.