Despite Softness, Winners Emerge in the Router and Switching Market in Q4

Weak economies and decreased demand from service providers contributed to a soft Q4 for the Worldwide Carrier Routing and Switching markets for some vendors. The Total Worldwide Carrier Routing & Switching market grew revenue $2.9B in Q4/11. The global market increased 1.1% sequentially but declined 10.7% year over year. This decline was due to a perceived negative economic macro climate and reallocation of CapEx shifting from wireline to wireless. Core Routing revenues were down 6.5% q/q and down 17.9% y/y. Edge Routing and Switching revenues were up 3.4% q/q but down 8.5% y/y.

Cisco gained in Core, Access Aggregation, and Carrier Ethernet, which it attributed to a solid book of orders across all regions. The company has been reorganizing and announced that it had reached its goal of reducing $1B in annual expenses. Cisco is gaining share against Juniper, which decreased routing revenue 8.1% sequentially and 22.4% y/y. However, Juniper posted a 36% y/y increase in switching revenue and a 33% y/y quarterly increase, which is in part due to solid sales of infrastructure products such as QFabric and Juniper's wireless LAN products. Alcatel-Lucent, which is benefiting from the market momentum for 100G IP/optical as well as providers replacing and leveraging 100GE and IPv6 transition technologies has 16.5% of the total market share. ALU posted gains in Total Carrier Routing, ESER, MSER, and Carrier Ethernet.

We still see mixed signals on the economic outlook and overall CapEx spending for 2012, but despite the macro climate, mobility and business video services are strong areas for spending and growth in 2012. The US economy has had slow growth over the past two years, yet earnings by companies in Standard & Poor’s 500 companies increased by more then 15% each quarter, which is a good sign for the economic recovery/growth. Traditionally in a presidential election year, perceptions and fundamentals may widen since debates tend to highlight the problems and not the positive fundamentals.

Vendor	Rank	Market Share ($)
Cisco	1	53.7%
Alcatel-Lucent	2	19.0%
Juniper	3	16.5%
Tellabs	4	2.6%
Huawei	5	2.5%

QUARTERLY TREND and DRIVER HIGHLIGHTS

• New technologies are driving innovation, which is being driven by market pressures and demands for enterprises to move critical and nonbusiness critical processes to cloud or virtualized infrastructures. With many countries reaching 100% mobile device penetration and with more people owning multiple mobile devices, fixed and mobile operators have to evolve their broadband access networks to create scalable capacity to deliver multiservice support, operational efficiency and an exceptional user experience. Vendors will need to react and offer innovative solutions that address these requirements.
  

• Mobility and cloud computing are two segments driving all aspects of the telecom industry. Both markets continue to be driven by vendors introducing new technologies for data centers, security, mobile Internet, and storage.

• Data plane traffic growth is being driven by the rapid adoption of video services and cloud services; control plane traffic growth is being driven by migration from fixed and fairly static information sources to personalized, socially-inclusive, and mobile information sources.

With global CapEx for wireline networks estimated to decrease 5.3% in 2012, ACG Research anticipates that 2012 will be challenging for providers and vendors as global economies continue to fluctuate. According to the Conference Board, global growth is projected at only 3.5% in 2012. In spite of this slow growth, service providers will continue to migrate to new technologies and routers will play a key role within the IP network. 2012 will be challenging for the telecom industry, but vendors must focus and invest in developing and introducing new products and services, especially those that support the data center, cloud computing, security and mobility. These solutions, which are putting pressure for differentiated solutions, must deliver innovation, support innovative business models, produce cost and operational management benefits and meet enterprises’ strategic requirements.

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Ray Mota

rmota@acgresearch.net

www.acgresearch.net