Blowing Hot, Blowing Cold

ISP activity slowed down, corporates turned cautious, but the banking and finance sector stuck to ambitious ramp-up plans. Industry bemoaned the slowdown, but networking still notched up 50%-plus growth

A year of reckoning would sum it up nicely. For the networking industry, challenges popped up unexpectedly, but these were
managed quite emphatically. Internet service providers (ISPs) continued to scale up their infrastructure, but the excitement seen in the beginning of the year faded as the year went by. The global slowdown had its impact, and those depending heavily on the ISP and the Internet data center segments found their targets were running away from them. The more seasoned and mature players reacted by reworking their targets—this helped them tackle the situation, with the top five growing at an impressive 89%.

New entrants with fresh ideas also brought enthusiasm into the market. Stable enterprise sectors—banking, insurance and telecom—contributed significantly to the overall growth of 50%, a jump of 15% over the previous year. The resulting surge in market size: to Rs 1,851 crore, from Rs 1,234 crore last year.

Caution ruled the moods

After the chaotic buying of networking products last year, a result of the Internet madness, this year turned out to be somewhat somber. Not many in the industry were expecting this sudden drop in the buoyancy in customer mood, and were dismayed by the fact that selling was suddenly more challenging. Network infrastructure providers were the most affected.

The flurry of demand remained undiminished in the first half of the year, but dark clouds loomed large in the second half. Even leaders like Cisco Systems and Nortel Networks had to wade through some rough waters. The global economic conditions, coupled with a continually low agricultural output at home, had a negative bearing on the economy. The resultant southward swing in demand for industrial goods forced corporates to lower expectations. To contain outflows, corporates reacted by slashing infotech budgets, and networking deals weren’t spared the hatchet. Gradually, a cautious mood set in—it was time for introspection and return to reality.

Cisco’s business in India remained robust, even as the parent company cut costs and downsized its workforce by 17% in other parts. India remained a thrust and growth area for most of the larger players, with Cisco, Lucent and Nortel setting up huge development centers for outsourcing activities. Lower development costs and overheads in India should see them remain bullish in the country, especially given the changed economic scenario.

Exploring new options

As activity in the ISP and data center arena slowed down, players in these segments were hit hard. Network vendors started rethinking and strategizing on options that would be more sustainable in the long term. New players began emerging as challengers, with their focus specifically on the traditional enterprise segment.

After its difficult years, Cabletron, which had split its business into four companies, came into the market with a fresh zeal and a new avtaar—Enterasys. Its long experience as infrastructure provider added to its advantage. Extreme Networks also made a move towards the large-enterprise market. However, it is yet to reach a critical mass to become a sound long-term player. Among other promising companies debuting, the notable ones are Juniper and Unisphere, both of which are testing their products with service providers.

Many service providers are currently using legacy systems based on outdated software and microprocessors, and will have to adopt newer technologies to align themselves with the global market. Therefore, networking vendors expect India to be a big potential market.

India was certainly growing in its importance as a major growth area in the networking segment—the best equivocation of this trend were the visits by Cisco’s John Chambers, Nortel’s Clarence Chandran and Juniper’s Scott Kriens, among others. All expressed confidence in the market, lauded the country’s talent pool of tech professionals, and underlined the significance in their development projects. Cisco went a step further—it invested in tech education and outlined plans to set up network academies across the country.

Market scenario

The tech-crash and the IT-led slowdown did have its fallout, but it did not impact noticeably on overall market growth. When ISP activity slowed down, software houses entered the picture, setting up development centers to handle increased offshore activity and making good purchases. Investments also poured in from banks and old economy sectors like manufacturing and insurance, which emerged as heavy buyers of routers and switches in their ramp-up quest.

Another area of steady growth was in LAN switches, which showed an increase of 57% in unit terms, notching up sales of Rs 612 crore, against 55% growth and Rs 389 crore revenues in the previous year. Routers too grew by an impressive 86%, touching Rs 408 crore. The shipment in volume terms during the fiscal was 24,337 units, compared to 17,000 in the previous fiscal—a growth of 29%. But value-wise, the growth was far higher due to better deployment of high-end routers, of which some were capable of gigabit routing.

Prices of basic networking products declined, affecting the network integration card (NIC) and hub segments. As switches penetrated the hubs market, the segment saw a huge drop of 35% and ended up being a market of Rs 49 crore by the end of the fiscal. The NIC market, worth Rs 92.4 crore in 1999-00, was also down by 11% to Rs 82.9 crore. D-Link, with a market share of 47%, remained the leader in the NIC segment, though Intel and Dax also made a mark. 3Com decided to move away from a mass-market product range to feature-rich products—stirring up a battle with Intel in the high-range fast Ethernet and gigabit Ethernet NIC market.

Leased-line modems and remote access servers (RAS) picked up well in the beginning of the year with ISPs coming in, but as things slowed down, there was only a moderate growth of 27% and 21% in the two segments, respectively. In the VSAT space too, nothing phenomenal happened. Although costs were brought down with the advent of the Ku band, implementation did not surge as expected. The total market size, estimated at Rs 214.74 crore, did not grow at all in terms of revenues. In terms of number of VSATs installed, the industry registered an average growth of 39%, far below the 49% registered in 1999-00.

This slackening can be attributed to lack of transponder capacity in the first half, while also contributing were the putting on hold of government tenders, and the lack of performance by e-commerce businesses like Skumars.com and others. Also, while the use of VSATs for village telephony was not allowed, accessing of the Internet using VSATs also remained a non-affair due to unclear regulatory norms. The wait-and-watch policy adopted by corporates only deflated demand further.

The network integration market grew at 64%, registering total revenues of Rs 1,675 crore. The industry matured as the top integrators moved from core products to value-added services like consultancy and network planning, segments that fetched more revenues than previous years.

Outlook

The networking projects that began this year will continue as large enterprises enter the second round of implementation. Among the traditional segments, banking and finance will remain on top, with ATMs and online banking expansion raging at the forefront. The IT and telecom sectors are also expected to be key drivers of networking this year, with outsourcing expected to pick up in a big way. As networks become mature, corporate buying decisions will no longer be product-based. End-to-end solutions that also take care of security issues will find favor.