Hardware: Beginning of the End, or End of the Beginning?

network switchIn a recent post here on WANSpeak, Zeus Kerravala, Principal Analyst at ZK Research, stated that he has evolved from trying to make the case that a software-defined WAN is a good alternative to a traditional WAN, to believing that the SDW should be the only type of wide area network that companies should even consider today. While ironists like IBM (and Cisco) insist that hardware matters, the latest market stats would seem to indicate that hardware might be better off on the endangered species list.

First, let’s set the stage for what network managers can look forward to in the near future. The Cisco Visual Networking Index Global Forecast and Service Adoption for 2013 to 2018 predicts that global Internet Protocol (IP) traffic will increase nearly three-fold over the next five years due to more Internet users and devices, faster broadband speeds, and more video viewing.

The majority of traffic will originate from devices other than PCs for the first time in the history of the Internet, Wi-Fi traffic will exceed wired traffic for the first time, and high-definition (HD) video will generate more traffic than standard definition (SD) video. The Internet of Everything is also gaining momentum and by 2018 there will be nearly as many machine-to-machine (M2M) connections as there are people on earth, and smart cars will have nearly four M2M modules per car.

By 2020 the market for Internet of Things (IoT) solutions will grow from $1.9 trillion in 2013 to $7.1 trillion. This growth will be fueled by a 17.5% compound annual growth rate (CAGR) of the IoT installed base from 2013 to 2020.

Clearly, network demands are growing, but the latest switch and router (hardware) numbers are not reflecting that growth. Infonetics Research reported that worldwide Ethernet switch revenue plummeted 15% from 4Q13 to 1Q14, to $4.8 billion, and the market is essentially flat from a year ago.

“In the first quarter of 2014, Ethernet switch revenue declined sharply, as a strong performance by Juniper and Arista was not enough to offset weak results at number-one Cisco,” noted Matthias Machowinski, directing analyst for enterprise networks and video at Infonetics. “For now, the positive growth momentum that developed in the second half of 2013 has stalled.”

IDC’s results weren’t much better, finding a significant seasonal decline of -12.3% quarter over quarter. The router market fared somewhat better, growing 2.3% year over year, but sequentially, it also decreased -12.5%, according to the preliminary results published in its quarterly Ethernet switch and router tracker. “The worldwide Ethernet switch market continues to see different trends across market segments with data center deployments seeing growth in spite of the ongoing market transition while the enterprise campus segment is essentially flat-lining or seeing slight declines depending on the segment or geography involved,” said Rohit Mehra, Vice President, Network Infrastructure at IDC.

Infonetics also painted a more bleak picture for routers, finding enterprise shipments down 14% sequentially. “2013 was a good year for enterprise routers, but 2014 is off to a bad start,” said Machowinski. “Among the key factors affecting revenue growth in the first quarter are a mix shift toward lower-end equipment, increasing discount pressure, weakness in North America, and preferences in China shifting to local vendors.”

Even though wireless devices continue to proliferate — Q1 tablet growth experienced a -35.7% seasonal drop but were still up 3.9% year-over-year, while smartphone shipments will grow 23.1% YoY — IDC reported that while the combined consumer (up 3.8%) and enterprise (up 10.3%) wireless local area network (WLAN) market segments increased 7% year over year in the first quarter of 2014 (1Q14), the pace of the enterprise WLAN market growth has been steadily decreasing over the last several quarters. “While a stabilizing growth rate suggests the market maturing, new vertical-specific use cases and the ramping adoption of the emerging 802.11ac standard will fuel sustained growth in the enterprise WLAN market for the foreseeable future,” said Rohit Mehra, Vice President, Network Infrastructure, at IDC.

So while hardware still matters, it appears to matter less and less. Does that make this the beginning of the end, or end of the beginning for network hardware?