Cisco Systems, the giant of the networking industry, is having an increasing difficult time being humble. Its competitors appear weakened and in some cases in disarray. Cisco may be hoping that customers and channel organizations will start to think that it is the only game left in town.

At

Cisco’s Analyst Conference held last December in San Jose, Calif., president John Chambers dedicated several presentation slides to reviewing Cisco’s past success against its competitors and to discount their chances of ever recovering the ground they have lost. In 1994 Cisco accounted for 12 per cent of the networking industry’s $81 billion market capitalization. In 2004, Cisco represented 64 per cent of total networking market capitalization, that has grown to US$210 billion. With this reality, Chambers’ cruel verdict is that those firms that have lost share to Cisco over the past decade would not gain it back. Going forward, Cisco’s most serious challenges would come from a new generation of Asian competitors.

On the surface, Chambers’ goal was not to denigrate his competitors. Nominally, he was speaking to financial analysts and fund managers with the honourable goal of justifying a high price earnings multiple for company stock. Nonetheless, his comments had a second message, which was that Cisco was the only viable supplier left in the North American market. The firms with the potential to be competitors in the long run still had not arrived on this side of the ocean.

Unfortunately, hard evidence supports much of Chambers assertions. Evans Research Corporation (ERC) has been tracking the Canadian network market for fifteen years. Over this period, Cisco has entered many segments of the networking market and then ascended to the number 1 position. Through the first three-quarters of 2004, Cisco routers (included those marketed under its Linksys brand) captured 76 per cent of the router market.

In the managed switch market, Cisco still dominates, although not to quite the same degree. 3Com and HP are both maintaining relatively stable positions.

It seems very likely that the trends of recent years will persist for a few more. It is likely that some of the vendors that have focused primarily on high-end modular switches for large enterprises and telecommunications service providers will disappear from the market. As this happens, Cisco stands to be the principal beneficiary. However, there are another group of vendors (including 3Com, D-Link, HP and SMC) that should survive because of their solid offerings for the SMB space. End-users will have excellent choice while the competition will be sufficient to ensure that prices continue to decline.

The implications for most VARs are that networking revenues will fall because of mediocre growth and lower prices. Should a new Asian player launch a significant offensive in the North American market, prices and revenues could potentially decline significantly.

In the short term at least, networking products will remain an important source of incremental revenue for VARS whenever customers decide to refresh their LAN infrastructure. However, it’s very unlikely many channel organizations will be able to enter new accounts by offering a new brand of networking equipment. As a rule, organizations will prefer to remain with their incumbent hardware vendors as long as the vendors appear viable. This practice will favour the VAR that sold the original network infrastructure.

Albert Daoust is a senior market analyst and networking market specialist with Toronto-based market research firm Evans Research Corporation. He can be reached at adaoust@evansresearch.com.

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