The only way is up

Revenue losses and job cuts were frequent among networking vendors during a testing 12 months. But the industry is now looking to a healthier future, with the Middle East offering many growth opportunities for vendors to exploit.

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By  Zoe Moleshead Published  March 10, 2002

Tough 2001|~||~||~|Networking vendors have had little choice but to become leaner and meaner, international factors such as the slowing global economy and telecommunications glut of 2001 have resulted in missed revenue projections and job losses.

The networking vendors particularly those addressing the service providers and telcos felt the greatest impact. Gartner Group estimates that these companies lost between 30-50% of their revenues.

“If you were a supplier who mostly sold to the enterprises, you haven’t been that badly affected. If you are a vendor which sold predominantly to operators you’ve been through a bloodbath,” says Neil Rickard, research director, networking, Gartner Group. “Companies like Lucent, Nortel and Alcatel — which are predominantly network operator focused — took big hits. Companies like Cisco took a reasonable hit, and companies like Extreme Networks and Enterasys took comparatively minor hits,” he explains.

Over expansion was to blame for the problems in the competitive worldwide service provider market. Caught up in the dot-com boom and the growing presence and use of the Internet for business, operators expanded in anticipation of future business, but instead caused a bandwidth glut.

“Telcos around the world had a huge amount of debt accumulated. In the previous years they had invested lots of money to be able to roll out an infrastructure on a ‘build it and they will come’ scenario. Obviously they built it and not everybody came. [Operators] had a challenge in terms of infrastructure costs and debt, and not enough profitable services to cover for that,” explains Ghazi Atallah, Middle East director of operations, Cisco Systems.

But while the telcos in the US and Europe may have been cutting back on the networking outlays, their Middle East counterparts have maintained their infrastructure spending.

The local service provider market, fuelled by pent up demand, is still proving healthy hunting ground for networking vendors. Alcatel is planning to expand their headcount and market share in Egypt, Algeria and Saudi Arabia to capitalise on the buoyant market. The vendor is also looking to consolidate the agreements it signed last year with regional telecoms such as Etisalat and Orascom.

“We have plans for growth in Saudi Arabia,” says Hala Gohar, regional communications manager, Alcatel. “In 2001 we signed a US$12 million contract with Saudi Telecom Company (STC) to deliver its local multipoint distribution service (LMDS) solution and allowing it to offer high speed data access and other advanced broadband applications to small-to-medium enterprises.”

The enterprise side of the networking market has been bolstered by the continued IT spending, despite the fact that many companies have been more cautious with their IT budgets. Organisations have been weighing up the costs and return on investment (ROI) more carefully before deciding which areas of the IT infrastructure to invest in.

“There hasn’t been a huge net slowdown [in the enterprise market], it has been very marginal, and pretty much business as usual,” comments Rickard.

“Most companies are still carrying on with network initiatives. [Also events] like September 11th have made people look at disaster recovery plans, [so] if you are going to have two data centres instead of one, you’ve got to have two network connections, so you end up spending more on networking to try and build a more resilient IT infrastructure,” he adds.

||**||Back to basics|~||~||~|However, the downturn in the networking industry has caused many players to take a long hard look at their operations. Vendors — either by choice or forced by market dynamics — have begun to adopt a back to basics approach, and returned their focus to core markets. As such, vendors underwent operational restructuring, which saw them spinning off various business lines and consolidating in key markets.

Lucent Technologies shed four divisions, spinning off its enterprise business – now Avaya, its microelectronics division, and selling off its fibre optics cable channel and most recently its customer care & billing solution business.

“All this is happening in effort to go back to the basics, and focusing on the market that we have at hand,” says Mohammed Ghafari, sales director, Indirect channels, Gulf region & Pakistan, Lucent Technologies.

“From a company perspective, the last 12 months have pushed vendors into rethinking their strategies and product offerings, and it has probably been very helpful. I wish in a way that it had happened a little bit earlier so we wouldn’t have had to spend unnecessary money on divisions we have eventually decided to spin off or sell,” Ghafari adds.

3Com also underwent an organisational restructuring, with the company being split into three divisions: commworks addressing the service provider market, a business connectivity company and a business networking company. According to Buddie Ceronie, regional director, multi-country region, business networks company, 3Com, this has allowed both the vendor and its customers to gain a clearer picture of 3Com’s business.

“The major achievement over the last 12 months is that we have found our focus,” says Ceronie. “That has been a major success because we have people in different markets that are focused on different customers, different solutions and really understanding what their customers’ needs are.”

The reshuffle has also allowed 3Com to achieve its 12-month target of saving US$ 1 billion in operating costs, and keeps it on target to return to profitability by the end of the fourth quarter of fiscal 2002.

The shakedown among the networking vendors has also enabled both Avaya and Cisco to readdress their business models and core markets, so Walter Koenig, regional managing director, Middle East, North Africa and South Eastern Europe with Avaya speaks of ‘re-energising,’ after the Lucent spin off, and Cisco’s Atallah talks of the slowdown as a period for ‘consolidating business.’

For smaller network players, such as Foundry Networks and Extreme Networks, the plight of some of the larger vendors served as a warning to over expansion and diversification.

“We are playing only in three areas, Layer 2 & 3, Layer 4-7 switching and IP routing. That helped us when the bad times happened, we didn’t expand wildly. We were not chasing revenues, we were chasing profits,” comments Farook Majeed, regional director, Foundry Networks.

||**||Local market|~||~||~|At the local level, networking vendors all claim continuing strong demand. The vendors admit that last year was a bad year, but they are also quick to claim that their company escaped the ordeal more lightly than its competitors. Vendors cite an array of reasons for ‘better than average performances’ including geographical diversity, the internal structure of their business, and smaller market focuses.

“Last year wasn’t the best year for the networking vendors on aggregate,” says Ceronie. “We probably did better than many of our competitors because we had actually started turning the company around before that,” he adds.

Extreme Networks cited the ‘geographical spread’ of their business as a key factor in escaping the worst effects of the slowdown.

“More than 50% of Extreme Network’s business is based outside North America, where the downturn has hit hardest,” explains Emad Makiya, general manager, Extreme Networks, Middle East & North Africa.

Although the Middle East has proved to be what Cisco’s Atallah, describes, as “a bright spot” and a “fairly stable environment,” the regional market did not escape unscathed from worldwide events, especially after September 11th. “We did see an aftermath in the region and a slowdown in foreign investment,” adds Atallah.

“People went slow for three months, projects may have got delayed, but we are still very much on track with projects. There hasn’t been any cancellations or any projects not going though,” says Afzal Jeddy, sales manager for data structure cabling company, Nordx/CDT, Middle East & Africa.

Even Lucent Technologies, which laid off 5,000 staff in Europe, Middle East & Africa alone, suggest their operations within the region have not been largely effected, and remain upbeat about the company’s position in the local market. “In the Middle East we have always had three hub countries where we’ve had a big presence — the UAE, Egypt and Saudi Arabia. Today nothing has changed on that front. There has been some downsizing; there have been losses in manpower, but the offices have been maintained,” says Ghafari.

The local market, however, is continuing to buck global trends as organisations and telcos continue to build IT infrastructure. The Internet is playing a key role in driving the regional networking market, with vertical industries and governments putting in place e-commerce initiatives and online services.

Foundry Networks has acquired 50 reference sites in the 18 months since it moved into the region, and according to Majeed, these “are large enterprises or service providers,” from a variety of different markets including “the universities, oil companies, PTTs, service providers, government ministries, and banks,” he adds.

Avaya’s Koenig says, “telebanking, web-enabled banking, things like this are really starting to come to the fore throughout the Arab world.”

Government initiatives, particularly within the UAE, have also ensured that development and expansion continue apace.

“About 80% of our business in the UAE is government related, 20% is in the private sector… therefore we are not feeling it [economic downturn] perhaps as much as others,” says Makiya.

Development hubs, such as Dubai Internet City (DIC) and Dubai Media City (DMC), are proving to be early technology adopters and leading the development and uptake of the ‘latest and greatest’ networking products and solutions in the region.

According to Cisco’s Atallah, the initial roll out of kit at DIC was “just basic IP telephony kit.” As teething problems have been ironed out, and more tenants have moved into DIC, additional video and information services have begun to be rolled out.

“DIC have already got the right infrastructure in place so all they have to do is turn on the new services, which was a failure of the service providers in the US and Europe. It was coverage rather than thinking about the service,” he adds.

||**||Early adopters|~||~||~|Purpose built IT hubs such as DIC are not alone in recognising the benefits of converged telephony solutions though. According to 3Com’s Ceronie, LAN telephony as a whole is starting to take off in the Middle East because users are beginning to recognise the benefits of value add services, such as, streaming media, video and voice over IP (VoIP).

“People are really starting to get their mind round real convergence issues, [the products] work and there are real and tangible benefits in terms of total cost of ownership (TCO), installation, and being able to utilise human resources more effectively,” he explains.

Gigabit Ethernet metropolitan area networks (MANs) are also beginning to spring up within the region.

“We are seeing the development of what we call metropolitan area networks where the LAN is going out of the office into the WAN. The lines between LAN and WAN are getting very blurred, and the MAN basically extends your LAN beyond your building into a campus environment,” says Foundry’s Majeed.

Extreme Networks’ Makiya explains that the benefits of deploying Ethernet-based services over a MAN are “a faster, simpler and lower cost networking technology, which both service providers and enterprises stand to benefit hugely from.”

The Middle East is also leading the way in deploying wireless local area networks (WLANs), which are becoming increasingly common among the region’s educational institutes and driving their anytime, anywhere laptop learning initiatives.

“We are having more and larger wireless local area networking (WLAN) opportunities in this region than in the West or in the US,” says Avaya’s Koenig. “Countries, like the UAE and to some degree Saudi Arabia and some of the other Gulf States as well, are actually early technology adopters,” he adds.

According to Nordx’s Jeddy, the massive amount of construction work going on in places, such as the UAE is one of the main reasons behind the rapid deployment of the latest technologies.

“This is an evolving market… all the buildings and construction are evolving, and people tend to put the latest into the building because by the time the construction is finished it is two or three years down the line from the start date,” he says.

Cisco has also found that the lack of legacy systems and slower upgrade cycles within the region has led to a more aggressive implementation of wireless and IP products.

“We are one of the most aggressive regions in rolling out new technologies for things such as IP telephony, wireless, and optical. Companies in the region roll out technologies basically on the edge earlier than the US or Europe has done,” Atallah comments.

Vendors also remain confident that the ramp up of networking solutions will continue over the coming months as demand grows for wireless solutions and Gigabit Ethernet technologies. IP telephony and converged telephony solutions are also beginning to gain momentum in the region.

“As phone systems come up for renewal it is becoming the default to replace them with voice over IP,” says Gartner’s Rickard.

“There is going to be a lot of video put onto people’s networks this year, and obviously people will consume more capacity because they are doing more things with video, not just video conferencing, but distance learning and training with video over networks,” adds Rickard.

Other networking vendors are also claiming to have a host of projects lined up for the coming 12 months, and are expecting to record double digit growth figures by capitalising on the continued investment in the Internet and IT infrastructure.

“Service providers in the region are carrying on with expansion plans, and [investing in] more Internet bandwidth, better facilities, better features to offer the customers, Internet access and so on,” says Majeed. “There is still a lot of room for growth in terms of Internet subscribers, they can easily double, triple the requirements.”

Although vendors operating in the local market look set to benefit from the unexploited potential that the Internet offers, they remain cautious about the immediate future. The approach to the next 12 months remains conservative, with both vendors and analysts alike expecting more consolidation and possibly even mergers.

“I don’t think we are overbullish about 2002, but we expect this to be a pretty reasonable year,” says Ceronie. “In terms of the competition that’s an interesting one because we are probably finding less competitors in the enterprise market and one of the trends for 2002 is that we will probably see more consolidation.”

“We believe that what we have at the moment is a gap year, and that this is basically a year for consolidating and settling down, for getting things in order, sorting out the projects you started off and making them successful; consolidating and making things work,” adds Rickard.

With the opinion among both vendors and analysts alike that the market has finally bottomed out it seems that a more positive, if conservative future lies ahead.

“It is part of the cycle and we needed to hit this bottom before we were able to solidify our current status and move forward,” says Lucent’s Ghafari.
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