CESR Market Likely Flat in 2009

Recent Heavy Reading survey feedback and discussions with carrier Ethernet service providers and equipment suppliers suggest that the long-term growth prospects for carrier Ethernet switch/router (CESR) sales remain strong. But I have become more cautious on the near-term market due to the global financial meltdown, slowing GDP growth worldwide, capital spending cuts by operators, and intensifying equipment vendor competition.

As I commented in a recent Light Reading article, one way to think about the CESR market is that we're likely to see a one-year shift in the overall numbers. Instead of reaching $3.2 billion in 2011, we'll hit that number in 2012. (See Sizing Up AT&T's Cuts (and Chops) .)

I expect the CESR market for 2009 to be flat compared to 2008, which should close at about $2.17 billion in sales.

For those who think this may be too optimistic, I would point to multiple positive data points from many operators worldwide as we entered the downturn, including: (1) double-digit year-over-year growth rates for Ethernet enterprise services; (2) metro and backbone traffic growth exceeding 30 percent per year; (3) strategic commitments to transition from legacy Sonet/SDH- and ATM-based networks to carrier Ethernet-based converged networks; and (4) increased adoption of carrier Ethernet for mobile backhaul infrastructure.

In addition, Heavy Reading feedback gathered from carrier professionals during October and November indicates there is still strong motivation within a large percentage of operators worldwide to boost – or at least keep flat – their spending on ESE and CESR equipment during the next 12 months.

For those who think I may be too pessimistic about 2009, I would highlight some emerging caution signs, including: (1) a slowdown in CESR sales prior to the financial meltdown; (2) intensifying vendor competition; and (3) a 22 percent increase in the value of the U.S. dollar vs. the euro since the end of June, which has the effect of decreasing the size of the market as measured in dollar terms.

Our latest Heavy Reading research indicates that worldwide carrier Ethernet switch/router sales fell 4 percent quarter-over-quarter from an estimated $561 million in the second quarter of 2008 to $538 million in the third quarter. This slowdown includes two successive quarters of single-digit declines in the North American market that appear to reflect the early signs of economic recession in the U.S.

On the competitive front, it appears seven additional vendors were shipping CESR platforms in the third quarter of 2008, compared to just 18 months ago. With about 18 revenue-generating CESR players active, the average revenue per vendor declined to its lowest level in the past two years.

Price pressure on vendors is likely to intensify in 2009, with even more new vendor entrants and increased traction for current suppliers of next-gen solutions that offer performance-price advantages vs. early-generation CESR platforms.

So, how did CESR vendors fare in the quarter? I estimate market leader Cisco Systems Inc. (Nasdaq: CSCO) owned 50 percent of the market. Cisco's revenue slipped a bit, but it regained one share point because the overall market declined more than Cisco's sales in the quarter. Alcatel-Lucent (NYSE: ALU) lost some ground primarily because of slower sales in Asia, but its No. 2 position remained unchallenged at 19 percent. Extreme Networks Inc. (Nasdaq: EXTR) edged out Foundry Networks Inc. (Nasdaq: FDRY) for the No. 3 slot with the help of strong European sales.

— Stan Hubbard, Senior Analyst, Heavy Reading

For more information, or a FREE PREVIEW of the "Carrier Ethernet Switch/Router Quarterly Market Tracker," please contact:

    Lee Salem
    Sales Director – Custom Research, Heavy Reading
    [email protected]

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