Google, Facebook Gaining Network Equipment Clout

Patrick Donegan
Heavy Lifting Analyst Notes
Patrick Donegan, Founder and Principal Analyst, HardenStance
9/26/2016



Did you know that web-scale Internet companies (WICs) such as Google (Nasdaq: GOOG), Facebook , Microsoft Corp. (Nasdaq: MSFT), Alibaba Group and Amazon.com Inc. (Nasdaq: AMZN) will spend $26.8 billion on network equipment hardware, software and services in 2016? And that the average network equipment vendor (whatever that might be) is generating around 9% of revenues from these key customers nowadays?

Did you know that the US Patent and Trademark Office (USPTO) granted Google more patents than Qualcomm Inc. (Nasdaq: QCOM) last year? And that vendors rate the WICs more highly as movers and shakers in the networking industry than their core communications service provider (CSP) customers -- except when it comes to the Internet of Things?

You didn't? Don't worry. Neither did the Heavy Reading team until we started asking questions around these and many other issues on behalf of vendor and CSP clients earlier this year.

Differentiating in the standards-dominated telecom world is never easy. Ask any service provider. Ask any vendor. Whisper it, but it's not always easy for industry analyst firms either. But where the role of the WICs in the networking infrastructure ecosystem is concerned, I'm pretty sure the Heavy Reading analyst team is managing to differentiate its coverage from other industry analyst firms -- and in a really fundamental way.

Analyst firms have been covering the WICs for many years. They've done it from all manner of different perspectives in the value chain -- consumers; the WICs themselves; the data center; online services; social media apps; smartphones; CSPs. You name it, the list goes on.

But until now -- to our knowledge, at any rate -- no one has publicly released anything really comprehensive in terms of what the rise of the WICs as networking powerhouses means for network equipment vendors, their revenues, margins, business models and customer prioritization strategies.

We're releasing Webscale Internet Companies: New Drivers of the Network Equipment Market today, covering these issues and many more. This new research represents a tremendous -- I believe groundbreaking -- effort by the Heavy Reading team at understanding the opportunities and challenges that the WICs and their approach to the networking sector present.

The opinion that matters most will obviously be that of our clients. But from where I stand -- and in terms of research that we've made available to our entire client base -- I suspect this is the single most important and potentially influential piece of research I've ever been involved in bringing to market. I'll be taking our findings on the road with supporting strategy workshops under NDA on client premises, starting in the second half of October.

One of the team's main findings is that in the coming years, strong capex by the WICs on networking equipment -- potentially in more diversified market segments -- will offset softness in traditional CSP capex. This points to a more positive outlook for vendors than conventional thinking would suggest. We also think there are major new opportunities for vendors to partner with the WICs -- as customers to sell into direct, obviously, but also as value-added channels to market for cloud services, leveraging their leadership in areas such as big data analytics and artificial intelligence.

We've known for some time that the WICs tend to view the Internet value chain differently from CSPs. Through our research, we've now arrived at a much better understanding of how this drives the WICs to engage differently with vendors in the communications ecosystem, including with respect to acquisitions, partnering, standards-making and patent policy.

Whether your company is short on insight into the networking strategies of these oft-secretive firms -- or you already know plenty, but need an independent analyst firm's perspective to challenge your assumptions -- I hope to help figure out the specific implications of our findings for your company in the coming weeks.

— Patrick Donegan, Chief Analyst, Heavy Reading

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