Recession, Competition Sting CESR Market

Carrier Ethernet remains the technology of choice for building converged telecom networks because of its extraordinary performance-price advantages versus legacy Sonet/SDH and ATM technologies, but the maturing market is not immune to the economic woes that have affected every region. Worldwide sales of carrier Ethernet switch/routers (CESRs) – which sit at the heart of the carrier Ethernet market – fell a disappointing 23 percent quarter-over-quarter and 27 percent year-over-year in the first quarter of 2009 to $423 million, according to the latest release of Heavy Reading's "CESR Quarterly Market Tracker."

I am now projecting the global CESR market to decline by more than 20 percent to $1.75 billion in 2009, but it will return to growth as the economy begins to stabilize. The World Bank recently revised its global economic forecast down from -1.7 percent to -3 percent for 2009, but this organization and others such as the IMF expect global GDP growth to return in 2010. The CESR market has a good chance to reach $2.74 billion by 2013 if we begin to experience the anticipated macroeconomic turnaround by 2010.

So what's the scoop with the recent slump?

While we continue to hear news of double-digit annual growth in metro and backbone network traffic fueled by demand for multimedia consumer services, next-gen Ethernet and IP business services, new IP-based applications, and emerging mobile data and video services, this does not necessarily translate into CESR sales growth every quarter.

The CESR market declined sequentially for the third quarter in a row in 1Q09. The slowdown actually accelerated between 4Q08 and 1Q09, due to the combined effect of the worsening global recession, lingering chaos in the credit markets, seasonal capital spending trends, and intensifying vendor competition.

Macroeconomic weakness generally is impeding service providers' access to capital and causing delays or cancellations of equipment orders associated with network upgrades or expansions. Many of the operators who spent a lot of money deploying CESR platforms during 2006-2008 are now apparently shifting their attention to adding Ethernet endpoints to their networks. The carrier Ethernet access platform (CEAP) market has been holding up relatively better than the CESR market, because CEAP deployments offer a faster return on investment than CESR solutions that aggregate traffic from the access boxes.

Beyond the macroeconomic challenges, CESR competition has never been more intense – with about 19 vendors battling for their fair share of a pie that has contracted beyond what might have been anticipated just a few quarters ago. The average CESR sales opportunity per revenue-generating vendor declined to its lowest level in the past three years during 1Q09, falling to $22.3 million – 45 percent less than the high of $40.2 million in 4Q06, the quarter in which we saw some consolidation, with Alcatel's acquisition of Lucent.

Increased competition has been particularly hurtful to Cisco Systems Inc. (Nasdaq: CSCO), which has a strong next-gen Ethernet service edge (ESE) router – the ASR 9000 – but lacks a new flagship CESR platform. Numerous competitors armed with next-generation CESRs have been winning new business and trimming share from market leader Cisco.

I estimate that Cisco's CESR share fell from 47 percent in 4Q08 to 44 percent in 1Q09 – 11 points lower than its ~55 percent share in 1Q07. No. 2 Alcatel-Lucent (NYSE: ALU) and No. 3 Huawei Technologies Co. Ltd. each gained half a point in 1Q09 to close at 19 percent and nearly 7 percent, respectively. No. 4 Extreme gained a full share point in 1Q09 and has recorded consistent share gains on a rolling four-quarter basis over the past 18 months. No. 5 ZTE, No. 6 Brocade/Foundry, and No. 7 Hitachi Cable were fairly close to each other in terms of market share.

— Stan Hubbard, Senior Analyst, Heavy Reading

stanhubbard 12/5/2012 | 4:01:48 PM
re: Recession, Competition Sting CESR Market

This is a good question because various analysts use different definitions.We spell out all of the vendor platforms in the CESR and Ethernet Service Edge (ESE) router categories in the report. Most of Juniper's carrier Ethernet sales fall into the Ethernet Service Edge category rather than the CESR category. Juniper has one of the strongest reputations for platform and service capabilities for both the ESE and CESR platforms and ramped sales nicely in 2008.

Carrier Ethernet switch/routers (CESRs) primarily act as a User Provider Edge (UPE) platform for aggregation and transport. They are optimized for Ethernet infrastructure to support E-Lines, E-LANs, triple play, and mobile backhaul.

Ethernet Service Edge (ESE) routers primarily act as Ethernet-centric Network Provider Edge (NPE) platforms that aggregate traffic from CESRs. They can hand a mix of Ethernet and IP services, including VPNs, triple play, VoIP, and mobile. They have multiple interfaces, including Packet-over-SONET (POS). We view the ESE as a subset of the multiservice edge router market.



Frank 12/5/2012 | 4:01:48 PM
re: Recession, Competition Sting CESR Market

A question arises concerning Juniper's apparent MIA status here. Any reason why Juniper should not be counted and ranked along with the others?  If it has to do with LR's definition of CESR, then kindly explain the distinctions, if you will. Thanks.

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