Article

Yankee Group: Switch vendors targeting wrong market

Jo Maitland, Senior Executive Editor

Fibre Channel switch revenues are down and vendors in this segment are suffering from significant price decreases because they are focusing on the wrong market, according to a recent study by Boston, Mass-based Yankee Group.

At approximately $120.6 million for the first quarter of 2004, the Fibre Channel switch segment was well below Yankee's forecast and below the 2003 quarterly average of $145 million, the firm said.

"This segment continues to suffer from price decreases because of ongoing competition and the targeting of small and medium businesses ... Vendors in this segment need to shift their focus away from small businesses to the departments and branch offices of medium and large businesses," the report stated.

Hamish Macarthur, founder of Macarthur Stroud International, said the situation is the same in Europe. "The U.S. is keyed up on small and medium businesses ... But it's the larger companies that already have SANs that are buying technology to pull these distributed islands and remote offices together ... that's the biggest driver for SAN sales here," he said.

Vendors duke it out

From the first quarter to the second quarter of 2004, Cisco Systems Inc. gained almost 6% market share and surpassed Brocade Communications Systems Inc. as the second largest vendor in the director segment, according to the Yankee Group.

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The U.S. is keyed up on small and medium businesses … But it's the larger companies that already have SANs that are buying technology
Hamish Macarthur
Founder, analystMacarthur Stroud International

The report noted that Brocade maintained its market share from the first to the second quarter in 2004 in the switch segment and remains the market leader here. In the director segment, Brocade gained market share (about 2%) but not enough to stay ahead of Cisco.

McData Systems Inc. ceded about 7% market share from the first to the second quarter of 2004 to Cisco and Brocade in the director segment but remains the market leader in this class. McData grew its market share slightly in the switch segment based on sales of its Eclipse SAN routers. The Yankee Group expects McData to continue to gain market share in the switch segment.

Market predictions

A decline in earnings among the switch vendors will lead to a series of mergers and acquisitions within the next 12 to 24 months, Yankee predicts. Vendors that refocus their attention on medium and large businesses are also beginning to realize that they have to sell more than just product, the report says. To compete in the current market, vendors must offer a broad portfolio of products (both Fibre Channel and IP), software and services to address more strategic customer goals. In addition, these vendors are now realizing that while they must continue to sell through OEMs, they cannot lose touch with end-user customers.

"These trends could also lead to a series of mergers and acquisitions because a consolidated company would be on better footing to compete with networking giant Cisco," the report said, hinting at the old rumor that Brocade and McData are back in talks.

The switch market isn't the only segment in decline. Yankee reports that at approximately $154 million for the second quarter of 2004, the Fibre Channel HBA segment declined sequentially from the first quarter ($168.9 million) and was lower than the 2003 quarterly average of $161.4 million. Based on the results of the first two quarters of 2004, the Yankee Group now estimates that the 2004 Fibre Channel HBA segment is approximately $646 million, down from original estimates of $710 million. Emulex and AMCC had declining revenue, while Qlogic increased its revenue.


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