During the economic downturn, many companies prolonged the active lives of their PCs and laptops from the usual three year average to four or even five years, but as desktop maintenance and support costs for older machines rise, many firms are taking advantage of an improving economy to upgrade to lower-cost, more robust machines. Additionally, increasing spending on Data networking is also occurring and is expected to accelerate in 2005.

Most network equipment companies were focusing on enterprise customers during the service provider collapse of 2001-2003. Due to the improvement in the telecommunications market’s overall health during the past year, enterprise networking generally has been very strong, particularly in a few key technology areas.

VPN
Companies of all sizes continue to invest in VPN to decrease networking cost. We expect there will be at least ten percent annual growth in the VPN market through 2006.

End-user demand is clearly a fundamental driver for VPN deployment, which is skyrocketing according to our research. Most end-users are transitioning from a model of centralized Internet connectivity to distributed connectivity, continuing into the next five years at least. Lower costing Internet bandwidth is widely available, and it is sensible to take advantage of the cost savings offered by VPNs and the distributed Internet connectivity. This encourages users to create large distributed VPNs, which are naturally difficult to manage, as well as drive managed service revenue. It also propels consumption of large quantities of Internet bandwidth for unmanaged VPNs.

Several Asian countries are outfitting their populations with high speed (DSL, VDSL, Ethernet) connections. China and India have announced lofty goals for broadband deployment, which we believe will help stimulate demand for VPN.

Routers
The enterprise router market has been and will continue to be a foundation for equipment manufacturers. Enterprise demand for WAN and Internet bandwidth will continue to increase and the router is the gateway to the outside world. The enterprise router market has been resistant of the instability affecting the service provider market from 2001- 2003. Steady demand and increased competition will keep the market solid through CY08, even in the face of declining prices.

Many segments of the enterprise router and SMB router market are commoditized to a degree, and as with any commoditized market, few companies dominate the space, with Cisco being the most influential in this market. These companies can only increase their revenue by shipping more units or ports (modules), or increase their margins by adding new features, like IPSec, firewalls, intrusion detection, QoS, and bonding. The previous basic enterprise router has developed into a new product class that integrates security, voice, QoS, and high performance features. This trend is reflected by the stabilization and increasing revenue forecast from CY05 to CY08 for secure routers.

Large organizations have significantly invested in network infrastructure during 1999 in anticipation of Y2K. Some organizations are seeking to extend the service lifetime of these devices. A portion of these organizations will take the opportunity to upgrade these devices since they are nearing the end of their depreciation cycle. This replacement will contribute to growth in unit shipments in the high-end and mid-range segments from CY05 to CY08.

Increasingly, higher user numbers are transitioning toward routers with built-in security functionality, which contributes to increased unit and revenue growth rates for the secure router categories from CY05 to CY08.

The enterprise router market is evolving into an IP-centric market where enterprise routers offer industrial-strength VoIP and network security. This trend is reflected in the stabilization and increasing revenue forecast from CY05 to CY08, particularly in the secure mid-range and low-end segments. Enterasys and Vanguard are examples of vendors beside Cisco and Nortel who offer VoIP ports on their routers, something customers must purchase if they plan to implement VoIP, and the router products developing from the Juniper/NetScreen Braintrust will likely lead integrated router and security. Any vendor that wishes to compete with Cisco must possess a well-developed VoIP and security strategy for routers.

Total worldwide enterprise router revenue was about $3.5 billion in 2004 and we project revenue will be stagnant through CY08.

Wireless LAN
There has been an increase in adoption of Wireless LANs as well. 2003 was a year of technology transformation for wireless LANs, and 2004 demonstrated significant growth as mature enterprise wireless LAN access points and switching systems hit the market concurrently. Service providers continue to initiate wireless LAN hotspots and running VoIP as an application over wireless LAN is a more accessible possibility with infrastructure improvements and VoIP/Wi-Fi handsets now in the market. This is likely to be a strong driver for further enterprise investment in wireless LAN deployment.

With vendors beginning to differentiate between large and small/medium enterprise products, carrier-class access points for hotspots, and SOHO/consumer products, wireless LAN equipment will continue to prove solid growth in all markets across most product segments in the next several quarters. Access point products are particularly becoming largely designed to target these distinct markets and most vendors now offer a comprehensive range of products and solutions.

One major area of wireless LAN application development is the extension of IP telephony solutions over wireless networks. In fact, voice over IP (VoIP) will likely trump WLAN (VoWLAN), being key application in driving widespread adoption of WLANs throughout the enterprise. There will inevitably be a marked adoption of Wi-Fi phones through our forecast period. As voice applications make wireless LANs more desirable and mobility makes voice over IP more valuable, it is natural that the two are converging toward a powerful mobile voice solution for the enterprise.

Enterprises are adopting businesses of all sizes to transition between both WLAN and VoIP. Vendors of WLAN and VoIP equipment have been educating the corporate market for the past two years on the virtues, benefits, and profits of VoWLAN.Companies are ready to embrace a maturing technology.

The extension of IP telephony solutions over other forms of wireless network blurs the lines between GSM and 802.11 networks- something heralded by the partnership announced between Avaya, Proxim, and Motorola. The latter has developed a dual mode GSM and 802.11 phone and mobility manager that allows hand-offs between Wi-Fi and mobile operator networks in mid-conversation, Proxim has developed access points that support 802.11e (quality of service) and 802.11i (WEP replacement), allowing IP telephony calls to flow over public and private Wi-Fi networks, and Avaya has extended its MultiVantage IP telephony features over Wi-Fi networks, adding SIP to end-points, and enabling presence-based messaging. These products are expected to be available in 1H05 and could immediately impact on WLAN enterprise market

The service provider public access hotspot market has shown accelerated growth through CY04, though subscriber growth and revenue remain modest. While it is currently a relatively small market, it is a concept gaining rapid acceptance as an inexpensive means for service providers to drive service subscriptions for an increasingly mobile yet data-reliant workforce. Numerous service providers have indicated their intent to roll out hotspots, spurred by advances in subscriber and network management systems. Many are publicly stating they view hotspots as part of a much wider-ranging wireless broadband strategy, and not as a service in its own right. Because of this, the public Wi-Fi market and the access points and switching infrastructure supporting it is likely to receive extra stimulus as other wireless technologies such as WiMAX and 3G gain market momentum.

Michael Howard is the Principal Analyst and Co-Founder of Infonetics Research, an international market research and consulting firm covering the data networking and telecommunications industries in North America, Europe, and Asia. Howard is a leading expert in emerging markets, service provider network market trends, and user buying patterns.