Data center infrastructure bright spot in slow H2

USA: The overall networking equipment market has slowed in the second half of 2012 with many customers decelerating and reducing spending on hardware. Most of the large equipment OEMs are predicting that fourth quarter revenues will remain flat sequentially from the third quarter, due to exposure to Europe where service providers have cut spending and increasing competition from lower cost domestic equipment makers in China.

The networking IC market is primarily driven by the data center market which, comparatively, has performed much better than others during this period of economic uncertainty.  In this space there are wholesale service providers as well as retail providers. Both are offering high speed connectivity, cooling and power management for infrastructure equipment to support the vast amount of digital media created daily.  Most providers are reporting that revenues were up around 10 percent from the second quarter, during the third quarter.

Capital expenditures for data centers are expected to be up double digits this year, so next year there could be a slowdown. However, this market continues to advance at a pace not seen in other traditional segments. Some OEM customers that serve this market include Cisco Systems, F5 Networks, Juniper Networks, Hewlett Packard, and Huawei.  Cisco has the lions share, but the other network equipment providers are steadily gaining momentum in the market.

Cisco enjoys little competition in the enterprise router and switch equipment markets, with 70 percent and 66 percent share respectively, in terms of revenue. However, the Chinese manufacturers, Huawei and ZTE, are gaining momentum domestically. Hewlett Packard has also reported increasing share thanks to increased sales to China.  Cisco maintains a 41 percent share of the overall Wired Networking market that includes data communications equipment and telecommunications equipment.

In the storage space, Brocade is the leading player, with a monopoly in the 16G Fiber Channel SAN equipment market but the company has lost share to Cisco in the overall SAN market. Brocade recently announced that it would acquire Vyatta one of the emerging technology companies developing Software Defined Networking (SDN) that moves control of traffic from firmware stored in the switch to a server. SDN could potentially be a disruptive technology in the networking industry.

Current architectures using expensive proprietary switches using expensive ASICs could be replaced with standard switches that only forward packets with all control of traffic handled by the SDN layer which would reside on the servers and not the network equipment.