Enterprise market in dire need of stronger challenger

In November, The Gores Group and Tennenbaum Capital Partners agreed to acquire Enterasys Networks for US$386 million, making Enterasys a private company. This is the latest chapter in the saga of a one-time networking powerhouse and it demonstrates the maturing of the enterprise networking industry.

Enterasys’ fate serves as a clear indication of where the industry is heading — a few large companies, some niche firms and a number of startups. What’s more puzzling is the clear lack of a number two vendor in the market.

Before looking into the future, first a little history. Enterasys was spun out of Cabletron Systems several years ago with Global Network Technology Services (GNTS), Riverstone Networks and Aprisma Management Technologies to increase shareholder value by releasing each smaller company to go its own way. Stock values did rise initially, but the smaller companies found it difficult to compete with larger rivals who had taken the opposite approach — acquiring everything in sight.

GNTS closed shortly after it was spun out and The Gores Group acquired Aprisma, remaking the spinoff in the process. Aprisma was sold by Gores to Concord early in 2005, which itself was acquired a month later by Computer Associates. Only Riverstone Networks, now a niche vendor in carrier networking, is still independent.

Consolidation usually leads to a few major vendors being left in an industry. In networking, the number one vendor is obvious — the number two is not. This doesn’t mean niche and startup vendors will disappear. There are networking people who enjoy working in smaller companies, especially for something as dynamic as a startup.

These people tend to leave when their companies are acquired and go looking for smaller companies to join, usually another startup. With venture capital funding, this guarantees that startups in networking will continue to exist. And this is a good thing, since much of the innovation in the industry comes from smaller companies and startups, which in turn go on to be acquired by larger companies.

Few startups grow to challenge the number one vendor. Vendors like Cabletron and 3Com have become smaller, non-acquisitive companies. Along with smaller niche vendors like Extreme, Foundry and Force10, they fight over a small share of the networking marketplace, generally over customers who are willing to buy from a vendor who is neither number one or number two. None of these companies is large enough or growing with enough momentum to pose a serious threat to the number one player right now. None can be considered a number two vendor, and neither is likely to become one on its own.

This begs the question — who will be number two? Clearly Cisco is number one in the enterprise networking market in any of the measures that matter. Each of the niche players and even startups has claimed the number two spot at one time or another. However, there is no clear number two enterprise networking company.

Juniper is large and getting larger. It’s a serious threat to Cisco in the carrier space and the most likely to assume the number two role in enterprise networking. Juniper has begun a strategy of buying interesting companies (Funk, Perebit, Redline, Kagoor, Netscreen-Neoteris) that play predominantly in the enterprise space. However, Juniper has yet to challenge Cisco in what has been Cisco’s most important business — the enterprise router and switch market. Until Juniper builds or buys a credible line of enterprise routers and switches, it cannot be considered a number two in the enterprise networking market.

Juniper has a number of interesting options. It clearly has routing and switching talent, but the needs of the enterprise are different from the needs of the carrier. Many carrier companies have failed in the enterprise because they didn’t realize this. Juniper could acquire again. There are several niche players that could fit its needs, or Juniper could go for a smaller startup with the right technology but no large customer base to maintain.

With all the consolidation going on in the industry, it’s also not impossible for another number two to emerge. If one company were to acquire all or most of the niche vendors, there would be enough market share in the consolidated company to seriously challenge the number one company. The problem is that all of the niche vendors basically have the same products and are competing for the same customers. If the niche vendors were combined, their total market share would likely fall.

Consolidation in any industry is normal. As an industry grows and matures, large companies buy or eliminate smaller companies. Enterprise networking is unusual in its lack of a number two vendor, and within this uncertainty is an opportunity. This position must be filled for the market to remain healthy and competitive. Either Juniper, some consolidated new company or someone entirely new could fill this position, but it must be filled soon. There are many rumours about who’s buying who in this race for number two, but the opening still exists.

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–Kanellakis worked at Enterasys Networks and its predecessor Cabletron Systems for almost 15 years. These days he is enjoying spending time with his family and looking for interesting ventures to pursue.

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