Boom time for South African networking industry

The South African networking industry is set to grow at a compound annual growth rate (CAGR) of nearly 20% up until 2003, when the market will be worth more than R4bn.

That`s according to the recently released BMI TechKnowledge SA Communications Equipment Market Report, which reveals that the market for networking equipment grew by 48% in the 1999 calendar year to nearly R2,5bn.

BMI research analyst, Mark Rotter, says the LAN and WAN markets both enjoyed strong growth in 1999 as the local telecoms industry continued to mature.

The growth of the networking equipment market was spurred by the adoption of Internet technologies by both home and business users, says Rotter. The growing momentum behind e-commerce and e-business will continue to drive the market for the next few years.

Other factors which contributed to the growth of the local networking industry last year included corporate investments in call centres, voice-over-data and multimedia applications such as video conferencing.

LAN equipment accounted for half of networking equipment revenues in 1999 with a total value of nearly R1,3bn. The LAN switching market was particularly buoyant in 1999, growing nearly 114% over the previous year to R721,4m.

BMI-T forecasts that the LAN switching market will show a CAGR of 30,6% between 1998 and 2003. Much of the revenue generated in this sector will come at the expense of the shrinking hub market.

Hub sales grew 12,9% to around R114m in 1999, but Rotter expects that growth in this market segment will drop off as LAN switch prices continue to fall and companies look for ways to boost network performance. He notes that this trend is already evident in Western Europe where hub sales declined by 25% last year.

The router market showed solid growth of 12% to R442m in 1999, with a CAGR of 8,8% forecast up until 2003. Rotter points out that the rapid advances in price/performance in the switching arena also threaten the routing market.

"However, I don`t expect the router market to display negative growth for some time yet, as the router is the only device that provides the functionality needed for some of the more complex protocol routing needs in the network," Rotter adds.

The WAN equipment market grew by 52,4% to just under R1bn last year. This market is expected to show a CAGR of 22,6% up until 2003, when WAN equipment sales are expected to pass R1,8bn. BMI includes the WAN switching, remote access server (RAS), frame relay access device (FRAD), modem, and wireless WAN markets in this figure.

WAN switching accounted for the bulk of revenues in this market segment last year, and BMI-T projects that this will be the case for the foreseeable future. The total value of the WAN switching market last year was close to R634m, representing 80,3% of the WAN infrastructure market, and a growth of around 123% over the previous year.

ATM switching accounted for revenues of nearly R406m in 1999, growing by 64%. BMI anticipates that ATM`s share of the WAN switching market will grow to 80% in 2003. Between 1998 and 2003, ATM revenues will grow at a CAGR of nearly 42% to a total value of R971m.

In contrast, the frame relay switching market grew by 36% last year to R228m. Between 1998 and 2003, this market will grow to around R243m at a CAGR of 16%. At present, frame relay remains the networking technology of choice for integrating voice and data on the enterprise WAN, but will lose market share as adoption of ATM, particularly the new services from Telkom, increases.

Modem sales in 1999 reached R191m, with a forecasted CAGR of 16% up until 2003, when this market will be worth around R352m. Rotter says that new technologies such as Digital Subscriber Line (DSL) and high bandwidth wireless access devices will soon start to bite into the modem market.

The FRAD market has started to move into a period of decline proportional to the growth of the RAS market. Last year, FRAD revenues shrunk by 9,6% to R32m. By 2003, the market size will have dipped to R30m.

On the RAS front, Rotter expects to see a shift in the market from fixed port RAS towards RAS concentrators. However, the total RAS market, which was worth around R123m in 1999, is expected to grow to R187m in 2003, showing a CAGR of 21,7%. Eventually, new technologies such as xDSL and cable modem will take their toll on the growth of the RAS market.

Network interface cards (NICs) accounted for revenues of around R208m in 1999. BMI-T expects the NIC market to show a CAGR of 4% to R232 m in 2003, with growth impacted by the emergence of LAN on motherboard technology.

Rotter says Cisco Systems has entrenched itself as the leading networking vendor in South Africa, as measured by its share of the networking revenues in the country. For 1999, Cisco racked up revenues of R815m and a 33% share of the local networking equipment market.

Unsurprisingly, Cisco dominated the routing market with revenues of R344m representing of nearly 78% of the market. The company also secured a 43% share of the LAN switching market with revenues of R307m.

3Com secured the second largest portion of the networking equipment market last year, with revenues of R387m representing nearly 16% of the market.

The company experienced staggering growth of 527% in the LAN switching market, capturing 26% of this market with revenues of R188m. 3Com also held onto its traditional lead in the NIC market with revenues of R72m and growth of nearly 49%.

Newbridge Networks - boosted by gaining a large share of Telkom`s ATM core and access business - came in just behind 3Com with revenues of R351m representing a 14% share of the market. The company has established itself as the leading WAN switch vendor in SA by revenue, but this picture could change over the next two years as Telkom plays its IP card.