International research concludes that networking equipment sales will begin to recover only in 2003, and BMI-TechKnowledge says that while the local networking market should have recovered by 2005, it will never match the 1999 boom.
Global Touch, the US channel consulting firm, has announced the results of its quarterly Channel Tracker report focusing on networking equipment. The survey monitors the equipment channel in both the US and Europe.
The Q4 report, for the period ending 31 December 2001, includes data obtained from almost 500 IT industry channel partners: distributors, systems integrators, VARs and other resellers.
"The mood of the networking equipment market is guarded," says Denise Sangster, president and CEO of Global Touch. "There are signs that the European market continues to decelerate and that the market may not recover until 2003.
"After a year of unparalleled pricing declines, anaemic demand and margin compression, the networking equipment channel seems to have weathered the 2001 storm.
"But with a recovery predicted for the end of the year in the US market and 2003 in the European market, this year could be very challenging for both networking equipment vendors and their channel partners as financial reserves are low or depleted, which means that the `buffer zone` between profits and survival versus loses and liquidity challenges is ultra thin."
Local research company BMI-TechKnowledge concurs with Global Touch`s findings. Craig Kolb, research analyst at the firm, says: "The networking equipment market in SA plummeted from a high of 2.4 billion in 1999, to 1.9 billion in 2000. It is expected that the market did not experience much growth, if any in 2001, and is not likely to increase dramatically in 2002.
"It is expected, however, that the market should have recovered by 2005 as replacement demand kicks in, but never at the phenomenal levels experienced up to 1999. This fits in with a general trend away from equipment spend to software and services," says Kolb.
Global Touch`s Channel Tracker report also pointed to a drop in the networking equipment "attach rate". Key technologies, such as networking equipment, servers and some software applications, drive strong additional revenue in add-on hardware, software, bandwidth and services.
"We estimate that the attach rate at the end of 1999 was approximately 1:14. This means that for every $1 in networking equipment sold, an additional $14 in add-on products were sold or provided as a result of the networking equipment sale," explains Sangster.
Global Touch estimates that the attach rate fell to an estimated 1:3.7 in the fourth calendar quarter of 2001. "Thus the cumulative effect of the triple whammy and the compressed attach rate has the potential to form the `perfect storm` in 2002."
Some 64% of European respondents indicated that they faced pricing pressure from brokers or liquidators. Some 36% of US respondents indicated that they faced pricing competition from vendors selling below best channel prices, while 31% indicated that all prices in networking equipment were down by at least 20%.
"Some 78% of US respondents and 55% of European respondents indicated that the network equipment sales were flat as compared to the prior quarter. These are alarming numbers and indicate that the most crucial quarter of the year, which often accounts for up to 60% of the year`s profits, were below seasonal levels," concludes Sangster.
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