Cisco's US$450 million buyout of wireless switch start-up Airespace last week not only represents something of an about-face for Cisco regarding wireless LAN technology, but also is the latest evidence of a shakeout in the overcrowded market. Last week, we looked at the implications for Cisco's competitors. This week we look at what it means for Cisco and Cisco's customers.
Although more companies are installing WLANs - the market has grown 65 percent in the past year, according to IDC - there just isn't room for everybody. Some $400 million has been pumped into a dozen WLAN switch start-ups in recent years, and millions more went to dozens of other WLAN start-ups selling everything from processors to security to mesh network products. That doesn't take into account the millions of dollars more invested in WLAN R&D by longtime wireless players such as Proxim and Symbol Technologies, and wired network experts such as 3Com, Cisco and Enterasys.
Signs of the market adjustment started last year.
- AirFlow Networks stopped making switches [and has said nothing since. It's dead. - Editor].
- Legra sold its assets to two other companies.
- Chantry Networks agreed to be bought out by Siemens.
- ReefEdge stopped answering the phone and is presumed dead.
The shake-out has got some vendors arguing about architecture
"There have been no new, serious start-ups for the last two years" in WLAN switching, says Samuel Wilson, a senior analyst with JMP Securities.
But what Cisco's acquisition of Airespace also shows, observers say, is that the basic concept of WLAN switching is a winner even if many of the companies pursuing the market are not. The acquisition is another example of Cisco shifting away from its previously held stance that WLANs are best run as add-ons to a wired LAN with "heavy" access points running as full routers at the network edge.
Turnaround for Cisco
The WLAN switch approach involves overlaying centrally controlled and managed WLAN switch hardware and software on top of an Ethernet foundation to unite wired and wireless 802.11 clients. Cisco and other established switch vendors have retrofit their switches to support wireless clients, but in what WLAN switch supporters say is a less elegant and more expensive fashion.
The market for wireless gear in general is roaring, Synergy Research says, with its latest numbers showing that revenue rose from $420 million in the third quarter of 2003 to $714 million in the third quarter of last year. WLAN switches and controllers, in particular, are hot, jumping from a $20 million business in the third quarter of 2002 to a $47 million business in the third quarter of 2004. Symbol is the market leader with a 25 percent share; Airespace and Aruba Wireless Networks Inc. follow, along with many others.
Prices will fall - eventually
In the long run, JMP's Wilson says, the WLAN market's evolution will mirror that of Ethernet switches - consolidation and commoditisation, with high-end and low-end players.
"You'll have your Cadillacs - the Ciscos, Extremes and Foundrys - and your Mini Coopers, like Netgear, D-Link and Linksys," he says.
What this means for customers ultimately is lower pricing. IDC forecasts that the price for enterprise WLAN gear will come down over time, from a current $450 average price tag per access point down to about $200 in 2008.
But in the near term, analysts still expect vendors to charge a premium for gear that ties elements of a WLAN into a cohesive system.
"I don't expect Cisco will suddenly start selling Airespace solutions at half-price," says Abner Germanow, enterprise networking research manager at IDC. "If anything, price pressure will come from smaller competitors looking to undercut Cisco."
Cisco was losing share
Some might question why Cisco would pay $450 million for a competitor in a market where it is already a runaway leader, with 48 percent market share. Analysts say it's a matter of finding the right WLAN architecture for the future.
"Right now, we're seeing a lot of big wireless LAN RFPs coming out, and Cisco was not winning them" with its decentralised WLAN architecture, JMP's Wilson says. "Airespace's products were better than Cisco's. (Airespace) has been gaining market share, and Cisco has been losing share."
Sources say Cisco recently lost out to Airespace for a network upgrade project at Microsoft's Redmond, campus, where Cisco gear is already installed. [We're still waiting to hear the details on that. Last May, Microsoft was still very happy with its Cisco kit and the WLSE management, claiming to support 4,500 APs with just five people - Editor].
"There are a growing number of companies that, because of budget issues or security issues, have found that a network overlay was easier," IDC's Germanow says.
Among WLAN switch start-ups, Airespace was a fast-rising star and like most of its peers has concentrated on revenue growth rather than profitability. Industry watchers estimate that its sales exploded from between $1 million and $3 million a year ago to about $18 million in the most recent quarter. Meanwhile, its market share grew from around 1 percent to 6 percent in access points and from 17 percent to 24 percent in WLAN switches.
What about Cisco's current architecture?
Cisco's acquisition comes just seven months after it launched technology similar to what the WLAN start-ups were touting. "This isn't a 180-degree turn for Cisco," says David Newman, president of Network Test and a Network World Lab Alliance partner. "They've already started to go away from the fat access point model."
Cisco launched its answer to the WLAN overlay approach with its Structured Wireless-Aware Network (SWAN) architecture, which includes switch upgrades launched in May. This basically puts a WLAN switch inside a Catalyst 6500 in the form of a WLAN services module (WLAM). This blade aggregates Cisco access points and manages their security and configuration settings, Newman says. But the cost of entry for Cisco's SWAN architecture starts at $28,000 for the WLAM.
"You can get a functional (Airespace) WLAN system for under $10,000," he says.
...and more from the rivals...
Competitors saying that they are here to stay in the WLAN switch market argue that Cisco's Airespace purchase validates their own existence and the market in general.
"Wireless LAN switching is something that Cisco has been fighting against for many years now," says Anthony Bartolo, vice president of Symbol's network infrastructure division. The Cisco deal, Bartolo says, is "a $450 million validation" that overlay WLAN switching technology is what customers demand.
Aruba, a WLAN switch player that turned down a Cisco acquisition bid in November, argues that wireless presents so many new challenges that there always will be room for specialists.
"We think the market is huge," says David Callisch, director of marketing for Aruba. "The opportunity is way more than the amount of money" Airespace got from Cisco.
Meanwhile, there's more investment coming
And just because many call the WLAN market overfunded doesn't mean new money isn't flowing into the arena. WLAN security and management company Roving Planet this week announced $6 million in fresh financing, while security specialist Bluesocket this week is announcing $10 million in new funding [Clearly, somebody out there doesn't think that Bluesocket's largely Cisco-centric customer base and distributed model isn't under threat. - Editor]
What do users say?
Still, many companies that are deeply entrenched with Cisco or other established network equipment makers often will stick with those vendors even for new technologies such as wireless.
CareGroup Healthcare System in Boston recently decided to install a WLAN based on Cisco's SWAN gear, after it evaluated Airespace and Cisco offerings.
"Airespace had been doing (WLAN) roaming capabilities for some time," which was a key feature, says CIO John Halamka. "The downside was buying separate proprietary Airespace access points and appliances" to overlay on a Cisco network.
But with Airespace now under Cisco's umbrella, "we'll certainly review the product offering and consider deploying an all-Cisco solution that includes Airespace components," he says.
Ultimately, Halamka says, he would like an architecture that integrates wired and WLAN management, security and provisioning with advanced roaming and radio frequency configuration features.
"We have a 15,000-port Cisco network composed of Catalyst 6500 gear, so we want to leverage our existing network if at all possible," he says.