Network industry watchers have been warning for months that the wireless LAN market has been overfunded and was due for a shakeout.

The tremors have started.

Investors in Legra Systems, a WLAN switch maker that was unable to convert US$21 million in venture funding into a sustainable business, have sold the company to two other outfits.

Separately, AirFlow Networks' long-term prospects are looking ever more questionable. CEO Robert Machlin says the company is still in business, still trying to license its technology. But AirFlow's listed phone numbers give callers a continuous busy signal and the company hasn't issued a press release since April, when the company announced it was shifting its focus from selling boxes to licensing its switch-on-a-chip technology an announcement which was greeted in some quarters as a sign of a kinder, gentler shakeout - Editor].

The survivors among those who reaped some of the hundreds of millions in venture capital put toward WLAN start-ups in recent years interpret these events in a way that vindicates their business acumen and product strategies or, perhaps, their good luck. But the still unanswered question is whether enterprise WLAN deployments will be an overlay to the wired network, by independent vendors such as Airespace and Aruba, or an extension to the wired network, from incumbents such as Cisco, Foundry (who upgraded its software this week) and Extreme.

"A lot of people have been expecting this market to consolidate relatively soon," says Aaron Vance, senior analyst with Synergy Research Group. "This is just the early stages of that."

Airespace (see review and Aruba (see review) are generally viewed as the two strongest switch vendors. Others include Chantry Networks, Trapeze Networks (see review) and Vivato But there are scores of other WLAN companies selling access points, gateways and adapters, as well as chipsets, specialised systems software, mesh networks, security software and hardware, and network management applications.

Synergy's second-quarter WLAN market figures peg worldwide revenue for WLAN infrastructure (mainly access points and switches and controllers) at US$244 million, up from $214 million in the first quarter. In terms of units sold, Cisco posted its highest market share ever: 46 percent for the quarter. The nearest rivals were Symbol Technologies at 14 percent, 3Com at 10 percent and Proxim at just less than 6 percent. The total number of switches/controllers has jumped in 2004, but still remains small, and includes products that are mainly security gateways: about 4,700 units in the first quarter, nearly 11,600 in the second quarter.

Snapping up the debris...
Not figuring much in those numbers was Legra, whose venture backers have sold the company's assets to NextHop Technologies, which markets IP routing software that's widely used by Cisco's rivals; and Fortress Technologies, which sells WLAN security gateways.

NextHop bought some of Legra's software assets, which will be incorporated in new Layer 2 features due out early next year. "Wireless becomes a logical extension of these Layer 2 features," says Dennis Tsu, vice president of marketing for NextHop. "We plan some news in the first quarter once we've done the integration."

Fortress will incorporate several elements of Legra's WLAN switch into future versions of its AirFortress security gateway. Legra used a trio of specialised processors, including one to handle several encryption algorithms at once, to boost the performance of its switch.

So do the incumbents (that's Cisco) win?
Two Legra investors say they are convinced the WLAN market is tilting toward the incumbent players, such as Cisco and Extreme, which are adding WLAN processing, security and management to their switch lines.

"We continue to believe there is considerable demand by enterprise customers for WLAN solutions," says Daniel Phelps, a partner with Duchossois Technology Partners. "We are not convinced, however, that this demand will be met by stand-alone, wireless-specific equipment."

Another Legra investor, Gary Gannot with Genesis Venture Partners, points to the OEM deals that network vendors are signing with WLAN switch vendors. The deals are "a stopgap strategy until (the incumbents) incorporate off-the-shelf WLAN software, such as that being supplied by NextHop, into their next-generation enterprise (network) equipment," he says.

WLAN switch company Airespace has OEM deals with NEC, Alcatel and Nortel Networks. Rival Trapeze recently signed a joint development deal with 3Com through which the companies will collaborate on future 3Com products.

"I don't know on what basis they draw that conclusion [that the market is going to be owned by incumbents]," says Brett Galloway, Airespace's president and CEO. "There is very clearly demand for an overlay WLAN infrastructure. And we're meeting that demand."

But could Cisco dry up that demand, with its push to incorporate WLAN functions into its Catalyst switch line?

"There are successful companies that have competed with Cisco, such as firewall or bandwidth management companies," says Galloway, who previously headed Packeteer in the bandwidth management market.

Storm Ventures incubated Airespace, and investors there say they're confident about the future. Companies like Cisco have been saying for two years that WLAN functions will be a part of the wired switch architecture, says Tae Hea Nahm, a founding partner for the venture fund. "But wireless is a very tough medium. You can have the best packet processing on your switch, but if the user can't get on your (wireless) network, who cares?"

Nahm shrugs off the demise of Legra and AirFlow. "It's a Darwinian process and not many of (the start-ups) are going to survive," he says.

Trapeze President and chief executive Jim Vogt says the WLAN market is so big it's "too early to say that the big incumbents will prevail. It's big enough to sustain new players, in a potential IPO."

In the end it's just software?
The 3Com deal exemplifies how Trapeze plans to be one of those players. Vogt says the deal will go far beyond a traditional OEM agreement, which has one vendor's product simply re-labelled with another name. "We're doing a tighter integration of our technology on their platforms," he says. The next phase in the partnership will be licensing Trapeze software across an ever-wider array of 3Com switches.

But it's still an approach that in effect buries the WLAN inside wired switch gear.

"Our latest figures show healthy growth (for the WLAN switch vendors)," Synergy's Vance says. "They're carving out their own space."

But in the long run, he's less optimistic. "A more integrated approach will probably win out," he says. "The technologies of these start-ups will be an extension of the larger network infrastructure."

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