The Telecom Ripple Effect

A report released by the Dell’Oro Group show sales of high-end routers and switches, the equipment used to manage and move data traffic on national and international networks, has taken a plunge in recent months.

It proves what everyone in the telecommunications industry already knows but was too afraid to ask – carriers are pulling back from big network builds and focusing on what they already have to shore up losses, which puts equipment makers in a bind.

Overall, the worldwide router market saw a six percent decline in sales, to $1.5 billion, due mainly to a lag in pricey router sales, according to the Dell’Oro report. Wide area network (WAN) switch makers saw a similar six percent decline to $639 million.

The top three router makers – Cisco Systems, Inc., Juniper Networks and Unisphere Networks (which was acquired by Juniper in July) – all experienced negative growth in the second quarter.

The biggest losses came with equipment delivering high-speed routing on the “fat pipes” of bandwidth data delivery, the OC-192/STM-64 and OC-48/STM-16 networks. Cisco fared best, given its market share and number one ranking in the switching industry, with only a six percent drop in sales growth.

Juniper and Unisphere both posted double-digit drops of 10 and 22 percent, respectively, in the high-end routing category. Lucent Technologies (-5%) and Alcatel (Quote, Company Info) (-12%) fared poorly in the second quarter in switching sales.

But amidst the poor sales figures, some gems have appeared to offset the losses in the routing and switching industries.

A sales gain of WAN routers – used by corporations and communities who use T-1/E-1 lines to connect to the Internet – gained in the second quarter among all the vendors selling the equipment.

Switches that convert voice traffic into data packets played a large part in marginalizing the losses of the second quarter, with a four percent gain. Nortel, with the largest market share in the switching industry, saw a 41 percent boost in sales of the voice-to-data equipment.

Joshua Johnson, an analyst at Synergy Research Group, said equipment vendors who could tap into the fixed Layer 3 market did very well. Businesses are turning toward switching to manage their data communications infrastructure, Synergy Research reports show; the result of equipment that is now in the business price range.

“Vendor’s orders soared on customer demand for switches that can support IP Telephony and that could accommodate their limited capital spending budgets,” he said.

It’s likely equipment vendors will place more emphasis on the low-end, infrastructure-type routers and switches going forward. In the past, the money was made building the high-end routers and switches used by large carriers like Level 3, Global Crossing, Deutsche Telekom and Qwest to manage their burgeoning networks.

None of these carriers are likely to build out much further than they already are, though, given recent economic developments and the ongoing bandwidth glut in the market.

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