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Networking And Communication Industry

|Includes: Arista Networks, Inc. (ANET), AVYA, CSCO, HPE, JNPR
Summary

Formation phase of networking and communication industry.

2004: Mushrooming of unsuccessful startups.

Course correction in 2010 and new "competitive" industry by 2017.

Formation of “Networking and Communication” industry

In and around 1984-85, some Stanford university employees and students created a piece of software then called “access” data interchange module that translated traffic between flavors of LAN connectivity protocols and result was seamless connection between computers on multi-protocol data communication networks. By 1990 or so software was plugged into dedicated devices, routers & switches, for selling it as commercial user product available in market for enterprises and small businesses’ local networks. Demand for long distance wide area networking services for inter-office connectivity between geographically separated locations also started growing thereby creating a need for bigger routers and hence need for multiple models of routing and switching devices.

Initial growth of “only” networking industry vendor Cisco Systems in excel “timeline-growth” chart:

In and around 1993-94, networking products sales started growing and multiple companies in this space mushroomed. Global need for the technology and these products created requirements for multinational presence for these “new” companies. By 1999, there were about 10 competitors in LAN and WAN products market and competition among them was mostly on speeds and prices. Cheaper communication interface between locations of enterprises/businesses and availability of network inside of local offices provided fuel for more innovation in both communication infrastructure components and use of communication technology in office. Technologies such as Wifi, Optics, Coax, Voice & Video, Security, TV either helped ease use of network or used data network for service betterment.

Networking_indu.png

With growth of internet and inter-office intranet links over long distance, need for third-party for management of links and better cost and traffic sharing arrangements amongst users of shared links created requirement for “service providers” in this space and telecom service providers stepped up to fill this. That SP move eased the use and growth of “core” of internet.

By 2004 or so, multiple communication technologies started using recently made “cheaper” data communication infrastructure as their digital data transport network. Cheaper Voice over net and cellular traffic management backbone are two such examples. Multi-feature digital data communication products market size grew big but there were limited number of vendor in this industry space. Many startups could not survive because of their small size and limited product portfolio as networking technology for connecting disparate communication devices by its nature is an end to end interoperable device portfolio game. This created conditions of monopolistic market competition with one big vendor in hold of complete market and technology. Need for more competition in networking equipment market with multiple full product portfolio vendors was felt. Here is a chart that shows very high level picture of competition situation in networking industry in and around 2004-05. There were just two big vendors Cisco and Huawei with approximately 30 thousand employees and 20 thousand employees generating revenue of about $20 Billion and $ 7 Billion respectively.

2004_net_ind.png

Multiple new startups tried their luck but there was hardly any lucky winner. For almost next 5 to 6 years industry only saw growth of two vendors. Around then competition started taking shape and by 2012 or so 3 to 4 big vendors with almost complete product portfolio of communication and networking point solutions started showing good potential. Competition is much better now. Here is as chart that shows current situation of networking industry in 2017 with more than 300 thousand employees working for 9+ vendors and no company has more 30-35% of industry revenue in reality.

2017_net_ind

HHI calculations 2004: 6 Vendors: 3812 (Highly Concentrated, very low competition)

HHI calculations 2017: 9 vendors: 2867 (Much improved, very close to medium competition stage)

Comparative HHI calculation for SP revenue from table in “derivative revenue table”:

HHI calculations 2017: Top just 10 SP vendors: 1148 (Low concentration, highly competitive)

HHI score improvement of 1000 points in just 10 to 12 years is tremendous progress in competition improvement for this economic activity. It would probably take 20 plus more years for it to correct to low competition range score of around 1000 to 1500 and for this to happen there should be at least 4 to 5 more vendors with annual revenue in the range of more than $20 Billion i.e. comparable revenues.

Network equipment industry with multiple thriving vendors is vibrant new job creator in economy with new world companies already generating billions of dollars of revenue. Table below compares networking industry revenue and employment situation at very high level between 2004 and 2017. One point to notice is the revenue generation by one employee of a company vs. competition and hence a sense of carrying a “Brand badge” decreased by almost 15% between 2004 and 2006. Non-Cisco industry employee generated revenue of 84% of Cisco employee back then in 2004 while now in port 2017 the percentage stands at almost par value of 97%.

Net_ind_now.png

Derivative revenue based off of new age telecom and networking gear

New development in telecom and networking technologies have made multiple new SP service provider business solutions possible. Some of the examples are:

  • Business and home internet access and data network connectivity using Ethernet, Wifi, Coax and optical networking
  • Ubiquitous cheap voice by using internet technologies such as IP, ATM and Frame-relay,
  • Cheap data networking based backbone for cellular telephony traffic management to enable low cost wireless telephony
  • “One-stop” IP technology based business collaboration system for enterprises, small and medium size businesses
  • Cheap web hosting and information delivery services

These advances have opened up new revenue opportunities for old world telecommunication companies and helped them in their transformation toward becoming communication services vendors with full set of portfolio that includes voice, data, Smart TV, cellular telephony and business collaboration solutions. New revenue that has been added into top communication services vendors P&L is that of order of “trillion’ of dollars not just billion as shown in below table.

int_SP.png

Some companies like AT&T, Verizon and Comcast have added almost $100 billion dollars in their income statements. On top of it, some new internet technology based media or information services companies such as Google, Akamai, Facebook, Yahoo, LinkedIn, Baidu, Twitter and Uber are already big multinational companies with billions of dollars of revenue generation capabilities. Total value of new annual revenue additional would sum to approximately $1Trillion for old world service providers and approximately $250 billion for new world media and information service delivery companies. Numbers of job which have already been added for delivering and supporting service based off of these new communication technology advancements would also sum up to some very high staggering “worldwide” number of the order of millions.

Effect of “Chasm Crossing on” human resource development and partner management:

As we have already seen from networking industries growth data in first section of this document; productization, technology adoption and globalization phases have had big impact on make-up of this industry. If we plot networking industry on category maturity life cycle curve for its growth, we would notice that techies and visionaries employment conditions have passed us long time ago. Failures of many startup efforts in and around 2004 – 2006 would point to the fact that journey through pragmatists employment stage wasn’t easy but now we many successful companies showing good business potential and growth and hence hiring. However overall growth rate of industry is now in low teens and we would see industry move into conservative phase unless we would hit another “technology S curve” and western hemisphere segment of industry would show high growth stage again. From the current data, one easy prediction would be that we are probably looking at a new industry that supplies technology and equipment for new advance forms of collaboration, entertainment and easy access to information to service and solution provider. By the end next decade, we would see that this new industry employees about 500,000 technology workers and generates about $250 to $300 billion in revenue.

Text Box: New “technology S curve” ???Category-maturity-life-cycle.jpg

Chevron: Timeline: 1995 2004 2014 2017  Techies Visionaries Pragmatists Conservatives Skeptics

 With growth of big companies in communication and networking industry based-of off new technological growth in web, collaboration and personal communication devices use, negative new-growth effect on local hiring and selective talent management along with closed partner and vendor relationship management has already started showing up. Growth of virtual organizations and “self-run” businesses that we have already started noticing inside of these newly formed big corporations are not unique to just this industry’s “new growth phase” though. Reporting chains because of local hiring and limited availability of skill-set along-with arms length business relationship in close networks do develop during new fast growth in any industry development cycle. Here is an example reporting hierarchy that could run un-noticed in a big company unless business relationships or conditions at top change and this virtual org. would have to merge within of company thereby exposing skill-set and hierarchy mismatches one way or the other i.e. better or worse whatever the case be.

It is usual happening in industry growth spurts though and “conservative” protective mode in some portion of businesses just after big growth cycle would result into growth of such team setups. Selective business relationships and hiring practices world be a hindrance in efficient growth of industry or industry segment and should self correct itself for proper recovery of technology growth.

Conclusion: In long run, top management in these companies should become confident in their abilities and should start playing freely in corporate world. New industry would properly adjust its functioning in overall “economy”. Thereafter, free market adjustments in skill-set valuation and management chain levels would make organizations in new industry companies’ normal functioning reporting chains with proper remuneration packages that no one would pay too much attention to.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.