Selling wired networks to small and medium businesses is usually a grim affair, with most demand for lowest-cost, small margin products such as basic Fast Ethernet switches and minimalist edge ADSL routers. While the number of ports sold is increasing dramatically, the average selling price is also dropping significantly.
According to In-Stat/MDR, worldwide port shipments were up 16 per cent last year, but manufacturer revenue still declined 11 per cent. Wireless, with its massive growth potential, has been the topic du jour for the past two years, and has driven much of the growth in product sales and profits.
There are a few early signs, however, that wired networks may also be due for a refresh. The growth in cheap broadband, new interest in voice over IP (VoIP) and a desire for greater manageability and speed look set to drive sales of wired networking products to SMBs in the next year.
The business has already received a much-needed shot in the arm earlier this year. On February 15, Telstra announced some of the largest drops in wholesale broadband pricing since the introduction of ADSL.
Under pressure from the ACCC, the price of layer 2 DSL services dropped dramatically, allowing ADSL retailers to deliver much cheaper products to a wider array of buyers. For less than $30, consumers could get always-on ADSL (with a limited traffic volume). Cheap consumer broadband flowed into small businesses as well, according to IDC analyst Susana Vidal.
"Small companies are using the consumer-type broadband, rather than the business services," she said.
The price drops had driven a significant increase in sales of both edge connectivity (especially ADSL routers) and company networks in SMBs, Vidal said.
"One of the interesting things we're seeing is that many companies are rolling out their first time networks," she said.
"Since the price drops in February there has been a huge increase in uptake. Now they have broadband they want to share the connection. "The inexpensiveness of ADSL means that a lot of companies are evaluating their networks national ISP account manager for Netgear, Ryan Parker, said. "It is coming to a stage now where people are looking at upgrading,"
According to Parker, many of the SMBs are now investing in more powerful products - 'lite' managed switches were a big seller in that space.
"The IT managers that these companies have coming in are interested in simple management tools," Parker said.
"People are thinking further ahead in terms of
managed switches. They're looking at Power over Ethernet and planning for future services such as voice over IP."
According to Parker, there is currently about a $35 per port premium to get a managed layer 2 fast Ethernet switch over an unmanaged switch.
Gigabit is also expected to be a big seller in the next year, according to IDC figures. "From Q2 last year to Q2 this year, sales of Gigabit Ethernet have more than doubled," Vidal said.
"The premium on gigabit is not very much, so people are buying it. They may not use the whole bandwidth at the moment, but people are planning for the future."
According to a report from the Synergy Research Group, an Arizona-based research organisation, the quarter on quarter growth of Gigabit Ethernet shipments worldwide was more than 53 per cent in the first quarter of 2004.
For the first time, worldwide gigabit Ethernet sales revenue has exceeded that of fast Ethernet.
The wireless effect
At this stage, the explosive growth of wireless networking does not seem to have had much of an impact on the sales or wired products to SMBs.
"The need for wireless in the SMB space is not as pronounced as it is at the enterprise end," Express Data channel marketing manager, Molly Baker, said.
"However, the flexibility that wireless gives you is very attractive and you only need look at the big push that Unwired is driving at the moment to see there is an undercurrent belief that wireless has an important role to play for SOHO and SMB in the future."
"There's no question that wireless networking is complementary to wired right now. It's not replacing it in the SMB space," national business manager for connectivity at Dimension Data, Roland Chia, said.
"When wireless is on the motherboard, we might see that change, but for now I don't expect it to have an impact on wired networks."
It would not be far off the mark to say that voice over (VoIP) is the new Wi-Fi. With the hype level on VoIP set to overdrive, we can expect to see a lot of products that support VoIP (or at least layer 4-based traffic shaping) on store shelves soon.
"The thing to watch is when Optus and Telstra launch VoIP services. If this takes off, it will kickstart another revolution in the SMB market," Chia said.
There has already been significant growth in the use of VoIP for company PBXs (including across virtual private networks). IDC reports that there was a 29 per cent quarter on quarter growth in sales of VoIP products between Q1 and Q2 this year. IP phone sales grew by 44 per cent.
IDC's Vidal said the lion's share of this growth had come from medium-size businesses, where there was a compelling reason to use VoIP.
"Medium enterprise has been faster to adopt IP telephony than the large enterprises in Australia. Large enterprises tend to be more cautious," she said.
The most anticipated products in this segment are the unified VoIP/Ethernet switching appliances.
These devices will take standard router functions and add in wireless, VoIP-based PBX (for internal company calls), along with PSTN and services-based VoIP interconnectivity (for external call routing). In some cases, they will also include Power over Ethernet (PoE) for good measure. Some products in this space are already available, most notably the Cisco Integrated Services Router (see sidebar).
"All in one options like routers that have switch modules or PoE (Power over Ethernet) modules attached for IP telephony will get bigger," Baker said.
"This way you can have routing, switching and telephony covered in one solution - this is good for SMBs that number about 20-40 users; you would use a dedicated switch for businesses larger than this, however you would want a higher grade router to run PoE for IP telephony. IP telephony itself is becoming very big, as is wireless."
Not everything is rosy when it comes to VoIP, however. The price of handsets is still way too high, according to several sources.
"SMBs are not going to jump right into it. The key sticking point right now is the IP handset costs," Dimension Data's Chia said.
"The switching part is probably the most inexpensive part of the whole thing," Netgear's Ryan Parker said.
"The problem is the cost of the other hardware."
Retail price comparisons
To give you an indication of the comparative prices for different wired networking technologies, we have put together a quick comparison of one vendor's prices across the range of different types of appliances. All the switches are base 24-port devices.
* Unmanaged layer 2 fast Ethernet Netgear JFS524 24-port 10/100Mbps Ethernet switch $241
* Managed layer 2 fast Ethernet Netgear FSM726 24-port 10/100 managed switch, 2 gigabit ports $833
* Managed layer 3 fast Ethernet (includes PoE) Netgear FSM7326P 24-port PoE Layer 3 managed 10/100 switch $2,518
* Unmanaged layer 2 gigabit Ethernet Netgear JGS524 24-port 10/100/1000Mbps Gigabit Ethernet switch $1,056
* Managed layer 2 gigabit Ethernet Netgear GS724T 24-port Smart Gigabit switch $1,415
* Managed layer 3 gigabit Ethernet Netgear GSM7324 4 GBIC/GTP port layer 3 switch $5,899
Source: Harris Technology