The LAN market: segments at a crossroads

Computer Industry Report,  August 31, 1995  

Tags: Desktops, HARDWARE, International Data Corp., LANs, Microsoft Corp.networkNETWORKINGPCrevenueserverSOFTWARETCP/IP

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Although high-growth opportunities abound outside the United States for the sale of basic connectivity to first-time corporate clients, in order for strong growth in the local-area network (LAN) market to continue vendors must focus on emerging opportunities driven by new technologies and emerging customer segments. Perhaps the most fundamental factor driving this change is that the corporate market (especially in the United States) is approaching saturation. Basic connectivity (file and print services, e-mail, etc.) needs are fully understood and widely implemented by corporate IS. Corporate users are more concerned about next-generation issues like connecting as yet unconnected portions of the enterprise (remote offices) and upgrading existing connections to enable new applications. Outside corporate IS, significant potential exists in the small-business, small-office /home-office (SOHO), and home markets.

To capitalize on emerging technologies, IT firms must position themselves for success without alienating existing customers and jeopardizing revenue from markets in decline. For example, although 3Com needs to offer switching solutions, it doesn't want to emphasize this technology at the expense of its significant hub business. This strategy may sound simple, but its execution is not. Not only do new products and technologies complicate the sales process, but existing customers may not initially understand such products and/or may feel threatened by them. Geographical differences in technology adoption can make this already difficult balancing act particularly troublesome.

To capitalize on new customer segments, firms must offer complete solutions targeted at specific customer segments and needs. This is not to say that every customer type requires a different product. In some cases this may be true, but even when it is not, different distribution channels are likely required (each of which have their own requirements), as well as differentiated pricing, packaging, etc. Many IT vendors have missed this point and have tried to sell the same product, through the same channels, to the year's hot new customer segment. If a product is not positioned distinctly -- if not in feature/technical terms, then in merchandising terms -- it will likely fail to capture this new customer segment and will dilute the overall marketing message.

Despite their presence at this crossroads, LAN hardware and software markets continue to grow impressively. From a base of more than $17.1 billion in worldwide revenue in 1993, IDC forecasts the LAN segment to expand to a whopping $36.3 billion market in 1998 (a compound annual growth rate of 11%). Not only is this growth driven by the ongoing penetration of LANs into large businesses -- as they continue to grow, extend, and upgrade their networks -- but also by the implementation of LANs in small and medium-sized businesses (and even in some homes and home offices).

Of the segments that make up the LAN market, backbone switches and servers are among the fastest growing in terms of revenue, with 1995 to 1998 CAGRs of 81% and 22%, respectively. The server market's continued robust growth is particularly outstanding since it is also the largest LAN market segment. Given average server prices of $10K and up, its status shouldn't be too surprising; no wonder PC vendors are stumbling over one another to increase their business in this segment.

Several LAN segments, however, will start to decline, not because of weak overall demand, but in response to technology shifts. After peaking in 1997, the PC network interface card (NIC) will fall off, victim of market saturation. Both the NIC and hub segments are shifting to higher-speed technology, which may provide a short-term window of opportunity for new or existing players to gain share.

PC LAN Operating Systems

Of the segments that make up the overall LAN market, the PC LAN operating-system (OS) segment is arguably the most mature. The segment is, however, far from stable. To the contrary, the LAN OS market is changing so dramatically that today's key players, including Novell and Microsoft, are fighting for their lives. Perhaps the strongest force driving this change is the broader architectural shift to a client/server architecture.

The need for basic file and print services is widely understood and implemented in businesses; nevertheless, users are demanding more from their LANs (and the OSs that run them). A client/server architecture, for example, demands more at both ends of the wire: both the server and the client must be smarter and more capable. Viewed another way, the pendulum of user focus is swinging back -- the focal point of user interest has shifted from the extremes of the server-centric mainframe era and the desktop-focused PC epoch to a point somewhere in between. The emergence of workgroup applications (like Lotus Notes) and network-capable desktop OSs (like Windows 95) exemplify this trend. Such tools blur the distinction between "desktop" software, like applications and desktop OSs, and "network" software to the extent that users may question what general IS infrastructure, not to mention LAN OSs, their information needs require.