According to a report in the French business publication Les Echos, the government is discouraging Alcatel-Lucent (ALU) from using the 1.6 billion euro credit line. The government fears that ALU could default on its loans and let its patents fall into the hands of foreign banks. The credit line would stabilize ALU while it tries to reduce costs following consecutive quarters of heavy losses. The French government prefers that ALU find alternatives to putting its patents up as collateral. My French is rusty, but my reading of Les Echos reveals that the government is pushing ALU to sell off a valuable business unit to raise cash, including the enterprise business or its submarine communications business. The government is also exploring a patent consortium, which would allow ALU to share its patent portfolio with other companies and derive revenue from them.

ALU has put its enterprise business up for sale a couple times in recent years, so this news is not great shock. But some customers must be frustrated by the continued instability of the company. ALU has a lot of debt, negative cash flow and dwindling cash reserves. Seeking Alpha says the credit line is unlikely to turn around the company’s fortunes.

Which narrative would you like to believe?

1. The networking industry is more competitive than ever with Cisco faltering and companies like Juniper and HP gaining market share.
2. Cisco owns the market and everyone else is fighting for scraps, hoping to make a graceful exit.

Can they both be true? In recent years we’ve seen companies build up their networking portfolios in an effort to compete head-on with Cisco, only to make a quick exit after those efforts made them into an attractive target for acquisition.

As Henny Youngman might have said: Take my company. Please!

Remember when 3Com established H3C as a joint venture with Huawei, built up an impressive product portfolio, and then bought out Huawei’s share? Just two years ago 3Com was promising to blitz North America with the H3C brand and challenge Cisco.  They were serious about the enterprise again, after abandoning their customers back in 2000. Six months later 3Com sold out to HP.  Goodbye 3Com.

Remember Foundry Networks? Brocade bought the networking vendor three years ago. Brocade wanted to transform itself from a Fibre Channel networking vendor to a data center networking vendor and Foundry had the engineering talent and a loyal customer list to draw upon.  Brocade has been aggressive since that acquisition, introducing its impressive new line of VDX data center switches.  But acquisition rumors have swirled around the company for more than a year. And now Bloomberg is reporting that Dell had considered buying Brocade before passing over it in favor of Force10 Networks this week. Bloomberg added:

“Brocade has been looking for potential buyers with the assistance of Frank Quattrone’s Qatalyst Partners for the past two years…”

Two years… Take my company. Please!

And now we have Alcatel-Lucent (ALU), a company that has struggled in countless ways since the 2006 merger of Alcatel and Lucent. Every year or so, ALU announces that it’s going to reinvigorate its enterprise business.  Every year, the effort falls flat.  ALU executives emphasized the company’s latest enterprise business unit reinvigoration drive back in April when it announced a new data center network architecture that was, frankly, impressive. Yet, at the same time that they were telling me that ALU wanted to renew its enterprise focus, the Wall Street Journal was reporting that ALU was looking to sell the division.  This week, ALU finally admitted that it is indeed weighing a sale.

Does anyone want to be in this business?

How are you, as a network engineer, supposed to navigate this environment? These companies work hard to earn your business. They develop good products, they invest heavily in sales and marketing, they prove themselves with technical support. They help you build your networks with their products, and then they sell out to the highest bidder leaving you with the uncertainty of dealing with a new vendor. Nortel customers found themselves transformed into Avaya customers. Foundry into Brocade. 3Com into HP. Force10 into Dell.

Most engineers play it safe. They stick with Cisco, which owns the market and isn’t going anywhere. HP Networking appears to be the safest alternative for longevity in the networking industry that we’ve seen in a long time. But things can change. CEOs turn over. Shareholders get restless.

Maybe things would be different if the global economy weren’t such a mess. But that’s the world we’re living in.  The Great Recession is still in full swing, but the world still needs networks. So here you are. There are a dozen vendors out there asking you to choose them over Cisco. A lot of them make great products. Some of them make Cisco nervous.  But some of them are eager to make an exit, and that’s a a risk you need to consider.

When a company exits the market, it usually argues, rightly or wrongly, that its customers will be better off with the new owner of the business. Force10 customers will benefit from the Dell deal, they say. Foundry customers have benefited from the Brocade deal, they insist. Avaya has done right by Nortel customers, they promise. All that could be true. But it’s not a guaranteed happy ending when your preferred network vendor sells out. If you were doing business with 3Com 12 years ago, you know how it feels when a company dumps you.

For the uninitiated, the Magic Quadrant is Gartner’s graphical evaluation tool for the technology markets it covers. It breaks down the vendor landscape into four quadrants: Leaders, visionaries, challengers and niche players. Gartner evaluates vendors via two general criteria (which in turn contain a handful of sub-criteria). The evaluation criteria are “completeness of vision” (or how much Gartner likes the direction a vendor is going with its technology) and “ability to execute” (or how much Gartner believes a given vendor has the marketing, sales and engineering resources to deliver on their promises to customers). Leaders score high in both, challengers score high in execution, visionaries in vision. Niche players score relatively low in both.

The only major change to the quadrant this year is the entry of Juniper Networks, which has quickly established itself as a big-time player in the switching industry. Gartner has named Juniper a challenger in this year’s quadrant, when last year it didn’t even meet the revenue requirements for inclusion. Gartner praised Juniper for its strong history in networking (particularly in Layer 3 routing), its aggressive pricing and its strong, young portfolio of switches. Gartner cautioned that Juniper needs to continue expanding its product line and it needs to get more specific on how it’s going to address next generation data centers. Project Stratus remains relatively vague.  Juniper also has no clear WLAN strategy, which is a concern since 60% of enterprises like to buy switches and WLAN products from the same vendor.

Cisco Systems and HP Networking remain leaders. Cisco still has the broadest portfolio of switches and WLAN products on the market. It’s introduced several innovations recently, such as StackPower (the ability to manage the power systems of a stack of Catalyst 3750s collectively) and its new NX-OS operating system for its new Nexus data center switches.  However, Gartner says Cisco has been slow in executing a unified wired and wireless product line. Cisco has also left many customers confused about how data centers built with the Catalyst product line will be integrated into the Nexus line. Gartner also claims that customers continue to be critical of Cisco’s efforts in sales, engineering and support.

Gartner says HP’s acquisition of 3Com (a visionary in last year’s quadrant)  has combined the number 2 and 3 vendors in the market into a single Tier 1 vendor that has transformed the market. Gartner says enterprises should now consider HP for all its networking needs when evaluating vendors. The lifetime hardware warranties and telephone support across most of its products lowers the TCO HP-built networks. However, Gartner warns that the integration of HP and 3Com will take time simply because the product lines are so big. And there is quite a bit of redundancy between the two vendors, which will cause some confusion. HP’s sales force is also relatively new to networking, which some enterprise networking pros might find as a turnoff if they’re used to buying network hardware from knowledgeable sales pros.

Brocade remains a visionary. Its combination of high-end switching and storage networking expertise bodes well for its vision for its data center strategy and Gartner says the customer support legacy of its Foundry Networks acquisition remains strong.

Extreme Networks, Enterasys/Siemens, and Alcatel Lucent remain niche players. Nortel (now Avaya) is also still a niche player. Force 10 Networks, which dropped off the the quadrant last year because of revenue, has not made its way back.

Although the quadrant looks very similar to last year’s, Gartner says that the networking market has transformed tremendously in the last year. Juniper and HP have established themselves as legitimate Tier 1 vendor alternatives to Cisco. The days of “Cisco and the seven dwarfs” are over. Brocade (with its Foundry acquisition) is strong in the data center, not so much in campus LAN.

Aside from the horse race aspect of the vendors, Gartner has also identified several key innovation trends that enterprises should follow closely to see how their vendors respond.

1. IP Telephony: Gartner says vendors have varied in their commitment to integrating their network equipment with IP telephony vendors. Specifically, vendors who have their own IP telephony products haven’t been as aggressive in integrating their products with competitors’ IP telephony equipment to meet customer requirements.
2. Security: Gartner says network access control (NAC) will be a mainstream requirement for enterprises within two years. It expects that switch vendors will start to embed NAC into their gear in the next couple years. Entersasys has been a leader in this area with its flow-based security technology.
3. Evolving network cores: Here is where things are changing rapidly in the enterprise LAN market. With Gigabit Ethernet (GbE) server connections becoming common, low latency, wirespeed core switches with high-density 10 GbE ports are becoming a requirement. Vendors are racing to establish a leadership role here.  Data center bridging, fibre channel over Ethernet (FCoE) and the convergence of storage and data on Ethernet are also going to become major disruptions to the market.
4. Converged access: Gartner also notes that the drive to integrate wired and wireless networks will lead to the disappearance of the standalone wireless LAN controller. Vendors are integrating controller functionality into their switches. Those who don’t have their own WLAN product lines will be partnering with standalone WLAN vendors to make this happen
5. Price: Gartner notes that the average gross margin on networking gear remains around 60% or 65%, which means there is a lot of room for vendors to come down on price in certain situations. Enterprises are more cost-conscious these days and they’re thinking more about the life cycle cost of the networks they build. This means they aren’t just interested in seeing vendors discount their products to win deals. They also want to know that managing and maintaining the networks they build won’t be too expensive.

This is driving a lot of revenue growth, but some vendors are reaping the benefits more than others.  I asked dell’Oro analyst Loren Shalinsky for detials.

Cisco remains number one in the market by a huge margin, Shalinsky said. But Cisco did not have a good quarter. Its wireless LAN market share shrank by about four points he said, and revenue was down for the quarter (Shalinsky didn’t say by how much).

Motorola had an awesome quarter, growing by 40% sequentially from the third quarter, he said. The growth spurt nearly helped it overtake Aruba Networks as the number two vendor for enterprise wireless LAN. Aruba’s revenue grew by 7% in the same period. Shalinsky said total product revenue for the fourth quarter was $42 million for Aruba and $40.5 million for Motorola. Of course, Aruba would point out that it is also selling quite a few products through it’s OEM relationship with Alcatel-Lucent, which saw its revenue grow by 30%. Alcatel actually overtook Meru Networks in market share and claimed the number five position. (HP ProCurve is holding steady at number 4).

In this blog post I’ll review this year’s Magic Quadrant for the LAN market, and I’ll compare it to last year’s Magic Quadrant for Campus LAN infrastructure, which is essentially a measure of the same market.

As I wrote above, Cisco is THE leader in the LAN market, scoring high in both of Gartner’s criteria for the quadrant: completeness of vision and ability to execute.  In their assessment of Cisco”s position, analysts Mark Fabbi and Tim Zimmerrman noted that Cisco maintains the broadest portfolio of LAN switching and WLAN technology on the market. The introduction of its Nexus switches have shown that Cisco is providing some leadership in addressing emerging connectivity demands in data centers.

However, Gartner cautioned that Cisco remains the high-priced vendor, with some workgroup switching products being twice as much as alternative products on the market. Gartner also said Cisco might be taking its customers for granted, especially those customers who believe in buying networking gear from more than one vendor. The analysts wrote:

We are hearing increasing concerns about Cisco’s presales organization taking customers for granted, and not providing expected levels of service, especially for customers that have not endorsed an end-to-end Cisco solution.

The only other leader in this Magic Quadrant is HP ProCurve, which was a leader last year as well.  Gartner described ProCurve as the fasted growing LAN switch vendor during the past two years and when clients speak with Gartner about their shortlists for vendors, ProCurve is the the second-most-asked-about vendor after Cisco. Gartner praised ProCurve’s integration into HP’s Technology Services group, which gives it access to HP’s broader sales force. It also praised ProCurve’s low cost of ownership and the successful integration of the WLAN technology it acquired with Colubris Networks.

But Gartner cautioned that ProCurve still lacks high-end core switches (An acquisition of a high end core switching vendor like Arista Networks or Blade Network Technologies would do the trick!). The company also needs to expand its channel for larger sales opportunities. ProCurve has in the past been known as a good vendor for SMBs.

A third leader from last year’s campus LAN Magic Quadrant fell down a notch in this year’s quadrant. Foundry Networks, now known as Brocade, the storage networking company that bought Foundry last year, was classified as a visionary in this year’s Quadrant, scoring high on its completeness of vision but scoring a little lower than last year in its ability to execute.

Gartner praised Brocade’s integration of Foundry but said Foundry lost momentum last year due to its U.S.-centric and data-center-centric sales focus. Gartner said it wants to see market evidence that Brocade’s integration of Foundry is successful and that Brocade can regain market momentum.  I have no doubt that last week’s announcement of a new Ethernet switching OEM agreement between IBM and Brocade will go a long way toward helping Brocade regain some of that lost momentum that Gartner is looking for.

Gartner identified three other visionaries in this year’s Quadrant: 3Com, Enterasys/Siemens and Extreme Networks.

Last year Gartner classified 3Com as a niche player, but it elevated the vendor to a visionary in this year’s Quadrant, giving it higher marks for its completeness of vision. Gartner praised 3Com’s revamped product lines and its growing market share in China and other emerging markets. H3C, 3Com’s Chinese subsidiary, has a 35% market share in China, for instance. And 3Com has a very large, low-cost R&D workforce in China. 3Com recently told me H3C has 2,300 engineers in China.  But Gartner cautioned that 3Com and H3C have been, until recently, run as two separate companies. It will be important for the two to integrate. Also, 3Com has very little market penetration outside of Asia. Gartner warned that taking products developed for China and selling them globally will be a challenge.

Enterasys, which merged with Siemens Enterprise Communications last year as part of a Gores Group acquisition, maintained last year’s position as a visionary. It drew praise from Gartner for it full complement of products from the data center to the access layer, its tightly integrated security technology, and good customer buzz around support and services. But Gartner said Enterasys’s market footprint remains small and its distribution channel is limited. Marketing has also been weak, Gartner said, as the market waits for the new combined company Enterasys/Siemens to change its name.

Extreme Networks, the third visionary in the Quadrant, drew praise for broadening its XOS-based switch line and its policy-based configuration and open architecture. But Gartner noted that Extreme is struggling to maintain revenue and it remains one of the smallest vendors in the market. Gartner also cited some support issues affecting the company’s install base.

Gartner identified two niche players in this year’s Magic Quadrant. First there is Nortel, which was downgraded from its visionary status in last year’s Quadrant. Gartner cited Nortel’s bankruptcy as an impediment to the company competing for new business. Gartner is predicting significant loss of market share and revenue for the company as it remains in bankruptcy. Gartner also said Nortel needs a new core switching platform.

The second visionary, Alcatel-Lucent, drew praise for a solid product strategy and its growing market share and revenue; however, Gartner said the company needs to invest more in R&D to keep pace with the latest innovations in data center switching and wireless LAN technology.

Force10 Networks, which was identified as a niche player last year, was dropped altogether from this year’s Magic Quadrant because it no longer meets Gartner’s revenue requirements for inclusion, whch is 1% of ports sold overall or 5% of ports sold in a specific market segment.

Gartner also noted that Juniper Networks has entered the Ethernet switch market, but it hasn’t earned enough of a revenue share to be included in this year’s Magic Quadrant. Juniper’s switches earned the company $56 million in 2008.

So there you have it, for what it’s worth. Cisco remains on top, but the other players in the market continue to make moves. ProCurve and 3Com are on the rise. Nortel and Force10 are in decline. Everyone else is looking to take a step forward.