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Networking market suffers growing pains

Although sales continue to rise, the overall growth of the networking market has slowed and will continue as the market matures, according to a new report.

The networking market continues to grow, but at a much slower pace than in past years, a new study shows.

Sales of networking equipment--led by Cisco Systems--grew 17.7 percent in 1998, from $26.8 billion to $31.5 billion, according to analyst firm Cahners In-Stat Group. That's a far cry, however, from growth numbers in 1996, when the industry watched its sales surge by 48 percent for the year.

Industry growth rates should continue to slow, according to the report. Cahners In-Stat analyst Mike Wolf predicts sales growth of 15.5 percent to $36.4 billion in 1999 as companies, faced with the costs of the Year 2000 bug, delay equipment purchases. Additionally, growth rates usually decline as a market matures, Wolf said.

"As a market gets bigger, you have smaller growth rates because you're growing from a bigger base," he said. "If it's a $36 million pie, it's harder to grow 50 percent. You'd have to grow almost $20 million."

While the market is no longer booming, however, sales are still rising. "It's still a growth market, very healthy. It's maturing with some commodization, but there's room for a lot of growth here," Wolf said.

But several networking firms, such as 3Com and Cabletron, have recently felt the financial squeeze. Market share for both companies has declined; 3Com, which ranked second behind Cisco, saw its market share drop 5 percent to 16.4 percent in 1998. Cabletron fell from 6.1 percent in 1997 to 3.9 percent last year.

Revenue for hubs, network interface cards (NICs), and analog modems--three networking devices that make up a significant portion of 3Com's sales--has dropped in the past and will continue to fall this year, Wolf said.

"There are a lot of competitors out there [with the same products] and they compete on price," he said. "A part of the reason 3Com's market share is declining is NICs, hubs, and analog modems make up large percentage of its revenue."

The broadband access market should experience the strongest growth this year, Wolf said. The demand for cable and DSL modems, gigabit Ethernet cards, advanced switches that offer routing capabilities, as well as home networking products will grow as more telecommunications companies update their networks for broadband services.

Overall, Cisco still ranks No. 1 in the industry, with 29 percent of the market share last year. Nortel Networks is in third place with 10.5 percent, while Ascend, recently purchased by Lucent, was fourth, according to the report.