Hoov's Musings (volume 3, number 1)

Got VRM?
Mark Hoover, President, Acuitive, Inc.

I’m spending most of my time these days learning how to change diapers and putting the final touches on a report to be published entitled “VRM Industry Update.” VRM stands for Virtual Resource Management, which is my term for the products and technologies sometimes called Server Load Balancing (SLB – considered too low brow by many, especially the vendors thereof) or Internet Traffic Management (ITM – a good term coined by IRG, but too broad for my purposes because it includes Bandwidth Management, firewalling, QoS, and caching). I’m sticking to the term VRM because (a) I’m stubborn, and (b) a good term is still needed (see a).

Anyway, I’ve been working hard on this report, which is supposed to be a short incremental update on the industry released in December 1999, but is turning out to be a not-so-short update on the industry to be released in February 2000. The issue I am having is that as soon as I come to some conclusion about something, get it in writing, or start a review process, something always seems to come up that requires me to go back and re-consider and re-write. It’s enough to make me want to re-tire.

This is all a symptom of a very dynamic market segment. Although small by some standards, we have seen the VRM market more than double in 1999, to around $250M. That represents greater than 100% growth in revenue, and I believe the growth in usage of the technology is even greater than that. As evidenced by the numbers, 1999 was a year where various constituencies “got it.”

The trade press “got it” as seen by the number of articles, buyers guides, seminars, etc. that they foisted on the public. In spite of the quality of some of this information, end users “got it” as they discovered a technique to increase the reliability and performance of their web servers, application servers, databases, firewalls, VPNs, caches, and mainframe front ends. Some large users “got it” to the point that we saw the first few million dollar deals in this product space. Some big vendors started to “get it” as evidenced by Nortel Network’s OEM deal with IPivot, Intel’s subsequent acquisition of IPivot, Lucent’s relationships with ArrowPoint and RadWare, F5 Networks’ OEM deals with 3COM, Extreme, and Cabletron, and Cisco’s movement towards integrating the functionality with IOS. These vendors are seeing that while the market is small, the mindshare and strategic implications associated with this technology is huge. But in spite of the early stage awakenings of some of the big vendors, the small to medium vendors focused on this space were the big winners. Alteon, F5 Networks, Foundry, and RadWare all had tremendously successful IPOs in 1999, fueled by good quarter-to-quarter top line growth, resulting in some multi-billion dollar market caps. And Resonate and ArrowPoint are reported to be on the IPO track for early 2000. Now the VCs and financial analysts have “gotten it,” with many scrambling around saying “get me my F5 Networks, get me my Alteon!” So you can expect to see some new companies launched into this space in 2000.

That last item bothers me a bit. As important as I think this technology is – in a sense it further commoditizes switching and routing, becoming the higher layer intelligence that determines where application flows go to achieve service level goals – it will still never be the huge markets that switching and routing are. Maybe $1-1.5B in 2-3 years. The problem is that it is too powerful of technology. For $10-20,000 you can stabilize a specific application. And that number is decreasing. For $250-500,000 you can build an entire system for enterprises to stabilize and scale all their key applications across the globe. The virtual nature of VRM puts a cap on the market. As opposed to switches and routers, a port of which is required to drive every networked link in the world, VRM solutions can be put into place in Kansas that ensure application delivery in Florida, the Christmas Islands, and Upper Mongolia.

So I worry about too many vendors entering a market that seems to me to have a fairly modest addressable market size. I’m pretty sure that 2000 will be the Year Of Reckoning for vendors in this market segment. Going into 2001, a fewer number of measurably stronger vendors will dominate most of this market. Others will have either faded away, found a niche that they will be forced to be happy with, or gotten acquired by Cisco.

The contending vendors will have to continue to put a lot of money into R&D because someone is raising the bar on features almost every day. But more importantly, in 2000, they have to develop channels as fast as possible. One of the interesting things to note about 1999 is that the vendors universally report little competitive pressure. Sure, they run into Cisco everywhere – but Cisco market share reduced from 50-60% to about 20% in 1999. So most are having no problem beating Cisco as long as they can get an audience with the prospective buyer. And that’s the big issue. This is not a time and technology that lends itself to RFPs, comparison-shopping, bake-offs, etc. People have a VRM itch and they find a VRM scratcher – and fast. The key to success just seems to be “being there.” And that means channel development. So when you want to make a bet on which players in this industry will strut into 2001 instead of stumbling into it, pay little attention to new feature, technology, or product announcements. They all have roughly the same technology, and if they don’t they will within a few months. Pay more attention to announcements about OEM deals, large VAR or distributor relationships, cooperative marketing and sales agreements, NSP and colo agreements, and M&A activities. Of course, it is sometimes hard to discern which such announcements are substantive and which are superficial, but somewhere in that pile of information will reveal the success formula of the winners as we go into 2001.

I have a pretty good idea who the winners will be, which I will identify in the Industry Update report. This, of course, will not win me any free meals from the vendors I don’t select. But that’s ok. It segues nicely into my New Years resolution to lose some weight by the start of the next new millennium.

(volume 3, number 1)

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Got VRM? Mark Hoover, President, Acuitive, Inc.

Got VRM?
Mark Hoover, President, Acuitive, Inc.