Today I attended the Extreme Analyst day at the NASDAQ in New York.
Extreme’s 4Q18 switch revenue grew over 10% and in our preliminary view of 4Q18, it took share. The company highlighted over 30,000 customers and over 6,000 partners in a one-Extreme approach that has integrated the acquisitions of Avaya and Brocade.
The company also highlighted that in 4Q18 it saw nearly 20 deals over $1M which is indicative of a rebound in its' business from large enterprises. We believe the company is maintaining a good portion of its' Extreme and Avaya installed based.
Extreme emphasized software as a driver for higher margin sales. We agree, software is the general direction of where campus switching is going with vendors looking to get incremental revenue from software instead of hardware. We have maintained for over two years now that campus switching would be a positive growth market led by software to help manage a more converged (Unified Access) market. We also see IoT and the inclusion of securing and monitoring IoT traffic as an additional growth drive for the campus market.
Today, Amazon announced that it will acquire eero, a consumer mesh WiFi equipment company that as of 3Q18 had 13% revenue share. In 3Q18, the consumer mesh WiFi market measured just over $150M, which was up just over 34% Y/Y. The number one player by revenue was NETGEAR in 3Q18, followed very closely by Google, who had retained the number one spot for the 5 quarters before 3Q18. Now, with Amazon's acquisition of eero, just three players will have well over 3/4th of the consumer mesh WiFi market. What's interesting here is that two Internet titans, Google and Amazon, are attempting to disrupt the consumer networking market that up till 2015 was dominated by hardware players such as NETGEAR, Linksys, TP-Link, D-Link (consumer WiFi vendors) and adjacent players such as Technicolor, Arris, Huawei, ZTE and Nokia (Broadband Customer Premises Equipment vendors).
So, what does it mean that now both Amazon and Google are battling for primacy in the home networking market?
It is complementary to their interactive speaker business. Both Amazon and Google have introduced various hardware products for the home, but most successful have been both of their interactive speaker products, which for Amazon has been the Echo and Dot and for Google Home. These speakers are generally in an "always-on" mode, which allow them to listen to all sounds nearby, and which also means they are generally always connected to the WiFi devices in the home. By always being connected, these speakers consume much of the available WiFi bandwidth in the home, deteriorating the available spectrum for other devices. One obvious solution, which is being made available by wireless chip giant, Qualcomm, is to integrate WiFi chips with speaker chips. That's the direction that both Amazon and Google may pursue - to integrate Home with Google WiFi and Echo with eero. This will mean that multiple WiFi mesh devices will also represent multiple interactive speakers in the home, all while combating the over-use of WiFi spectrum in the home.
These Internet giants can, and probably will, attempt to overwhelm the market with low prices, subsidized by primary businesses. We already see that Google's price for a 3-pack is 37% lower than eero's comparable system. Our working theory is that Google has been selling close to no margin and that eero has been experiencing a 30's percent margin. This is probably not good news for the following companies who either do have gross margins above 30% or we assume do, like NETGEAR, TP-Link, D-Link, and others mentioned above.