Extreme Networks announced plans to acquire Aerohive, which has most of its revenues in Enterprise WLAN.  The deal was a surprise, as evidenced by the 40% price premium paid on on HIVE.  After this deal closes, Extreme's WLAN business will be the combination of three WLAN businesses - the traditional WLAN business from Enterasys (Ottawa based team), the Motorola Wireless WLAN business (acquired by Zebra, then sold to Extreme) and Aerohive.  Each of these three businesses had strengths, for instance, the Ottawa team had designed a product line that had high performance in crowded venues - Extreme has enjoyed a long relationship with the NFV; the Motorola team had designed systems that were effective in retail and logistics (as a consequence of Motorola's ownership of Symbol Tech, a bar code scanner company); and Aerohive, which was as of 1Q19 the #2 revenue player in cloud-managed WLAN services and with a strong presence in the US K-12 vertical.  While there is certainly some risk that Extreme does not integrate the Aerohive business effectively, there are some interesting aspects to this deal.
#1: Aerohive's cloud-managed WLAN services is a significant player in the market.  We expect many small and medium businesses will adopt cloud-managed WLAN, and Extreme had a less mature offering here.  We see this as the primary benefit of the Aerohive acquisition.
#2: Aerohive's vertical market exposure in US K-12 (education) market and the managed care part of the health care industry are a nice addition to Extreme.  These markets are additive.
#3: Aerohive had a SD-WAN product that while not a big revenue generator will be important for Extreme in selling to small and medium sized businesses.  We expect the SMEs and branch offices will be upgrading using a SD-Branch approach, where upgrades to WLAN, switching and SD-WAN will be done at once.  Extreme had a hole here and Aerohive fills it.
#4: Aerohive had a new product, A3, which we categorized as Enhanced Network Access Control.  The front end of this product is very modern.  Extreme also had its own NAC product.  Our hunch is the company will merge the two, taking the best of both.  We see larger enterprises as demanding this type of support.  HPE Aruba sells its Clearpass product in a wireless+wired+ENAC bundle to larger sized business, just as Cisco sells its ISE and wireless+wired bundle.  
#5: Aerohive has 802.11ax products.  We expect that increasingly, as customers adopt 802.11ax, with its expected throughput under high loads exceeding 1 Gb/sec, this will drive an upgrade cycle to switches with MultiGigabit support.  Extreme cited "cross selling" in its announcement of this deal, and we agree that customers in the 802.11ax world will be increasingly buying new switches when they adopt new wireless.

This deal was a surprise because Extreme already has WLAN in its portfolio, but if Extreme executes on this business transaction effectively, it can solidify its position in the mid-market by offering cloud services and SD-WAN (through a SD-Branch bundle) and potentially move both up market (with ENAC) and if it choses, downmarket by maintaining a business practice that Aerohive rolled out well over a year ago that can be described as a "freemium" model for its cloud-managed WLAN services.

Earlier this year, Aerohive issued a press release about its A3 software system.  A3 is what we categorize as an Enhanced Network Access Control (ENAC) system; we calculate market share statistics on this market in our Security report series.  The company is now getting ready to bring the product to market and is blitzing the media, so to speak.  We were briefed and learned more about the product. To summarize, it checks the boxes necessary for us to include it in our ENAC report and we like that it has a common user interface to allow customers to perform device profiling, authentication / registration, compliance / remediation, device management, billing integration and network access control.

Our outlook for ENAC is positive and, today, three main vendors consist of the majority of share: Cisco (with ICE), Aruba (with Clearpass) and ForeScout.  We learned that company has more aggressive pricing than these market leaders.  If you look at why a product like A3 is important to Aerohive, recall that back when Aruba introduced Clearpass back in 2012/2013, it used it as a selling tool to get into its competitors' accounts (it also got high margin sales from Clearpass, too).  Aerohive's A3 is positioned similarly - it operates with its competitors' equipment (including those from Cisco, Ruckus, Extreme and others).  So, Aerohive has developed another means of selling to customers, by offering A3 to customers using non-Aerohive equipment.  

cWe attended the upbeat Alcatel-Lucent Enterprise (ALE) Connex18 conference, where the company said its strategy is focused on three pillars: verticals, cloud and services.  In its networks business, most significantly, the company announced: its Omnivista Cirrus cloud-managed network services offering, the WLAN indoor Location Based Services system and its plans for its Network On Demand offering.  Finally, the company has retained the use of the Alcatel-Lucent Enterprise brand name for the next few decades, shutting down speculation of a rebranding.

Verticals.  Company has organized its development and selling efforts around five vertical markets: transportation, government, healthcare, education and hospitality.  Last year, the company achieved over 100% growth in its transportation vertical, benefiting from Internet of Things (IoT) trends.  Our view is the transportation vertical and, more generally, industrial, has the opportunity to grow faster than other verticals due to the growing number of IoT use cases emerging.

Cirrus.  The company will soon offer a cloud-managed network services capability to customers that use its WLAN and switch products.  In this respect, ALE is taking on Cisco's Meraki and Aerohive, among others.  Customers can choose from its free offering or its premium offering, depending on what features are needed.  We expect that the company will be aggressive about moving customers to this service.  Pricing was not announced, though we expect the company will set prices generally at a modest discount to those of Meraki, both on product and services.

WLAN & Location Based Services (LBS).  The update focused mainly on the in-house developed Stellar WLAN product line.  Its capabilities have improved over the past year, its management capabilities have improved and will soon include cloud based management (called Cirrus), and the devices are being offered using new business models (including NOD).  The wireless product line is being specialized to support the new verticals discussed earlier.  Generally, Stellar is moving up market.  The Stellar WLAN product line is much broader than it was last year and has increased capabilities, including far greater scalability - Stellar will support 4,000 APs per campus will soon be possible.  ALE exepects Stellar WLAN to support 802.11ax by 4Q18.

The company made a big deal about Location Based Services.  Today, Bluetooth (specifically BLE) is the wireless technology being used.  BLE is incorporated into high end APs and is available using USB ports on the rest of the WLAN Access Points, or BLE beacons are available, too.  The company will offer WiFi LBS later in '18.  Examples of capabilities enabled by LBS include geopositioning and wayfinding, geofencing notifications, people tracking/flow, analytics (geofencing based).  For instance, for healthcare, the company demonstrated a 'Way Finder' capability that runs on patient smartphones that uses WiFi and Bluetooth capabilities from its WLAN APs to allow patients to navigate themselves through the healthcare facility.  Another example is for the transportation industry, where the company's ruggedized switches are finding a home, the Outdoor ruggedized APs are matched well.  

Network On Demand (NOD).  The company has signed up about 40 customers to use its NOD offering, which allows customers to use ALE switches and wireless products while paying a monthly fee instead of purchasing the equipment up front.  NOD was introduced in 4Q17 and is currently available for in-house developed products like OmniSwitch and Stellar WLAN.  NOD may be offered for third party devices, such as those from HPE Aruba, but are currently not available.  We understand that the network architecture is designed by ALE.  The company gave a few examples of customer types, mainly surrounding the idea that a quick decision had to be made on upgrading the network but there was a lengthy approval process for capital spending but a short one for operational spending, or that there was insufficient budget for the capital spending.  

Aerohive, a leading enterprise-class WLAN vendor, announced changes to its product and services pricing that is intended to get its foot in the door of more customers.  Here is what it has done:

• Announced a new WLAN Access Point, the AP122, an 802.11ac device, for $229.  This includes a cloud-management service for no cost.  The version of cloud management, called "Connect" that comes with this product has fewer features than its current cloud-manged service, which will be called "Select."  The AP122 will still have BLE Beacon and USB support, making it suitable for both retail and hospitality vertical markets.
• Announced it is changing pricing across its total product portfolio, with the approximate net effect being a lower customer price for hardware plus its services of about 1/4 off the prices just a week ago.
• Changed pricing of its exiting AP130 to $299, which, like the AP122, includes "Connect" cloud-managed service.  the previous price of the AP130 was $599.

Taken as a whole, it appears that Aerohive has seen that there has been stronger growth with more aggressively priced products from competitors, such as Ubiquiti Networks, and the company wants a piece of this faster growth.  

In our interview with management about the new product (AP122) and new service (Connect) announcement, we learned that the company expects many of its prospective customers will opt to chose the "Select" service level over time because there are more features than those available from Connect.  Additionally, we learned that the company will be charging somewhat more for its services and software and somewhat less for its hardware, taken as a measure across its entire product line.  We see this change as being consistent with its price-aggressiveness it just announced for its low end" of its product line, namely the AP122 and AP 130.  

We expect that Aerohive's pricing moves will have an impact on the industry. Certainly, other well-featured products with aggressive price points have done well in the marketplace in recent years.