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For several years now, we have been watching the SD-WAN market push through the growing pains and the ups and downs that new technologies typically encounter. As end users became more educated about SD-WAN technologies, use cases, vendors’ solutions, and the cost-benefit that solutions provided, the market grew at a remarkable rate.

In 2019, SD-WAN moved through the early adopter phase and expanded by more than 60% for the third consecutive year. Manufacturer’s revenue surpassed $1 billion, and 2020 was shaping up to be another solid year. Then the COVID-19 pandemic hit the world in an unprecedented manner, and cast a dark shadow on the SD-WAN market’s growth prospects.

How does the pandemic change the market’s potential?

We believe that the momentum of the SD-WAN market will be dampened over the near term, but there are a number of technological and business attributes that provide the basis for a positive long term outlook.

In the first quarter of 2020, the SD-WAN market grew by double-digits, but the growth rate decelerated considerably due to supply chain disruptions and end user purchase hesitations at the start of COVID-19. The lower growth rates will persist for some time, and we expect that over the next 12 months, some enterprises will defer plans to adopt SD-WAN, and severe financial distress will permanently eliminate deployment plans for others. However, over the longer term, we believe that SD-WAN is a compelling technology solution that many businesses will adopt despite the economic pressure resulting from the pandemic. At a high level, the SD-WAN market has these factors in its favor:

  • SD-WAN sales should accelerate as macroeconomic conditions improve, but the flip side is that demand for legacy technologies such as standalone branch office routers will likely erode at a faster rate.
  • SD-WAN is largely a software subscription-based business model whereby a vendors’ revenue is recognized on a recurring basis over multiple-year periods. As companies attain a critical mass of SD-WAN deployments, revenue streams are less susceptible to quarter-to-quarter fluctuations and more predictable.
  • SD-WAN technologies are deployed by enterprises and by service providers, and the use cases for each are quite different: enterprises build infrastructure for internal business operations, and service providers construct infrastructure for revenue generating services. The SD-WAN market will benefit from the diverse demand and investment cycles the two customer sets.

But aren’t more people working from home?

In order to mitigate the spread of COVID-19, governments around the world have instituted lockdowns that force millions of people to work from home instead of travelling to their places of employment. These policies have both short term and long term effects on the SD-WAN market.

For the short term, some SD-WAN deployments will be delayed due to facilities being underutilized or inaccessible. Human and financial resources are being diverted to enable and support people’s ability to work from home. For the long term, we expect that a portion of the work force will continue to work from home rather than return to facilities, and that the number of existing work sites or branches will be reduced to align with the redistributed work force.

The workforce redistribution may present new opportunities for SD-WAN technologies. There is the possibility of a change in work facilities with an increase in smaller, less dense locations that creates additional demand for SD-WAN. Some people working from home may benefit from or perhaps require a SD-WAN solution. New technology and solution developments for work from home use cases will emerge, and these solutions may potentially reshape the reach and scope of SD-WAN solutions. To what extent these solutions are additive or substitutive to the SD-WAN market size is an open question that we will monitor closely.

Will all vendors gain from the market’s growth?

In 2017, Cisco and VMware plunked down more than $1 billon combined to acquire SD-WAN startups Viptela and VeloCloud, respectively. The acquisitions set the stage for the vendor landscape to consolidate around these two companies with deep pockets and several companies with best-of-breed SD-WAN solutions. Our market share research shows that the market opportunity is narrowing to a smaller set of vendors, with more than 75% of the 2019 market revenue concentrated amongst eight vendors.

Now the question is, will the COVID-19 pandemic accelerate SD-WAN vendor consolidation? To be clear, predicting the timing and players of consolidation is a fool’s errand, but we can point to some of the conditions and indicators that potentially accelerate the change in vendor landscape.

  • There are more than 50 vendors touting SD-WAN technologies, and it is unlikely that the SD-WAN market will be large enough to sustain the number of vendors that currently offer solutions. The competition for end user mindshare and spending will be fierce.
  • The global recession and ongoing macroeconomic uncertainties caused by the pandemic will place financial pressure on all SD-WAN vendors. Not all companies will have the resources to support ongoing business and technology developments required to remain competitive.
  • In times of turbulent and unpredictable circumstances, the “flight to quality” becomes a common approach to technology investments. This type of conservative business decision making will drive demand to those vendors perceived to have strong and stable business models.
  • Consolidation can occur in many forms. In addition to mergers and acquisitions, we expect some vendors to deemphasize, downsize, or terminate their SD-WAN solutions.

There is no doubt that the COVID-19 pandemic is disrupting the SD-WAN market in ways that were completely unexpected just six months ago. Because the SD-WAN market is a relatively young, it has the ability to adapt its technologies, solutions, and business models to this unprecedented disruption. We look forward to keeping you apprised of how this market evolves.