Aruba CEO Details Channel Ambition For Year Of 'Won And Lost' Market Share

wireless LAN LAN

Calendar year 2009 was kinder to Aruba than other networking vendors, and Aruba recently reported quarterly revenue increases that were 10 percent year-over-year and 8 percent sequentially for its first quarter of fiscal 2010.

And while channel strength hasn't traditionally been an Aruba forte in the U.S., Aruba's more recent emphasis on building out the VAR program -- including the hiring of networking veteran Bob Bruce to run channel efforts -- has many Aruba partners wondering if this is the year Aruba breaks out as a networking and infrastructure channel force.

Along with Bruce and Michael Tennefoss, head of strategic marketing at Aruba, Orr joined Assistant Managing Editor Chad Berndtson to look at what lies ahead for Aruba's channel and the wireless LAN space as a whole. Excerpts of the conversation follow:

I wanted to look at some of the things that helped Aruba excel last year and are continuing to help you excel. Your first quarter was superb. How did you do it?

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We started focusing on solving an extra set of problems, sometimes not related as much to mobility as what we called network rightsizing. People tend to over-provision. If you have a wiring closet that needs more switches, you tend to just double the switches so you don't have to go back to the wiring closet for another six months. But when the downturn came, people realized that a significant percentage of their wired resources aren't being used. I imagine that in your office, you probably have three to four Ethernet ports per user. However, you're continuing to pay 15 to 20 percent in annual maintenance, software upgrades and refresh for those ports. People who don't have budget can't refresh. At the same time, you're also realizing that a lot of your workers use laptops and move around and work outside the building. You don't need to upgrade your wired Ethernet switches so much, and you're realizing this is a good opportunity to re-engineer your infrastructure.

Adding 802.11n [wireless] connectivity actually solves your connectivity problems and enables the mobility applications you want, and at the same time, you're taking out switches, so you're paying for less maintenance. So the push toward rightsizing the LAN was a big factor for us. It gave us a very timely agenda to take in to talk to enterprises, because everyone has a reduced budget. Mobility projects have slowed down, but the rightsizing has been kind of a big drive for us to overcompensate for that slowdown.

There are two more factors that help us. One is the ratification of 11n [in September 2009]. Even though the universities lead the charge to deploy 11n, many enterprises tend to be more conservative, and many did say that until it's actually ratified, we'd rather not deploy it. 11n in the enterprise also costed more than double 11a, b or g access points. At Aruba, we introduced the AP-105, which coincidentally was timed with the 11n ratification, to reduce those costs. The lessening of the premium between n and a/b/g, coupled with the ratification, was a big kick-start.

Finally, we figured out a way to extend architecture where we created a secure roaming capability. People can go from building to building without losing connectivity and session applications and without security problems. Then, we found out we can with a little bit of tweaking extend that roam to home offices and branch offices. As a result, we have a new brand, Virtual Branch Networking, so now we can offer a single controller pointing to the user and letting that user roam around the main campus and branch offices. The combination of all these factors is responsible for the resurgence of revenue growth.

You mentioned the AP-105 and growth for 11n access points. On the earnings call in November, I think you mentioned that you expect about 50 percent of your AP shipments to be 11n by the middle of 2010. We've talked about some of the things catalyzing the 11n demand, but are you holding to that projection?

You either have a very good memory or you take very good notes. That is what I said. It looks like if anything, it may have accelerated. There's a strong possibility that 50 percent of units being 11n will come even slightly before that time.

In the AirWave division, we saw the introduction of AirWave On Demand, which is a software-as-a-service version of AirWave Wireless Management. That product is in line with what appears to be a cloud strategy taking shape from Aruba. Can you talk about why that's important and what Aruba's strategy for cloud deployments is?

Yes. AirWave is one of the most important strategies for our large enterprise customers. In most of those large accounts, people have a history of investing in other vendors, so by the time they choose Aruba, they're primarily looking forward for our 11n capability, but they obviously would like to ride the depreciation cycle for as long as they can for their existing equipment. What we have is a system that allows them to recognize their future and their past. The multi-vendor network management aspect -- and we are the only company in the wireless LAN industry that provides that -- is the value.

Why put it in the cloud? Well, when you go out and especially move to extend your business over the channel, you find fewer IT professionals in mid-tier accounts and also people who want to avoid capital equipment purchases. So basically AirWave On Demand allows a midtier account to buy the drinks by the glass rather than buy the bottle -- it's an ongoing op-ex kind of model. Servicing in the cloud also means they don't have to invest in network management personnel.

Channel partner feedback to us has been that they want to participate in the cloud computing phenomenon and derive some services revenue, and one of Aruba's major objectives is to differentiate ourselves from the incumbent vendor in the channel. We want our channel partners to be profitable with as many ongoing revenue sources as possible, whereas our major competitor [Orr is referring to Cisco] has a tendency to try to get it all to get the growth they need. Our core competency is creating products and platforms, and we would like to enable our channel partners to derive extra service revenue. AirWave is a very good way for our partners to do that. Aruba has not had a history of being a channel powerhouse, and I think a lot of your partners would like to see more from you. And so we see Aruba making a number of channel moves, including bringing Bob on board. That suggests you're doing more channel investment this year than you have in the past. How will you grow channel business through Aruba this year?

For the record, internationally our business is now 100 percent channel. Domestically, traditionally we have been by design successful in the large distributed enterprises, and some accounts, particularly early adopters because of the complexity and newness of the technology, demanded a direct relationship. So it wasn't always us deciding how to sell versus the customer deciding how to buy.

Technology and industry knowledge has broadened, and we see 2010, with the growth of 11n this year, as the year where market share is going to be won and lost. In 28 years in this business, the only way I know of how to gain market share is through the channel. One can never add territory managers and system engineers fast enough to grow business. That's why this is so important and strategic and timely.

Philosophically, we believe that the explosive growth of the industry is going to make it strategic for us to expand business through the channel. What we want to do is make sure we have geographic coverage and industry coverage. The whole mobility story has a new set of ecosystem partners, such as mobile voice and location services. For channel partners, we can allow them to make more revenue by participating in that whole ecosystem, enabled by an Aruba platform and with extensive training on skill sets. Because those skill sets are new, the services created tend to be a lot more higher margin than installing routers and switches or introducing firewalls. We are single mindedly focused on how to create a comprehensive set of services, wrapped around the Aruba platform, to help channel partners increase revenue and growth margin.

I also wanted to mention that traditionally in the U.S., we have had channel advisory councils. This is the year that we're expanding the size of those councils, increasing the frequency of the meetings and creating similar structures in other theaters. I am personally spending a lot of time getting Bob on board to actively communicate and seek advice from the principals of the major partners. This is a very exciting program that I'll personally be involved in.

Going back to your thought about market share being won and lost, where does Aruba have the opportunity to take market share? From whom are you taking it?

If you look back at quarterly market share trends for this industry, I think Aruba and Cisco take market share back and forth based on product cycles and supply chain cycles. The vendor that's losing market share is Motorola. You can look at the smaller, private companies too, and they're losing market share. In tough times, people tend to deal with vendors that are more stable. We were quite lucky in that we got through the whole IPO process two years before the downturn, so we have the cash position, brand awareness and installed base to assure people they're dealing with someone financially stable.

But some of those smaller, private or soon-to-be-not-private guys, like a Meru or a Ruckus, wouldn't agree with the idea that customers, in a downturn, would go right to who is most stable. They're basing a lot of their momentum on people looking at them as alternatives, just as the way a lot of maybe former Cisco devotees look at Aruba as an alternative. What do you make of those smaller guys and their competitive threat to Aruba?

In general, in a downturn, what we've seen is people are not willing to pay a 30 percent premium or more just because it's large brand of so-called end-to-end solutions. When budgets are tight, they go to shop for the best deals in best-in-class products, so that argument has some merit. Of all of the private vendors you mentioned, I would not single out one or two, but in general, I would say that if those vendors really have best-in-class products at superior price points, they will have a chance to play.

I think particularly in channel business, channel partners are very aware of margin pressure. If they think that for a certain type of job they have a product that will give them a competitive end user price, they will do it. But there's obviously a trade-off between scaleability of the product line and manageability. What Aruba has against any competitor is that we have the most scaleable product. Anywhere from an office of 5 people to a campus of 6,000 users, we use a single line of product with a single interface. If you're a channel partner, you're training on learning one set of technologies from Aruba to go after different markets and product size. If not, you're using Cisco maybe in the high end and doing someone else in the low end, but you're ending up having to carry all of these lines just to make sure you don't lose out on an opportunity.

So I think that ultimately, in a downturn, the one vendor that has definitely lost out in terms of at least traditional pricing strategy is the large guy who used to charge a premium and who says we have a single strategy between the router and the firewall. A lot of people don't think that way anymore. That benefits all of the more focused wireless LAN companies.

What do you make of the planned Meru IPO? We haven't exactly seen a flood of IPOs in the wireless space lately, so is that good news for the space as a whole?

I don't know whether that's a true business-driven IPO -- and I'm just repeating things I've read from their S-1 filing -- so much as them being under some kind of obligation to do the filing. Because of their latest round of investors I think they have to make their stock liquid for the investors to get some money out. I think that tells it all, and that's explicitly spelled out in the Meru S-1. I didn't know that before I read it.

All the same, doesn't seeing another player in wireless go public help? Part of the rising tide?

We thrive on competition. It's much better when you are a winner expanding in a hot market place than you're a winner because you're the only game in town. I think Aruba thrives on having the market we participate in be hot and attract a lot of good people. All the companies you've mentioned are founded and run by very smart, very intelligent people, and that just makes us sharper. We can't just rest on our laurels, we have to [ask], 'How do we make products better?' and, 'How do you make our customers appreciate us more?'

I welcome more participants in the market. I wish Meru the best of luck, and maybe they are one of the first of many to come. The more the merrier. But we have a single-minded focus: We will strive to be the alternative to Cisco in wireless LAN, and that will require maintaining a market share that is very distinctly above all other competitors. If there are more of them, that just makes our position clearer and more established.

Do you envision any changes to how Aruba works with distributors? [Aruba uses Avnet and Catalyst Telecom stateside and Westcon Group internationally.]

We're happy with our relationships. Worldwide, we have three distributors, and in each geography and vertical, one is stronger than another. In this day and age, the major role of the distributor has changed. People don't use them to stock a lot of stuff anymore, but with a lot of the sales logistics and credit management, we are deriving immense value.

How do you see the role of distribution continuing to change?

Just to comment on the supply chain, even at the depth of the downturn, we started implementing a large ERP system through our partnership with SAP. Now that the market is coming back, we have a robust and quite well implemented ERP system that we are now trying to integrate with our distributors and our supply chain to offer much better service to resellers. We want to give the distributors much more visibility with product delivery and hopefully they can supply even more value-add.

What vertical markets will be particularly strong for Aruba this year? You've been a presence in health care for a long time, but you're also making moves to expand your government customers, especially in federal, for example.

Looking through our telescope for the year, this is actually the year we feel like wireless LAN will be brought horizontally to many verticals, and hence that much more important to get it engaged with a broad scale of partners. We believe retail is coming back, government, education and health care will continue to be strong for us, and then in transportation, energy and multiple other verticals, people are starting to use the whole rightsizing concept. You're going to see all these horizontal applications happening, which is requiring a much larger scope to engage the channel.