The Farce of Market Sizing

I can't help myself. I'm really going to rant for a couple of minutes because I just read something that is just off the charts ridiculous and I cannot hold my tongue anymore.

I'm talking about some of the asinine market sizing projections that the "bean counter" analysts come up with. I made a little comment about IDC's numbers on compliance, but the numbers published by Infonetics on NAC (network admission control) just boggle the mind.

Worldwide manufacturer revenue for NAC enforcement will grow 1,101%, from $323 million to $3.9 billion between 2005 and 2008, according to Infonetics Research’s latest report, Enforcing Network Access Control. (source: Infonetics press release)

Sorry, I just can't possibly believe that number. How they get a $300 million dollar market now is interesting enough, but $3.9 BILLION in just 4 years. Actually projecting a greater than 1000% growth rate, are they serious? Give me a f***ing break! What market in the history of markets has ever grown 1000%/yr over 4 years, except maybe search advertising?

Yes, Infonetics has an overly broad definition of NAC to include "network integrated NAC enforcement devices, NAC enforcement appliances, and SSL VPNs for NAC enforcement." But still. I'm not sure Layer 3 switches are a $3.9 BILLION dollar market, much less a niche offering like NAC. Even if you consider all switches to be NAC devices, I'm not sure you get there.

I truly believe that these guys use a methodology they believe in. They aren't bad guys and they are trying to put some type of defendable estimates out there. But it just strikes me as odd that after so many years of just being absolutely wrong we continue to see this stuff from the usual suspects. 

I most recently spent time in the anti-spam market and the quants made similar wild projections of the market being a multi-billion dollar market in 2008. I guarantee you that it won't happen, not for anti-spam and not for NAC. I make that statement with 100% certainty. How can I be so sure, you ask? BECAUSE THESE ARE NOT STAND ALONE MARKETS. Anti-spam is a feature of the gateway perimeter platform, whether the vendors in that space admit it or not. And over time, NAC becomes a feature of the underlying network switching fabric.

Does anyone honestly think that in 2009, Cisco will not have built this capability into their switches? It's already on their roadmap, for God's sake. That's why I can't stand 5 year revenue projections. I have some ideas about what things are going to look like in 5 years, but I will be wrong. So, to publish wild market projections 5 years out is borderline irresponsible.

So, why do we continue to see these crazy market sizing estimates year after year? That's actually a very simple answer. The vendors need them. The VCs need them also. They have to feel comfortable that they are targeting a market of size. No one wants to invest $100 million dollars in a market that turns out to be $300 million in sum. The economics of that situation are not pretty.

So vendors will keep paying for these numbers and these bean counters will keep generating them. And they'll all feel good about participating in a potentially billion dollar market. I can only hope they enjoy their delusions of grandeur because I've seen this movie before. Here's how it goes:

1. Customers have a problem. A few technical solutions emerge to solve the problem.
   
2. Some bright marketing exec comes up with a new category name. Market heats up. Start-ups emerge. Quant analysts publish wild market projections to justify further investment by VCs. More start-ups emerge. Hype cycle starts in earnest.
3. Customers start buying. Leaders grow sales in the category 200-300% per year.
4. All of the VC fueled companies introduce products. The first acquisition happens where a big tech buys the perceived market leader for a big multiple. EVEN MORE VC money chases deals because VCs are scared to miss the next big thing.
5. Brutal competition ensues. Every deal is a bare knuckle brawl. Probably a few more acquisitions, but more likely on the technical side with lower multiples. Pricing comes under pressure. VC funded start-ups start missing their numbers. VC's panic.
6. In a consolidation frenzy, start-ups try really hard to be acquired. They are deathly afraid of not having a partner. Soon after, big tech integrates the technology into their core offerings. Remaining start-ups struggle.
7. Stand alone market goes away, integrated offerings prevail. The original market size estimates prove WILDLY optimistic. No one goes back to check that the quants were right.
   
8. Epilogue: A number of start-ups get nice exits, so they do it all again. Go back to step 1.

This is happening right now in the anti-spam market. Identity management has already consolidated, and it will happen to NAC.

So, what's the point? Take these numbers with a grain of salt. They aren't worth the paper they are printed on.

To be clear, I think there is great value in NAC and it's going to be a substantial market. I'll go into that more tomorrow in Day 6 of Incite, but I just can't understand how a respected group can publish a report like that, and expect to stay respected. 

OK, off soapbox now. I just couldn't let this one go.