The revenue of the network security market in 2023 reached $22.5 billion with a deceleration to a single-digit growth rate, largely due to the decline of hardware-based solutions, according to a recent Dell’Oro Group report.

The report also named Palo Alto Networks and Zscaler as “notable 2023 victors” in this market.

The analysis firm found the revenue of hardware-based solutions saw a 1% decrease, while the software-as-a-service (SaaS) and virtual network security segments surged 26% to $9.6 billion. Nearly $5 billion of this growth is attributed to the secure service edge (SSE) market, which ballooned by 30%. This rise reflects the widespread adoption of remote work and cloud applications, necessitating a SaaS-based approach like SSE.

The divergence between hardware and the new powerhouses — SaaS and virtual solutions — highlighted the industry’s pivot toward more agile, cloud-centric security solutions. This comes as organizations try to navigate the complexities of modern cyberthreats and the digital landscape.

“In a year marked by economic recalibration and strategic introspection within the network security domain, the industry’s gravitation towards SaaS and virtual solutions has been nothing short of revolutionary,” Mauricio Sanchez, Sr. director of enterprise security and networking at Dell’Oro Group, said in a statement.

“2023’s tempered growth rate, juxtaposed with the explosive rise in demand for adaptable, cloud-centric security measures, paints a vivid picture of an industry at a crossroads, eagerly charting its course towards a more resilient, agile future,” he added.

The Market Research Reports on Network Security also showed the firewall market increased by low single digits last year to nearly $13 billion, highlighting its enduring relevance in enterprise defense strategies.

In the last quarter of 2023, virtual firewall revenue rose over 60%. The web application firewall (WAF) market recorded a low double-digit growth, predominantly driven by the adoption of SaaS-based solutions.

However, hardware-based firewall revenue dropped nearly 8% year over year in the same quarter. The slowdown in the hardware network security market was acknowledged by major players like Fortinet and Palo Alto Networks.

Fortinet Founder and CEO Ken Xie acknowledged a slowdown in the network security market during an earlier earnings call. Palo Alto Networks Chairman and CEO Nikesh Arora also said during the company’s latest earnings call that the vendor started to notice customers are facing cybersecurity spending fatigue.

“The entire market was impacted and all firewall vendors were impacted by varying degrees,” Dell'Oro's Sanchez told SDxCentral. “[Hardware]-based firewall market was impacted by the severe drop in spending by SP [service provider]-class customers in high-end firewalls and by enterprise digestion at the low end.”

He explained that one possible reason for this spending drop is that service providers went on a spending spree during the pandemic due to expectations of continued growth and concerns about supply chain unpredictability. However, when the expected growth didn't materialize and they were inundated with hardware in late 2022 and early 2023, they hit the brakes.

For the low-end market, the supply chain problem led to huge vendor backlogs and then a flood of equipment in 2022. Enterprises had to spend 2023 digesting (or maybe in a state of indigestion). Some firewall vendors also had large exposure to the service providers who offer managed services, Sanchez said.

Sanchez named Palo Alto Networks, Cisco, Fortinet, Zscaler and Check Point as the top five vendors in the network security market for the quarter.

Palo Alto Networks expanded its No. 1 firewall revenue share to over 25%, attributed to a balanced contribution from both hardware and virtual firewalls, he said. “Among the big vendors, they are beating Cisco and Check Point. However, there are many firewall vendors in the market and as a general trend, the bigger are getting bigger.”

Palo Alto Networks earlier announced its plans to offer a “no-cost” period for its platforms until customers’ existing legacy contracts expire.

When asked if this strategy will boost its market share in the network security market, Sanchez said, “I think it’s an audacious move to take a page from the startup playbook (customer footprint over customer revenue/profit) to boost market share. I think if they stick to the plan long enough it will pay dividends; but in the short term, it may weaken the bottom line, and Wall Street isn’t known to have great patience.”