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Ethernet switch firms fall victim to falling prices

Demand for Ethernet switches is growing, but drastically falling prices are making it difficult for vendors to increase their revenue, according to new research.

Demand for Ethernet switches is growing, but drastically falling prices are making it difficult for vendors to increase their revenue, according to new research.

Revenue from Ethernet switching products fell about 1.5 percent in the fourth quarter of 2003, compared with the previous quarter, Synergy Research Group said in a report released Friday. Shipments of Ethernet ports grew 5 percent. In the fourth quarter, the worldwide market for Ethernet switch gear was $2.893 billion.

"There's steady growth in port shipments," said Joshua Johnson, a Synergy analyst. "But prices continue to fall, making it look like the market is shrinking."

After port shipments and revenue showed strong growth in the third quarter, analysts and vendors hoped that enterprise buying would stay ahead of price cuts--but Ethernet demand has increased only slightly.

Enterprise customers, who are the main customers for Ethernet switching gear, are unusually cautious about spending on new equipment, said Cisco Systems CEO John Chambers during an earnings conference call in February. Chambers, who saw signs that the overall economy was improving, said he expected corporate customers to be spending more.

"Three months ago, people were very optimistic that enterprise spending would really take off again," said Johnson. "But I think what we're seeing here is that spending levels are pretty much on the same level that they were last quarter. It's not runaway growth like everyone had hoped."

Ten-gigabit Ethernet products are most attractive to customers that are migrating their networks to gigabit Ethernet, where 10-gigabit switches can be used to aggregate traffic. These customers include companies that are installing high-end data centers, research networks and metropolitan-area networks.

The most challenging sector for vendors is the low end of the market, specifically small and midsize businesses, educational institutions and customers operating in remote offices. Companies such as Dell, Hewlett-Packard and 3Com have been slashing prices in an effort to win new business. Higher-density products, more-efficient manufacturing and lower-cost components have also contributed to sharp price declines.

High-end products, such as gigabit Ethernet and 10-gigabit Ethernet, remain the bright spot, though. According to Synergy, shipments of gigabit Ethernet ports rose 18 percent in the fourth quarter. Shipments of 10-gigabit Ethernet ports grew 305 percent, and revenue from these increased 42 percent, quarter-on-quarter.

But prices of these high-end switches also declined. Gigabit Ethernet port prices fell 15.6 percent, and 10-gigabit Ethernet per-port pricing dropped 80 percent from the previous quarter. On average, a 10-gigabit Ethernet port is priced at around $5,000.

Johnson attributed the 10-gigabit price declines to the introduction last year of a 4-port, 10-gigabit-per-second Ethernet line card from Cisco. (Cisco, the leading Ethernet switch provider, also offers 1 port and 2 port configurations.) While the denser line card drastically reduced the per-port cost of 10-gigabit Ethernet, it also spurred sales. Cisco went from selling a few hundred of the 10-gigabit Ethernet ports between July and September to shipping 3,700 ports in the last three months of 2003.

"I think this is the year that we see 10-gigabit deployed in backbone networks," said Johnson. "And with prices this low, some customers may even skip deploying gigabit Ethernet and go right for 10-gigabit (products)."