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Chipmakers Unfazed by Vendor Chip Shops

The recent decisions by Cisco Systems Inc. (Nasdaq: CSCO) and Juniper Networks Inc. (NYSE: JNPR) to use homemade processors in their latest big-name systems is not an indictment of the network processor business model, chip companies insist.

But those network processor firms may have their work cut out for them when it comes to convincing the industry and investors of their ongoing worth as big-name equipment players increasingly turn to their in-house chip development teams.

Earlier this week, Cisco announced that its home-grown QuantumFlow chip is at the heart of the ASR 1000, the vendor's next-generation edge router. (See Cisco Intros QuantumFlow and Cisco Takes Hold of the Edge.)

And just weeks earlier, Juniper unveiled its EX line of Ethernet switches, powered by the Hurricane chip -- another internally designed processor. (See Juniper Storms Into Ethernet Switching.)

Those are the kinds of jobs network processor vendors used to relish, so why aren't the chip makers worried?

In part, it's a case of telecom crash survivors shifting their priorities. Network processors have mostly moved to the carrier Ethernet sector rather than chase the kind of socket QuantumFlow is filling. And chip vendors claim they're finding success there.

"What we have seen is a continued trend to move over to merchant silicon for tier one companies," writes Thomas Eklund, VP of marketing for network processor vendor Xelerated Inc. , in an email to Light Reading. "There is a big disconnect today of what is actually happening and the perception of the network processor market."

The old days
Back around 1999, network processor startups were chasing the dozens of equipment startups that, in turn, hoped to sell to the CLECs. As the dotcom bubble burst, many CLECs and equipment vendors died off -- as did many network processors and related chips. (See Fast-Chip Flees the Market and Cogni-Gone?)

It turns out Cisco did shop for network processors to run the ASR 1000, but chose instead to embark on the five-year, $100 million project to produce QuantumFlow. (Some of the 100 engineers on the project included former Procket Networks employees, according to Treillage Network Strategies Inc. president Deb Mielke.)

"We evaluated everything that's out there -- EZchip and all of them," says Suraj Shetty, director of marketing for Cisco's service provider group. "You either give up performance or you give up power -- or if you want both, you give up price. This is why we went back to the drawing board."

That might have been disappointing in 2003, but EZchip Technologies Ltd. (Nasdaq: EZCH) doesn't mind today.

"In the past few years, we've been targeting a very specific type of switch and router, and that's carrier Ethernet," says Amir Eyal, EZchip's VP of business development, and recent big-deal systems such as Cisco's ASR and Nexus lines don't fall into that category.

Moreover, EZchip's NP-2 processors are built for forwarding packets quickly, a task that sticks to Layers 2 through 4. Cisco is using QuantumFlow for Layer 7 functions such as deep packet inspection -- something the NP-2 could do, but not very effectively. "You would have to go to something that's a more multicore type of design," Eyal says.

Even so, shares of LanOptics Ltd. (Nasdaq: EZCH), EZchip's parent company, fell 7.7 percent on March 4, the day the ASR launched. Investors apparently got the company's message later, because EZchip rebounded by $1.20 (11.6 percent) to close March 5 at $11.58.

Cavium Inc. (Nasdaq: CAVM)'s stock fell, too, based on similar thinking.

Cavium doesn't sell network processors; its Octeon chips are more general-purpose designs. But it happens to claim Cisco as its biggest customer. So, when Cisco announced QuantumFlow and its 40 processor cores, investors apparently got spooked into thinking Cavium was going to lose some business. On February 29, Cavium shares dropped $3.58 (20 percent) to $14.22.

But QuantumFlow is a chip too large to really compete with Cavium, which is going after a higher volume, more mainstream market. "This essentially is not related," says Amer Haider, a Cavium director of marketing.

Comments from Cavium's CFO seemed to set things right, and the stock has recovered much of its ground, closing at $16.42 Wednesday.

Ethernet havens
The network processor survivors, meanwhile, claim to be doing quite well with their Ethernet focus. In fact, they might be capturing business at big name equipment vendors.

"If you believe what the network processor vendors are saying, there are other designs that are going merchant, but you have to wait for them to see light of day," says Bob Wheeler, an analyst at The Linley Group .

EZchip no longer names its customers publicly, but the company has confessed it sells to the big players. (See EZchip Names Cisco, Juniper.)

And Cavium continues to sell into Cisco. In fact, one source claims Cavium's security chips -- a product line separate from Octeon -- are in Cisco's ASR 1000, though Cavium declined to comment.

Xelerated, meanwhile, seems to have found a gold mine in Huawei Technologies Co. Ltd. . Xelerated's X11 network processor may be just one of many chips Huawei has admitted to using, but it seems the Chinese vendor is using it extensively. (See Huawei Picks Xelerated.)

"We have basically all next-gen platforms at Huawei, and they alone are so big that they will carry us to profitability this year," Xelerated's Eklund tells Light Reading via email.

The overall network processor market was around $260 million in 2007, Wheeler estimates. "So, it's not a large market, but it's enough to sustain a few vendors," he says.

The fastest growing sector in that market is in 10-Gbit/s network processors, by Linley Group's reckoning. In addition to EZchip and Xelerated, Bay Microsystems Inc. , Broadcom Corp. (Nasdaq: BRCM) and Netronome are selling parts there -- Netronome having taken over development of the Intel Corp. (Nasdaq: INTC) IXP2800 line. (See Clicking Netronome.)

— Craig Matsumoto, West Coast Editor, Light Reading

BigBro 12/5/2012 | 3:46:06 PM
re: Chipmakers Unfazed by Vendor Chip Shops
"We evaluated everything that's out there -- EZchip and all of them," says Suraj Shetty, director of marketing for Cisco's service provider group. "You either give up performance or you give up power -- or if you want both, you give up price. This is why we went back to the drawing board."


The way I read that statement, he's implying that they could have bought low-power, high-performance silicon off-the-shelf, but at a cost, so to drive down cost, they built their own... (Seem like a reasonable interpretation?)

If so, let's do the math:

If Cisco sells half a million of these chips (good luck!), then the R&D cost alone is $200 a piece. That's before the actual chip has been manufactured, which probably costs a couple hundred bucks for something this complex.

As a reality check, the 7200 series installed base was estimated at about 330k units less than a year ago, and that box has been selling multiple generations for a *long* time, so maybe they'll sell 100k copies of this chip before they go to version 2.0? That'd be $1k just in R&D per chip!!

Yikes, guys!

There's plenty of amazing merchant silicon out there, and system vendors building incredible products. This lets system vendors pick the best-of-breed, rather than having to bet on a single ASIC team, and hoping they get it right...
ruready 12/5/2012 | 3:46:06 PM
re: Chipmakers Unfazed by Vendor Chip Shops Could not agree with you more. As long as a company has 70% GM they can afford to keep ASIC teams around and make that type of investment.

And then justify it by however they see fit.
rs50terra 12/5/2012 | 3:46:05 PM
re: Chipmakers Unfazed by Vendor Chip Shops The truth is probably different. Cisco and Juniper are not willing to bet their farm - and their new generation products - on small companies like EZchip, Xelerated, Bay Microsystems.
Carriercop 12/5/2012 | 3:46:04 PM
re: Chipmakers Unfazed by Vendor Chip Shops It's always about "control"...
Cisco and Juniper consider their market acceptance via organic development.
brahmos 12/5/2012 | 3:46:02 PM
re: Chipmakers Unfazed by Vendor Chip Shops why consider it in isolation ? the cost of the product initially and its lifecycle sw/hw upgrade fees will more than make up for any R&D costs upfront.


optobozo 12/5/2012 | 3:46:02 PM
re: Chipmakers Unfazed by Vendor Chip Shops Is it my imagination, or has the more concerted effort to develop one's own NP ASICs coincided with pressures of certain other vendor activity in "mirroring" a competitor's product? If you copy someone's internally developed ASICs, it's pretty much a slam dunk in court.
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