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Optical/IP

Why Is Ethernet Switching in the Dumps?

There's a puzzle about Ethernet these days. On the one hand, experts say Ethernet's shaping up as a key transport technology for metro networks (see Report Sees Metro Ethernet Growth and 10-Gigabit Ethernet Switches and Routers, page 2). On the other, market stats show ongoing decline in Ethernet switching gear.

Figures released today from Gartner Inc., for instance, show worldwide sales of Ethernet switches fell to $2.3 billion during the second quarter of 2003, representing a 15 percent decline year over year (see Gartner: Ethernet Switch Market Slips).

What gives? Doesn't the law of supply and demand call for Ethernet services to drag Ethernet switches up the ramp?

Analysts say it will take some time for Ethernet switch sales to correspond with growth of Ethernet services. First, the growth of services needs to gel. Right now, most of the activity is happening in the Asia/Pacific region, and the progress of services in North America has been slow, broken up by the demise of several high-profile Ethernet services vendors over the past couple years (see Yipes Files Chapter 11: Is Ethernet a Sustainable Business Model?).

"Some data points show increased levels of activity... but you need to see that over numerous quarters," says analyst Mark Sue of CE Unterberg Towbin. "Some bright spots don't make a trend."

One analyst says Ethernet switch sales to carriers are "definitely growing," but the data is masked. According to Michael Howard, co-founder and principal analyst at Infonetics Research Inc., stats for Ethernet switching alone don't reflect the progress of service provider sales, since they're so laden with enterprise data.

There's good reason for that. Vendors of Ethernet switches say they turned to enterprise business when the telecom market slid. The trend was noted by Bobby Johnson, CEO of Foundry Networks Inc. (Nasdaq: FDRY), in a recent interview (see Bobby Johnson, Foundry Networks, page 5). And in its latest earnings report, Extreme Networks Inc. (Nasdaq: EXTR), which showed only slight revenue growth in its latest quarter, said enterprise customers accounted for 85 percent of sales (see Extreme Optimism Boosts Stock).

Gartner analyst Rachna Ahlawat concedes that most of Gartner's revenue figures, about 95 percent, represent sales to enterprises. But she says it doesn't matter: Sales of Ethernet switches to any group won't increase until buyers start upgrading their gear to accommodate higher than Fast Ethernet speeds at the desktop, she says. And that's not happening, not even with prices dropping. Until it's clear that Ethernet services have caught on, and higher speeds are demanded by individual users, carrers won't drive up their own procurement.

Granted, carriers don't use Ethernet switches alone to roll out services. Routers, multiservice provisioning platforms, and next-gen Sonet/SDH gear is usually key to the mix. Interestingly, separate Gartner figures also issued today indicate worldwide second-quarter router sales to carriers were $455.4 million, up 6 percent sequentially (see Gartner: SPR Market Rebounds). How much of that was due to Ethernet capacity being added isn't clear, however. And Ahlawat says at least two to three quarters of sustained sequential growth will be key to declaring a solid upward trend.

What will materialize is probably a domino effect: Demand for Ethernet services will pick up along with demand for greater user bandwidth. Prices will drop. Ethernet equipment sales will go up.

The question is "When?" Most sources contacted for this article have an open-ended answer, such as "Later this year," or "Later, in 2004." One way to chart activity is through the financials of the leading vendors, which by Gartner's reckoning include Cisco Systems Inc. (Nasdaq: CSCO), Extreme, Foundry, Hewlett-Packard Co. (NYSE: HPQ), Nortel Networks Corp. (NYSE/Toronto: NT), and 3Com Corp. (Nasdaq: COMS).

Most of these vendors sell to both carrier and enterprise customers. One, 3Com, however, does not, and a spokesman says the company has no plans to do so.

— Mary Jander, Senior Editor, Light Reading

netskeptic 12/4/2012 | 11:35:06 PM
re: Why Is Ethernet Switching in the Dumps?
There are three factors in play.

1. Everybody and his uncle can build a reasonably decent switch, hence price is low.

2. Everybody and his mother-in-law already connected through the switching port, hence demand is weak.

3. There is not going to be mass migration on GigE on the desctop, hence future is bleak out not counting few segments.

Sometimes, it seems so attractive to switch into making big bucks by providing clueless masses with my incredible insight :).

Thanks,

Netskeptic

Standardsman 12/4/2012 | 11:35:06 PM
re: Why Is Ethernet Switching in the Dumps?
This article doesn't hightlight how much of the drop in Ethernet switching revenue is due to price erosion versus other factors such as the slow growth of Ethernet services.
metroman 12/4/2012 | 11:34:52 PM
re: Why Is Ethernet Switching in the Dumps?
Ethernet "Services" are not delivered over Ethernet Switches. Anyone foolish enough to deliver a Carrier Grade service over standard Ethernet switches is crazy.

Ethernet Services are delivered over carrier grade devices with Ethernet Access ports. These are typically MPLS Edge routers, EoSDH or RPR devices and not Ethernet Switches.

This is why many vendors struggle. As mentioned before Price erosion is a problem. Ethernet Switch vendors will try and position their technology against a carrier grade device of higher cost. Cisco will do this to either buy time due to a lack of credible technology or to drive the competitors to a price point where they have low/no margins.

Once the MEF or other body come up with a defined set of services that the industry buys into (they are making considerable progress) then people will feel the need to buy the carrier grade equipment and will cease to make innapropriate comparisons with cheap Ethernet technology.

This will push Cisco into actually delivering technology and not just watering down the market. ... did I hear the words anti-competitive?

Metroman
alchemy 12/4/2012 | 11:34:51 PM
re: Why Is Ethernet Switching in the Dumps? 3. There is not going to be mass migration on GigE on the desctop, hence future is bleak out not counting few segments.

With most desktop machines, a Gig-E interface to the network would be like putting a 3" diameter fuel line on a Yugo.
lr_fan 12/4/2012 | 11:34:41 PM
re: Why Is Ethernet Switching in the Dumps? AGREE

Ethernet switching is not really a part of the equipment mix for a service provider. If the service is GigE then the transport gear will drop the GigE, if the service is lower speed, there will be a carrier grade MSPP or MPLS device there.

Does everyone agree the writer of this article is missing this point?
optical_optimist 12/4/2012 | 11:34:27 PM
re: Why Is Ethernet Switching in the Dumps? Yipes Communications positions itself as carrier class, and I think it uses Extreme Switches and DWDM gear from LuxN (no Sorrento). I think it
is an overstatement to state that an Ethernet switch cannot be carrier grade. The devil is in the details of the box design. Riverstone is positioning its new 10GigE box as carrier grade.
Generally the Metro Ethernet Forum is not in favor of SONET MSPPs. So, the work of the MEF in the end could favor Ethernet switch vendors.
change_is_good 12/4/2012 | 11:34:16 PM
re: Why Is Ethernet Switching in the Dumps? >> Anyone foolish enough to deliver a Carrier Grade service over standard Ethernet switches is crazy.


hey man - what about the "carrier grade" services that were brought down with the power outage after your post?

if you have reliable cheap transport, who cares what it is. right?
cron 12/4/2012 | 11:31:29 PM
re: Why Is Ethernet Switching in the Dumps? Any carrier deploying Ethernet Services has to be NEBS compliant, IE Carrier Class Ethernet Service. Nortel makes good Gigabit ethernet equipment for their classic oc48's and thier optera line. Good for extending your lan to anywhere in the world. Would never have to touch layer 3 between your two offices ...
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