Commoditization of Ethernet Switches: How Value is Flowing into Silicon

Commoditization of IT, moving to more standardized components is a force that affects every product line across the industry.  Looking at the details of any server or storage device will show the impact that Intel has had.  Network switches have specialized chip designs that differ from processors, but face the same competitive pressures of creating new generations of products at a lower cost with more functionality.  The move to standard switch components has moved significantly over the last decade and is creating a shift in the economics of the switch market.  Specifically, hardware value is flowing from the switch vendors (Cisco) to suppliers of switch silicon (Marvell, Broadcom, QLogic).  The implication is that to maintain margins, switch manufacturers will need to look for alternative value streams.

What kind of functionality are we talking about?  Specifically, addressing, packet processing, traffic management and fabric management which provides for scalable architectures.  Historically these technologies were either owned by or tightly controlled by the switch vendors.  In addition, protocol management functions such as encapsulation would have required a separate appliance.  Today, all of these functions can be embedded into a single integrated chip and delivered as off-the-shelf technology that is the domain of silicon vendors.

Off-the-shelf vs. Internal Silicon Design

I spoke to Eyal Dagan, Senior Director of Broadcom’s Network Switch group (he was the CEO of Israeli-based Dune Networks which was acquired in 2009 by Broadcom for $178M) and discussed the switch silicon market.  Dagan told me that the market has been shifting from internally designed ASICs (90% of switches in 2001) to off-the-shelf designs (50% in 2010) [see Figure].  Every generation of design is moving more in this direction and his claim is that these outside suppliers drive much of the innovation in the market.  Switch silicon is expensive to design and the off-the-shelf suppliers can take more risks and drive more cost out of the products due to economies-of-scale.  Dagan also walked me through his company’s new BCM88600 chip, which claims to be the first full duplex 100 Gigabit Ethernet (100GbE) design and has scalability to an unparalleled 100Tbps.  While OEM design wins cannot be disclosed at this time, it is expected that first products shipping with this chip will be released in the market in the second half of 2011.  Using off-the-shelf components does not standardize the market.  In addition to layering the switch operating system and services on top of the hardware, switch vendors packaging decisions to make when choosing the chip.  With a total capacity of 100Gb per chip, vendors need to configure how many chips per line card (likely 4-6) and what port mix to put on a card; with some oversubscription, typical configurations are expected to be 12x10GbE or 3x40GbE or 1x100GbE.  The bandwidth of these solutions can truly become “cloud-scale” with a single chassis in half of a rack supporting 700-800 ports.  Dagan warned that 100GbE ports are rather limited today due to very large CFP copper connections which limit port density; the more standard QSFP copper for 40GbE or SFP+ for 10GbE are more practical.

Another place where Ethernet switch companies are looking outside for chips is for storage expertise, specifically with Fibre Channel over Ethernet (FCoE).  Avaya recently partnered with QLogic to provide Converged Networking technology into its switching product line.  While Cisco and Brocade are the big players in the Fibre Channel switch marketplace, QLogic has quietly become a switch technology supplier for switch vendors (such as with the HP Virtual Connect FlexFabric which I hear is now shipping), expanding on the existing adapter chip relationships that it has built over the years.  QLogic provides a technology option from a supplier that does not compete with core switches (Brocade with its Foundry acquisition) or servers (Cisco with the UCS product).  While Avaya is not a large player in the switch marketplace, it does have Nortel’s Ethernet portfolio and is looking to move beyond the unified communication segment that is its telecom roots.

While many vendors do not disclose the components that make up a new design, it is useful to understand how new functionality and innovation is entering the marketplace.  Component vendors will look to become known brands similar to what Intel did in the microprocessor space.  The silicon vendors need to continue to grow volume and innovate technology to enable more secure cloud architectures.   Meanwhile, switch vendors, in order to maintain margins, will need to add value at higher levels of the value-chain such as security, management and application-awareness.  The outcome of this is a good one for end-users as the ultimate result is that products will have more functionality and lower cost.

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