As switches soar, routers stall

Two studies show that the switch market is growing rapidly while the market for routers is slowing. In part it's because switches are becoming more important.

Two studies released this week show that sales in the switch market are up and router sales are not as strong.

These results suggest a growth in the need for internal corporate connectivity, which requires more switches and a preference for Layer 3 switches over more expensive routers.

According to a study by Synergy Research Group of Scottsdale, Ariz., port shipments of Ethernet switches were up 2% in the second quarter compared to the previous quarter, and shipments grew 36% compared to the same quarter in 2003. Revenues increased 25% in the same period.

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Joshua Johnson, an analyst with Synergy Research who authored the report, said a strong first quarter led to the drop-off in the second.

"Another large sequential increase would have created the beginning of a bubble," Johnson said. "Flat growth is almost a good thing. Customers took a breather to deploy the equipment that they bought in the first quarter."

Growth in the overall market was driven by the push for getting Gbit to the desktop, Johnson said.

Because so many switch units are selling, Johnson said vendors have not cut prices as they often have in the past. And he does not foresee any significant bargains in the near future.

At the same time, the router market is sluggish. According to a recent study by the Dell'Oro Group of Redwood City, Calif., the router market fell by 2% in the second quarter. Compared to the second quarter of 2003, the market grew by 13%, still a smaller growth rate than the switch market.

The router market has been soft for some time, said Shin Umeda, principal analyst for the Dell'Oro Group and author of the report. "Businesses are not at the point where they want to spend money to upgrade or expand their network," Umeda said. "They are OK with the investment they made three or four years ago."

Meanwhile, switches have become increasingly important as businesses connect more individuals and more devices on the LAN. Companies are taking longer to replace their routers and instead are investing money in switches, said Jeanne Dunn, senior director in the product and technology marketing group at Cisco Systems Inc.

"Now everyone has access to the Internet, and you have to purchase many more [switches] as you continue to provide more connectivity to users," Dunn said. In some cases users have two or three ways to get on the LAN via desktop, mobile and other devices such as IP phones, which increased the need for switching on the LAN.

In addition, some high end enterprises and POPs are buying switches instead of routers because they have found that a Layer 3 switch can perform 90% of the functions that a router can but for less cost, said Ray Mota, chief analyst with Synergy Research.

Partly because of that trend, Layer 3 switches have seen an increase in sales over the last year and a half, Johnson said.

Today, routers have a more targeted role in enterprise networks, Umeda said. They are primarily used as the point of connectivity between the LAN and the wide area network.

Over time, as carriers offer more services based on Ethernet protocol, the router market may slow even further as businesses begin to use switches and other hardware to connect to the WAN. That trend, however, will unfold slowly over time, Umeda said.

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