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Ethernet switch sales pounded by falling economy

Dot.com déjà vu

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Every part of the IT ecosystem has been slammed by the economic downturn, and the Ethernet switch market is no exception. In fact, makers of Ethernet switches are probably feeling a little bit of déjà vu after the downtown that followed the dot.com bust in 2001.

According to a report put out by network box and adapter counter Dell'Oro Group, sales of Ethernet switches are expected to decline by 19 per cent to $15.8bn and will struggle to recover growth rates anything like the transition to Gigabit Ethernet afforded in the wake of the dot-com bust.

In 2004, for instance, the market was growing at 21 per cent and hit $13.5bn in sales. But by 2008, the market had cooled to 7 per cent growth (thanks to the economic meltdown) but nonetheless turned in $19.5bn in aggregate sales. The belts have surely tightened in 2009, and while there will be some growth in 2010, Dell'Oro Group is currently forecasting a 1 per cent boost in Ethernet switch sales next year, to $16bn. It is going to take a few years to even come close to 2008's sales levels. Even with a 10 Gigabit Ethernet roll-out over the next several years, Dell'Oro Group is only projecting a 5 per cent increase in Ethernet switch sales, to $18.3bn, in 2013.

"Given the severity of the decline during the first quarter of 2009, it will be difficult for the market to rebound quickly to the revenue and port levels we saw in 2008," explained Alan Weckel, director of Ethernet switch market research at Dell'Oro Group in a statement announcing the revenue projections.

"We believe that the data center will be one of the largest drivers for growth beyond 2009, as the market is expected to begin expanding again in 2010. However, it will be difficult for the market to return to the robust growth rates it enjoyed over the past five years."

The decline in Ethernet switch sales this year and out through 2013 is mirroring current and projected server sales. As El Reg previously reported, box counter IDC in June revised its server spending forecasts downward and now says it expects a 22.1 per cent drop in worldwide server sales in 2009, dropping to $44.5bn.

The company also said it now only anticipates a smidgen of growth in 2010, to $44.3bn in sales, and that between 2011 and 2013, revenues for servers will only grow by a few percent. In 2013, IDC is expecting a 3.1 per cent rise in global server sales, to $48.5bn. That is a far cry from 2008's server sales, which came to $57.1bn.

Those peddling servers and switches are going to have to justify what they buy based on more than increasing capacity metrics like processing speed or network bandwidth. That's for sure. And it looks like the key storage players - IBM and Hewlett-Packard and maybe now Cisco Systems and maybe not Sun Microsystems Oracle - are going to try to boost their sales against each other by converging servers, storage, and networking. But if Dell'Oro and IDC are right, none of this will change the fact that the server and networking pies are getting smaller, and that means price wars and maybe acquisitions or certainly very strong alliances.

Dell had better do something to get into the converged server-networking game, such as buying Xsigo and maybe some obscure players like Liquid Computing and Egenera, who have the tools to help Dell create something akin to what HP is doing with its Matrix blade setup and what Cisco is doing with its "California" Unified Computing System. IBM needs a more consistent message to counter Cisco, beyond reseller agreements and rebadging arrangements on switches for its various server lines.

The 10 Gigabit Ethernet transition is well under way on servers, according to Dell'Oro Group, which says in a separate report that sales of LAN on motherboard (LOM) adapters for 10 Gigabit Ethernet ports will be larger than on 10 GE adapter cards that plug into server peripheral slots by the end of this year. The main reason this will happen is that blade servers are now shipping with 10 GE ports built in, and rack servers are starting to as well.

Of course, it will be a while before tower servers have integrated 10 GE ports and SMBs shell out dough for 10 GE switches to match them. But enterprise shops are already trying to figure out some way to justify an upgrade to faster switches - such as supporting more end users or fatter applications and improving transaction response times.

The beauty is that companies buying servers with 10 GE ports today can still link into Gigabit Ethernet (or slower) networks because of backwards compatibility. When they move their switches forward, servers will already have 10 GE support. So they don't have to upgrade both at the same time, as the vendors surely must want them to do so they can make their own numbers. ®

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