Compared with today, in 1990 there were many more computer suppliers, including Digital, NCR, Unisys, HP, and IBM. The typical data center of 1990 used computers from different suppliers with each supplier implementing its own network protocol for connectivity. Interworking and routing data among these diverse protocols was a challenging task. Cisco was one of the first to offer routers to support multiple network protocols. By addressing this complex problem, Cisco delivered high value and could charge a premium for its products.
Twenty years later, consolidation has reduced the number of computer manufacturers, and multiple network protocols have given way to IP and MPLS. Instead of multiprotocol routers, enterprises and data centers now only need Ethernet routers. Several vendors supply these standard routers and switches. Cisco, however, continues to charge a premium for its products. Although this premium was justified in 1990, today it is an unsustainable tax--not withstanding the company's leads on pre-standard features.
Large data centers can realize significant savings by using switches from HP instead of Cisco. HP's switches legitimize the use of non-Cisco switches and open the door to low-cost suppliers such as Huawei and ZTE as well as innovative startups such as Arista. Google, one of the largest users of data centers, has gone one step further by developing its own top-of-rack (ToR) switches based on switch chips from Broadcom.
To minimize loss of market share, Cisco must reduce prices on its routers, which will pressure the company to cut R&D spending. While Cisco develops ASICs for switching, most other OEMs use merchant switch chips. By moving to merchant silicon, Cisco could achieve sizable cost savings.
Standardization around Ethernet reduces the barriers to entry for enterprise switches and routers. In this multivendor, standards-based environment, switch pricing becomes more important than before. To reduce R&D and bill-of-materials cost, even the largest OEMs will migrate from ASICs to merchant silicon, expanding the available market and opportunities for Ethernet switch vendors such as Broadcom, Dune, Fulcrum, Marvell, Xelerated, and others. --Jag
Jag Bolaria, senior analyst
Complete coverage of Ethernet switching components from Broadcom and other vendors is available in our new report "A Guide to Ethernet Switch and PHY chips."
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6 comments:
I disagree with the conclusion. I've worked as an ASIC Consultant at many different networking companies in CA over the past 10 years, including a year in Cisco's Enterprise Business Unit. The engineers at Cisco set the bar for productivity & efficiency, and which obviously provides great value to the company's bottom line. I don't see Cisco migrating to standard (chip) products for the vast majority of their Enterprise switches.
Let me share my assumption first-- with the factors contributing to making a chip versus buying an off the shelf chip: you have some proprietary technology that has high worth and you do not want to share that with competitors, the cost to develop silicon can be easily amortized over the volume that you will consume, and time to market-- i.e. no merchant silicon available on the horizon.
The thesis put forth in this piece is that with standardization the value of the proprietary technology is diminishing. Also with standard approaches, the barriers to entry for system OEM will be diminished and thus create greater competition for market share holders such Cisco. More competition generally results in markets share distribution and reduction in ASPs. With a lower volume and ASP, amortization of silicon development cost becomes more difficult. The amortization situation is further exacerbated if the solution requires (or can benefit from) lead process technology such as 40/32nm. Merchant silicon guys today can offer a pretty complete set of building blocks for switching & packet processing --thus reducing time to market for OEMs.
Given this logic, large vendors can save development costs by migrating to merchant silicon. Of course there are other non tangible reasons for not to (migrate) and thus I agree with you that Cisco is unlikely to take this path for the next 2-3 years. Beyond this time frame, things may change as large players such as Intel offer unique value to Cisco.
Jag
i completely agree with author.If you see the market trend
year to year rates are going down.if you see the indian TV market, LCD TV(32') used to cost 50-60 K(INR) ,3-4 years back now same thing with more features comes for 25-30K(INR) now going down from this is difficult until you combines some of the modules in to single chip(tuner+demod+ mepg decode) which reduces BOM which in turn reduces TV unit cost.I think in future this is going to be trend so cisco might also follow same path to be competitive in the market.
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Gururaj Padaki
Sw Architect,Saankhya Labs Pvt Ltd.
Disagree for two reasons. One, by driving volume for merchant silicon Cisco would indirectly support Cisco's competitors by ensuring the viability of merchant silicon. Two, ASIC-based designs are harder to rip off and thus serve as a barrier to emerging competitors from countries where ripping off designs is considered standard practice.
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