The Carrier Ethernet market has transitioned from one in which the driver of revenue growth are switches that deploy mostly business applications into one in which the push comes from routers for large infrastructure deployments for residential applications. Consequently, if vendors wish to corner a significant market share, they need to be strong participants in both areas.
Although growth slowed somewhat in 2007, it was another outstanding year for the Carrier Ethernet switch and router market, growing almost 30% and adding $1 billion to 2006 results. Growth was buoyed particularly by routers and by the continued large infrastructure build-outs for the deployment of residential services.
Router revenue growth has continued to outpace, and recently even surpassed, that of switches. We believe that three major factors are driving this transition. First, the switch market is much more mature than the router market. Service providers have been deploying Ethernet switches within a contained or limited metro environment since the late 1990s. More recently, service providers are adding routers to interconnect these metro networks and add additional levels of scalability and service.
Second, some of the major platforms that have driven growth in the router space have emerged only within the past three years and have ramped subsequently. For example, Alcatel-Lucent's flagship router platform, the 7750 Services Router, generated only about $5 million per quarter in early 2005. Recently, this product has had a run-rate of approximately $200 million per quarter. Juniper, which accounts for over 20% of total service provider router market revenues, did not announce a purpose-built Carrier Ethernet platform until late 2006 (the MX series) and is only now starting to see meaningful revenues from this product.
Third, the service provider edge router market, of which Carrier Ethernet routers are a component, has been enjoying very strong growth over the past few years. This is driven by the expansion of network capacity to handle ever-increasing traffic and demand for additional services, especially in the residential broadband arena.
In line with the strong growth in router deployments, vendors that offer both switches and routers as part of their Carrier Ethernet product portfolios have claimed the top market-share positions, while those that offer only switches have become niche players. The top five vendors in the market - Cisco, Alcatel-Lucent, Huawei, Juniper and Foundry Networks - all now offer combined switch and router solutions.
Residential push
There are three main Carrier Ethernet applications - residential, business and wireless backhaul. Of these, residential now makes up a majority of total revenues for the market and has been responsible for much of its recent growth. The number of subscribers using broadband in their homes continues to increase and carriers are aggressively marketing services (or service combinations) that require more bandwidth per subscriber.
Also, many telecom service providers are building out large networks to increase their capacity to support residential triple-play services (voice, video, and data) in the face of competition from cable television operators that offer voice and data.
A technology transition is magnifying further the importance of the residential space as a driver of the Carrier Ethernet market. DSL is the most popular broadband residential connection technology. In the past, asynchronous transfer mode or frame relay often served as the technology of choice for carriers to aggregate DSL broadband subscribers via DSL access concentrators.
However, in conjunction with the migration to higher-speed DSL connections (such as VDSL) for delivering higher-bandwidth services and service combinations, carriers have migrated to IP and Ethernet-based access concentrators because these technologies allow them to aggregate the subscriber traffic in a more cost-effective manner. This, in turn, has presented an opportunity for Carrier Ethernet routers and switches to aggregate and backhaul this access concentrator traffic, so these products have become an integral part of these network build outs.Seamus Crehan is vice president at Dell'Oro Group