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VoIP drives Ethernet switch sales to new highs, but it's not the only factor involved

A huge increase in Ethernet switches geared to VoIP indicates strong demand among customers; but end-of-life replacements and other elements also helped sales numbers skyrocket.

Demand for networked applications such as Voice over IP, IPTV and teleconferencing is driving the market for Ethernet switches to unprecedented levels, according to a report from the Dell'Oro Group, which was confirmed by other analysts.

A Dell'Oro market report estimates that sales of all Ethernet switches jumped 16% worldwide during the third quarter of this year compared to the same period a year ago, and compared to the second quarter of this year.

The $4.3 billion spent in the segment included nearly double the number of Power over Ethernet (POE) ports sold during the same period last year. POE ports, which supply electricity as well as data connectivity across CAT5 networking cable, are primarily used to power VoIP phones without the need for an additional power cord.

The number of POE ports shipped hit 8.1 million — an increase of 25% over the previous quarter. Add to that the 10% increase in IP PBX phone-system shipments during the same period and what emerges is a convincing picture of a market being largely driven by the demand for VoIP.

The picture isn't quite as convincing as it seems, however, according to Seamus Crehan of Dell'Oro.

"It was a record quarter in terms of percentage growth and absolute growth," Crehan said. "It jumped half a billion dollars; it was a dramatic quarter. But we're certainly not saying the market's on a new trajectory or something."

Some switch shipments that should have fallen in the second quarter were delayed until the third, for example. And the second quarter was abnormally slow and part of the ground was made up during the third quarter.

Still, $4.3 billion in one quarter buys a lot of switches; and 8.1 million POE ports is pretty impressive.

"I've been kind of bearish on this market for years," said Zeus Kerravala, analyst at The Yankee Group in Boston. "But the last couple of quarters are very positive; and from the feedback I get from channel customers, I think it'll continue."

Anecdotally, though, customers seem not to be upgrading their networks and adding in what functions they can afford, according to Scott Faxon, regional vice president for Atlanta-based IP telephony integrator Digitel Corp.

Instead, they seem to be picking an advanced application such as VoIP for teleconferencing, and working their way backward.

"Companies that are emerging in our markets are looking to replace the desktop device, the phones," he said. "The switching and routing just come with the package. If we just sold switches and routers we couldn't make a living. There's just not enough margin there."

"We bundle our services around that opportunity and provide value because most companies in our [small- to medium-sized business] market don't really understand telecom; the telecom manager role has just gone away," Faxon said. "We play that role for them."

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Power over Ethernet (PoE) Crash Course

Though it is possible to use POE shipments to gauge the growth in demand for VoIP, Crehan said, POE makes up only about 10% of the installed base of Ethernet ports and about 20% of the new purchases. That's far too small a number to indicate POE or VoIP are taking over as primary drivers in the market.

"Something over half the installed base [of Ethernet switches] was installed for Y2K, so you're looking at products that are six- or seven-years-old, when the replacement cycle is typically two to three years," Kerravala said.

And some customers seem to be planning ahead for VoIP – buying switches with a certain number of POE ports even if they don't need them right now.

"Often we see purchase patterns that show future-proofing in the enterprise," Crehan said. "The price premium, it's only about 50%, of a powered port over a non-powered port, makes it attractive." The price premium during the upgrades from Fast Ethernet to Gigabit Ethernet, then from Gigabit Ethernet to 10-Gigabit Ethernet was often 100% to 200%, he said. "Folks that are on the hedge about upgrading feel they can get these switches and get ready for future rollouts."

"It's not just one thing," Kerravala said. "You've got gig to the desktop, network access control, POE. None of those is enough to drive the upgrade alone, but put them together and that creates enough value to drive the kind of growth we're seeing."

"There's also a risk to not upgrading," Kerravala said. "If you're running fairly old stuff and you're planning to upgrade, but haven't – you're putting your organization at risk."

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