There are few franchises in the silicon business where one vendor so completely dominates the market. Everyone can name Intel’s CPU business as one. But can you name another?
Infineon/TI (IFX) in DSL is a contender. Conexant (NYSEARCA:CNXT) in PC modems (but little profit to show for it). Netlogic (NASDAQ:NETL) in exotic CAMs (but beholden to one sugar daddy customer - Cisco).
But nothing approaches the complete and total dominance of Broadcom’s (BRCM) grip on Ethernet switching silicon.
Broadcom and Marvell (NASDAQ:MRVL) are the Intel and AMD of this market, with Marvell occasionally scoring tactical victories as an insurgent force, but never toppling the regime. Broadcom pulls in about $1B a year in Ethernet switching and is the Microsoft of switching silicon.
As big as Broadcom’s Ethernet switching business is, it would double in size if Cisco (NASDAQ:CSCO) moved to use outside silicon. Cisco represents about 60% of the market for Ethernet switching equipment and has doggedly pursued ASICs for the majority of its systems. The reasons for doing in house silicon are debatable, but the general consensus is that it prevents companies like Huawei from easily cloning their systems.
I previously highlighted the risk Huawei/3Com (COMS) poses to Cisco based on their strong success in China (see Dr. Strangelove, Or: How I Learned To Stop Worrying and Love Huawei). Cisco has about 60% market share everywhere except China, where they have 40%, and the difference is Huawei/3Com. It is interesting to examine what threat Huawei/3COM poses on a macro scale.
Cisco can afford to fund their own ASICs because of the premium prices they charge. It is generally believed that buying standard silicon on the open market would be a cheaper solution for Cisco, but would open the risk that their products are cloned by vendors such as Huawei.
It would be very positive for Broadcom if Cisco faced pricing pressure by vendors like Huawei/3Com, and lost market share as a result. Either Cisco would be forced to move to standard Broadcom silicon for cost savings, or concede market share to vendors that use Broadcom silicon. Either way Broadcom sells more product, and if the market fragmented away from Cisco they might even command more margin.
This realization came as a shock, as I always felt Broadcom was a good company, but a fairly valued stock. But if Cisco’s shift from ASICs to outside silicon takes place, which I think will in the next three to four years, it has the potential to add another $500M-$1B in revenue at Broadcom. I am sure Cisco would manage such a transition delicately, and do their best to break the Broadcom dominance, so perhaps Marvel captures a fair share of this windfall.
A failure by Cisco to move from in-house to standard product silicon already has a historical proxy. DEC failed to move from in-house processors to Intel standard products and ultimately their dominance of the computing market was toppled.
In short, as dominant at Broadcom is in Ethernet silicon, the reality is that 50% of the market remains untapped. Eventual market or technological changes will force the inevitable conversion of Cisco’s Ethernet business to outside silicon suppliers.
Public Enemy album cover modified under fair use provisions. Modifiactions copyright Nyquist Capital LLP.
Disclosure: The auuthor owns shares in COMS.