Network World, 01/04/99

The power of Layer 3 switches resides in their ability to bring routing to networks at faster speeds and lower prices than software-based routers. Traditional software routers, in fact, cost up to 10 times as much as Layer 3 switches and provide one-tenth the performance. As such, Layer 3 switches are pushing these routers to the edge of enterprise networks to handle WAN access and aggregation instead of LAN segmentation, as they've been doing for 10 years.

But to say Layer 3 switches will replace routers or render them obsolete would be inaccurate. Layer 3 switches supplant software-based routers. In fact, Layer 3 switches are themselves routers - inexpensive, fast, hardware-based routers.

The enterprise network is not the only place that will feel Layer 3 switching's powerful impact. Cisco's pocketbook will, as well.

At $650 per 100M bit/sec port, Layer 3 switches threaten to squeeze the handsome profits Cisco enjoys from sales of software-based routers for collapsed enterprise backbones. Those devices bring in about $5,000 per 100M bit/sec port.

Cisco is battling this profit crunch on two fronts. First, it is selling more and more routers to service providers that are more than willing and able to spend $5,000 per 100M bit/sec port. Second, Cisco is charging up to $2,000 per 100M bit/sec port for its Layer 3 backbone switch, the Catalyst 8500.

Cisco attempts to rationalize the pricing of the Catalyst 8500 by claiming it's much more than just a Layer 3 switch or fast packet forwarder. Cisco calls the product a "wire-speed switch router" and notes that it includes multiprotocol support and a slew of IOS software features usually found only on traditional routers.

Perhaps that's so. But the true power of Layer 3 switching may be its ability to force Cisco - the dominant supplier of network gear to enterprises - to bring its prices in line with those charged by other industry players.

"Will Layer 3 switching hurt Cisco revenue-wise? I don't think so," says Craig Johnson, an analyst at The PITA Group in Portland, Ore. "Cisco understands very well the transitions that are taking place. It's just a question of how Cisco manages its own transition."

Prediction: Cisco has been under fire for some of its premium pricing practices, but by the end of 1999, it may be forced into line by other Layer 3 switching vendors. Lucent, Nortel and others will begin to loosen Cisco's stronghold on the router/ switch market.