Cisco Losing Share of Top Layer Switch Market, Assessing Impact

Cisco (NASDAQ:CSCO) has maintained its dominant market share in layer 2-3 switching (bottom layer) market which is mainly comprised of ethernet switches. However, the company seems to be losing ground when it comes to layer 4-7 switching (top layer) market and has been witnessing declines in its market share for quite sometime.

Cisco competes with other players like F5 (NASDAQ:FFIV), HP (NYSE:HPQ) and Juniper (NYSE:JNPR) in layer 4-7 switching market. While Cisco has lost share, F5 and HP have gained significantly in layer 4-7 ethernet switches. Juniper still remains very small in this arena.

Layer 4-7 switching is used for server load balancing which essentially means directing and managing data flow to websites. There are different types of switches depending upon the network type — common ones are ethernet, fiber channel and converged network switches.

According to research from Dell’Oro Group, Cisco has maintained 72% market share in overall ethernet market, but its market share in layer 4-7 ethernet switches declined to only 14% in Q3 2010 compared to 25% during same period in 2009. ^[1] For size, the layer 4-7 ethernet switch market (which is a part of overall layer 4-7 switch market) amounted to $300 million in Q3 of 2010. ^[1]

Should Investors be Worried?

Investors should be least worried about what is happening in layer 4-7 market primarily because Cisco’s dependence on this segment is very limited. We estimate that Cisco’s revenues from layer 4-7 switching business are approximately 8% of what it earns from layer 2-3 switching. ^[2]

This is primarily a result of huge differences in market sizes and Cisco’s dominance in layer 2-3 segment. Under an extreme scenario where Cisco’s market share in layer 4-7 switching was to decline to 0% by end of our forecast period, its price estimate will suffer a downside of around 3%.

Below you can see how change in Cisco’s market share in top-layer switches (layer 4-7) can impact its price estimate.

You can see the complete $24.04 Trefis price estimate for Cisco’s stock here.

1. Cisco losing more steam in Layer 4-7 [↩] [↩]
2. Calculated based on estimated market share and market sizes [↩]