Intel and 3Com recently cut prices steeply for Gigabit Ethernet-over-copper network-interface cards. The cuts were made possible in large part by intensified competition in the market for Gigabit Ethernet-over-copper transceiver ICs.

Communications semiconductors that perform physical-layer functions are by their very nature commodity products, in that they perform standardized functions that are in the public domain. This is true even if only one company is in the market. Implementations may be patented, but not functions.

In the case of Gigabit Ethernet over copper, Broadcom had an enviable time-to-market lead. For at least six months no other supplier could get product out, and Broadcom was able to command a premium. Of course, with such a profitable market opportunity, this one-vendor condition could not last forever. In due time, Marvell Semiconductor introduced its product and we had a two-player game. Simple game theory says that price pressure should be low in a two-player game with public sales terms, rapidly growing demand and small but frequent orders. The market should expect "tacit coordination," which is just a fancy term for legal collusion. As orders grew, the incentive to cut prices intensified. But there was a longer-than-expected delay in price decline, one justified by differentiation.

In communications ICs, companies differentiate their products based on power, size, integration and price. In a way, the first three are interrelated. A small device will likely be lower in power and the combination of small size and low power makes it possible to integrate more cores on a single piece of silicon. Marvell led the small, low-power, highly integrated race for a while and thus had no incentive to cut price. Broadcom, with a larger order base in the early days, also lacked incentive. Eventually, however, Broadcom more or less caught up to Marvell. With the power, size and integration differentiation gone, the only thing left to compete on is price. And this is where things stand. The prices of Gigabit Ethernet-over-copper transceivers have already fallen 50 percent from last year's pricing and will probably fall another 50 percent before the game is over.

So it should come as no surprise that Intel and 3Com are slashing prices-clearly, their bill of materials has fallen significantly. More often than not semiconductors are the drivers for both innovations in new systems and pressures on system prices in mature ones.

Jeremey Donovan (Jeremey.Donovan@ Gartner.com) is a Principal Analyst at Gartner Dataquest.