Fibre Channel has gained enormous popularity in recent years as the foundation for storage-area networks (SANs). Vendors such as Emulex and QLogic have ridden this technology to rank among the fastest-growing and most profitable high-tech companies of the past five years.

Unfortunately, the joyride is over. Despite continued double-digit growth in Fibre Channel unit shipments, some factors are conspiring to cut vendors' profitability.

First, success attracts competitors. Traditional chip vendors Agilent, AMCC and LSI Logic are now offering Fibre Channel controller chips, letting third parties leap into the host-bus adapter market, where Emulex and QLogic earn much of their revenue. We expect this competition will drive down the price of Fibre Channel host-bus adapters and other components by at least 50 percent over the next three to four years.

Prices will fall quickly because margins are so high: Emulex, for one, reported gross margins of 64 percent-much better than Intel's.

Technologies are also emerging that will replace Fibre Channel in many cases. Fibre Channel is commonly used to connect high-speed disk drives in shelves of up to 16 drives and loops containing several shelves. Fibre Channel drives are expensive but yield better performance than commodity ATA drives.

This year, SATA and SAS drives appeared with greater throughput and simpler cabling than ATA drives but at the same low price. SATA and SAS should displace Fibre Channel within drive shelves and even in some multishelf configurations.

Fibre Channel also connects these storage arrays to servers, often via SAN switches. This type of SAN may span multiple buildings, requiring a complete Fibre Channel network that is separate from but parallel to the Ethernet LAN.

A simpler solution is to route storage traffic over the LAN using iSCSI. This method creates a virtual SAN that is cheaper to build and simpler to maintain. The Internet Protocol SAN can also extend across the WAN to join remote sites into the storage network.

iSCSI and SATA/SAS will eat into Fibre Channel sales in 2004 and accelerating in 2005. After that, Fibre Channel revenue will be flat and will decline by '07. Some vendors are already diversifying; those that don't will find themselves in a stagnant market.

Linley Gwennap is founder and principal analyst of The Linley Group and co-author of "A Guide to Storage Networking Silicon" (www.linleygroup.com/npu).