Cisco's $450 million buyout last week of wireless switch start-up Airespace not only represents something of an about-face for Cisco regarding wireless LAN technology, but also is the latest evidence of a shakeout in the overcrowded market.

Although more companies are installing WLANs - the market has grown 65% in the past year, according to IDC - there just isn't room for everybody. Some $400 million has been pumped into a dozen WLAN switch start-ups in recent years, and millions more went to dozens of other WLAN start-ups selling everything from processors to security to mesh network products. That doesn't take into account the millions of dollars more invested in WLAN R&D by longtime wireless players such as Proxim and Symbol Technologies, and wired network experts such as 3Com, Cisco and Enterasys Networks.

Signs of the market adjustment started last year. AirFlow Networks stopped making switches. Legra Systems sold its assets to two other companies. Chantry Networks agreed to be bought out by Siemens. Meanwhile, outfits such as ReefEdge and Trapeze Networks have been dogged by questions about their health.

"There have been no new, serious start-ups for the last two years" in WLAN switching, says Samuel Wilson, a senior analyst with JMP Securities.

But what Cisco's acquisition of Airespace also shows, observers say, is that the basic concept of WLAN switching is a winner even if many of the companies pursuing the market are not. The acquisition is another example of Cisco shifting away from its previously held stance that WLANs are best run as add-ons to a wired LAN with "heavy" access points running as full routers at the network edge.

The WLAN switch approach involves overlaying centrally controlled and managed WLAN switch hardware and software on top of an Ethernet foundation to unite wired and wireless 802.11 clients. Cisco and other established switch vendors have retrofit their switches to support wireless clients, but in what WLAN switch supporters say is a less elegant and more expensive fashion.

The market for wireless gear in general is roaring, Synergy Research Group says, with its latest numbers showing that revenue rose from $420 million in the third quarter of 2003 to $714 million in the third quarter of last year. WLAN switches and controllers, in particular, are hot, jumping from a $20 million business in the third quarter of 2002 to a $47 million business in the third quarter of 2004. Symbol is the market leader with a 25% share; Airespace and Aruba Wireless Networks follow, along with many others.

In the long run, JMP's Wilson says, the WLAN market's evolution will mirror that of Ethernet switches - consolidation and commoditization, with high-end and low-end players.

"You'll have your Cadillacs - the Ciscos, Extremes and Foundrys - and your Mini Coopers, like Netgear, D-Link and Linksys," he says.

What this means for customers ultimately is lower pricing. IDC forecasts that the price for enterprise WLAN gear will come down over time, from a current $450 average price tag per access point down to about $200 in 2008.

But in the near term, analysts still expect vendors to charge a premium for gear that ties elements of a WLAN into a cohesive system.

"I don't expect Cisco will suddenly start selling Airespace solutions at half-price," says Abner Germanow, enterprise networking research manager at IDC. "If anything, price pressure will come from smaller competitors looking to undercut Cisco."

Some might question why Cisco would pay $450 million for a competitor in a market where it is already a runaway leader, with 48% market share. Analysts say it's a matter of finding the right WLAN architecture for the future.

"Right now, we're seeing a lot of big wireless LAN RFPs coming out, and Cisco was not winning them" with its decentralized WLAN architecture, JMP's Wilson says. "Airespace's products were better than Cisco's. [Airespace] has been gaining market share, and Cisco has been losing share."