Be prepared to upgrade your design skills while developing small embedded networking applications. If it is small size and performance you are after, then the old methods no longer work. Until recently you would think nothing of cramming an entire PC on a single-board computer and using standard Ethernet interfaces on a PCI bus to connect to the network. Alternatively, you would not have hesitated to consider a 32-bit microcontroller (MCU) with integrated Ethernet MAC, requiring several megabytes of RAM and Flash memory to run the latest Real-Time Operating System.
Now imagine how you would handle embedded networking applications that are smaller, much smaller to the point that they become so inexpensive, so low-power, so cheap and simple that a whole new world of applications opens up. Then think of some everyday embedded applications that could take advantage of the ubiquitous Ethernet backbone in new industrial and office buildings. You probably would not have thought of submitting them to Ethernet control. For instance, applications like fire and smoke detectors connected to the building network; individual light switches and light bulbs controlled via the network; dimmers, blinds and fans controlled by the network; and emergency lights communicating over the network.
To make this granular level of control possible, and to enable these novel applications, (and many others that we cannot yet conceive today) as designers we need to think real small. You need to look at low cost and low pin count (down to 28-pin) Ethernet controllers, freed from the legacy of the PC busses (ISA, PCI and others) by using simple SPI interfaces instead. To make your designs even simpler, you need 8-bit MCUs that require only kilobytes of code to run a TCP/IP stack, instead of megabytes.
You can also simplify Ethernet designs by taking advantage of the Power over Ethernet (PoE) technology to further reduce cost and size. With PoE technology you don't need a power supply and power outlet, just a CAT5 cable. The software to handle these applications might be further squeezed if you realize that the complete TCP/IP stack might not be necessary.
There could be a few concerns regarding deploying the Ethernet protocol in these embedded applications. Let's start with throughput — a 10-Mbps rate can be more than enough to handle these applications. You can ensure the security of the network by simply keeping the data within the firewall. Or, if you need strongly encrypted data, you can implement the AES (Advanced Encryption Standard) or Triple DES (Data Encryption Standard) algorithms on an 8-bit MCU.
It is not just about shrinking PCBs, it is about re-thinking embedded networking design from the ground up. What you need to do is right-size the tool for the problem. Cost is the final arbiter of features in embedded applications. Technically, you can achieve many things, but these need to be measured against cost and benefits.
If you truly appreciate the benefits of Ethernet networking for its interoperability and ubiquitous availability, the right solution might be a byte-sized solution!