Early this week, Cisco announced a major initiative which has the potential to shake up the overall server, storage markets completely.
Cisco announced a blade server ( Unified Computing system) that combines computing, storage and networking into a single layer all being managed by a specialized software being offered by BMC. It is increasingly becoming clear that virtualization is the primary driver.
This is a game changing play.
First, it puts Cisco directly in competition with their established partners like IBM and HP who have a lot of stake in the server and storage segments. Till now IBM and HP (especially with the EDS acquisition) held the keys to the data center and now they will face a frontal attack from Cisco. My own view is that Dell may be least affected as they cater to the low end of the server segments. So, Cisco is up against their own partners and this partnership with IBM and HP is at risk.
Clearly Cisco which has not had a legacy in the data centre equipment of services business has created a new value proposition of building an “intelligent and carrier class digital” IT infrastructure. It would be difficult to ignore this value proposition as new data centers emerge.
There is an entirely new market opening up for mega data centers — the ones owned by Google, Amazon, Facebook etc. This market is poised to grow at over 30% over the next 3-5 years as digital data grows and as many companies go through the M&A process. My own estimate is that one of every 5 servers (medium to high end) sold finds itself in a data center. So, Cisco is clearly addressing a potentially huge market.
But will this new customers accept Cisco’s proposition? Clearly Cisco is trying to own everything in the data center and many data center managers would resist lock in.
Apart from the fact that Cisco would treading into an unknown territory, the dynamics of competition makes the play interesting:
Cisco’s gross margins in the routing/switching market is around 62% while the typical server markets fetch close to 22%. Assuming the bundling (computing, storage and networking) finds acceptance, Cisco’s margins for this business may be around 40%. Hence this may lower the overall profitability. How Cisco manages their margins in this business would be interesting to watch.
HP emboldened by the success of ProCurve is likely to take a more aggressive stance. IBM will have to figure out how to fill the gaps in their product line up.
Both IBM and HP are likely to make a slew of acquisitions and companies like Juniper and Brocade make interesting candidates. Should any of these occur, Cisco might end up acquiring VMWare completely (currently it owns 2%) or might even attempt to acquire EMC to bolster its position.
Now, everyone is waiting for IBM and HP to come up with competing announcements. The battle for the data center is beginning and promises to be long drawn. Cisco would also need to make a lot of investments in getting their partner network ready and some of the Cisco partners also have relationships with IBM and HP.
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