UCS – Brilliant Move or Blunder?

I spent last week in the San Jose area. Outside of the discussion of whether Avaya or Siemens would acquire Nortel, the next hottest topic was Cisco’s UCS. Some of the conversations were around the technology, but more of the conversations were about how the announcement of UCS will dramatically alter the marketplace. In particular, there was a lot of discussion about what Cisco’s movement into servers means for Cisco’s relationship with HP and IBM.

To put all of this into context, roughly two years ago I was among a small group of analysts who were having lunch with John Chambers. As ever, Chambers was peppering the room with questions. One of the questions he asked us two years ago was if we thought that three years into the future that Cisco would still be a close partner with HP, IBM and EMC. His question clearly portended Cisco’s movement into servers. Based on what I now know, I feel quite confident that a year from now Cisco will not be a close partner with HP and IBM.

There is a line of thought that says that they only way that the elastic provisioning of IT resources (a.k.a., cloud computing) will ever work is if the environment is homogeneous. This line of thought argues that even minor differences in the IT infrastructure greatly increase the difficulty of achieving the goals of cloud computing. If Cisco truly buys into this line of thought, then they could argue that they had to move into the server market just as some of the major players in the server market will have to move into the networking market.

However, there is another line of thought that says that Cisco is a big company and the only way that a big company can grow substantially is to enter other big markets. That is a reasonable business strategy, but like all business strategies it comes with risk. In this case, part of the risk is how will the major players in the server market respond? The story that I heard is that when Cisco told HP of their plans to enter the server market, they were walked to the door. I don’t know if that story is true, but I doubt if HP’s reaction was to embrace Cisco, give them the secret handshake and welcome them to the club. I also doubt if IBM was terribly amused. So what is Cisco’s upside as it enters the server market? The good news is that the server market is indeed sizable. The bad news is that it is characterized by a number of large, established players and relatively small margins.  

Cisco’s switch and router business brings in over twenty-five billion dollars a year in revenue and is characterized by extremely high margins. Cisco does have some competitors in the enterprise router market, but none of them have found a way to gain double-digit market share. There is a line of thought that says that Cisco is putting this cash cow at significant risk in order to enter a low margin market.  

Probably nothing dramatic will happen in the market in the near term. The rumors that IBM was going to buy Juniper Networks have calmed down, at least for now. HP already has a networking business, but I doubt if Cisco takes it very seriously. That could certainly change if HP started to gain market share. One of the key issues that will get played out over the next year or two is “Is it easier for a network company to do servers than it is for a server company to do networking?” Part of that issue is technical. A bigger part, however, is account centric. For example, who has more control over the customer – Cisco or IBM?  

Last Comments from Interop

I always love coming to Interop in Vegas. This year’s show is over and it definitely was a success. Ok, it was not the Interop of ten years ago. The show did, however, perform a critical task. For three days it brought together thousands of IT professionals and provided them with a platform by which they could learn about technology, ask questions and in general expand their understanding of technology and its myriad uses.  

One of my panels today explored the need for IT organizations to rethink their LAN strategy. The four panelists were Manfred Arndt of HP, Jeff Prince of Consentry, Barry Cioe of Enterasys and Kumar Srikantan of Cisco.  These are four leaders in our industry and I was very pleased to have them on the panel.

It should not come as a surprise to any of you that all four panelists were of the opinion that IT organizations need to deploy LAN switching functionality that is different from what was deployed just a few years ago. For example, Prince stated his belief that LAN access switches need to be able to natively understand context and use that for myriad purposes, including providing more flexible security. Cioe suggested that the movement to SaaS and cloud computing drives the need for visibility and control beyond Layer 4 in order to understand transactions and prevent the leak of intellectual property or confidential content. Arndt discussed how the growing movement to implement unified communications drives the need for technology such as Power over Ethernet (POE), POE Plus with intelligent power management and multi-user network access protection (NAP) based on 802.1X. Srikantan talked about how the next generation of LAN switching is characterized by base hardware (i.e., Gig Access w/ POE Plus), base services (i.e., L2 and routed access), enhanced services (i.e., MPLS and IP SLA), service modules (i.e., server balancing and firewalls) and investment protection; i.e., 7 to 10 year lifecycle and incremental upgrades.

I buy off on one of Srikantan’s key points – that being that the LAN switches that IT organizations deploy need to have a 7 to 10 year lifecycle and be able to also support incremental upgrades. I also believe that access switches need to be intelligent enough to support applications such as unified communications and also support the evolving security requirements. One last point that I buy off on is that the data center LAN needs to evolve in order to support the highly consolidated, highly virtualized data centers that many large companies are on the road to implementing. At this point in time, however, I don’t have a good handle on what I think the new data center LAN needs to look like.   That is still a work in progress.

While moderating eleven panels at Interop was fun, I am not all that sad that the show is over with. As much as I love coming to Interop in Vegas, I really love going home to Sanibel.

Jim Metzler