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Cisco’s Data Center Moves: Who Wins, Who Loses?

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Cisco Systems (s CSCO) today announced its new blade server, first reported by us in March 2008, along with a Unified Computing strategy that converges storage, compute and networking into a single layer (thanks to virtualization technologies) that is managed by a specialized piece of software. Stacey has captured the intricate details of the news, while I have already posted about the imperative behind these moves.

This new comm-puting approach adopted by Cisco is unique, in that it is the first time a company is selling a single packaged offering so to speak. People have sold either storage related equipment, or network layer gear or just servers. So, what does Cisco’s announcement mean for existing vendors?

Prior to Cisco’s announcement, Sun Microsystems (s JAVA) and eGenera, a Marlboro, Mass.-based early stage company have often talked about such a unified, network centric future. Even IBM (s IBM) takes a holistic view of the data center.

Cisco, by virtue of being a late comer to the market, has managed not only to lap them, but has also posed a serious challenge to two major blade server makers – Hewlett-Packard (s HPQ) and Dell (s DELL). You can put Rackable in this category as well, but it’s a small player compared to these behemoths. One of the main reasons these companies are at risk is because they have typically innovated on cost and performance metrics, not a whole 360-degree view of the changing data center infrastructure. Google (s GOOG), as a company, has reinvented data centers by building its own gear, and taking a holistic approach to the data centers.

About three years ago, I wrote a piece for Business 2.0 about how the mega computers were dictating the technology trends of the future. Many gear buyers were frustrated that companies weren’t building “Internet class” stuff. Today, when I talked to Saavis CTO Bryan Doerr, he reiterated that point and said that one of the reasons he was excited about Cisco’s data center moves was because they were finally making service provider class equipment.

Cisco’s Impact on Other Sever Makers:
Dell Negative
HP Negative/Netural
Sun Neutral
IBM Neutral
Others Negative

What he didn’t say was that it would literally get Dell and HP get off their duffs, rethinking their approach to server computing going forward. If I had to pick a company likely to respond with a resounding slap to Cisco, it would be HP. It already has elements of what Cisco wants to sell as part of its HPC product line; it has software capabilities (remember, HP bought LoudCloud) — and it also has the capability to buy a whole slew of companies.

Dell has an existing relationship with eGenera, but I really don’t see it as a technology innovator, so I feel it will be reduced to selling “commodity” servers with commodity type margins. I also expect Sun and IBM to get supercharged and start aggressively positioning themselves against Cisco and its new systems. All these companies would like to partner with Juniper Networks (s JNPR) or acquire some of the existing switch makers to become more competitive with Cisco.

Now the good news: they all have time — but not a lot — to respond to Cisco. Cisco has challenges – its products are still in beta. For instance, the company is new to the server market and will have a different market dynamic to deal with. The sales cycle for these new offerings are going to be long, and there is plenty of room for Cisco to stumble. Secondly, I wouldn’t count on its software to work flawlessly. The company has a checkered past when it comes to software.

I am sure there are many who will resist Cisco lock in, as articulated by one of our readers who writes, “Cisco is trying to own everything in the datacenter…which sounds good to them $$. How many datacenters do you know run entirely on one or two vendor’s gear??”

I agree. Cisco talks about APIs and working with legacy equipment, but like our reader points out, the truth is always harsher. Most importantly, in these tough economic times, many companies would be wary of the excessive margins typically built into Cisco’s products.

19 Responses to “Cisco’s Data Center Moves: Who Wins, Who Loses?”

  1. This is clearly a game changing move. The key question is how will Cisco transform this low margin business (gross margins in server business is in mid twenties) into something respectable? Cisco would also have to bolster its partner network and given that many of their current partners also work with IBM and HP, this may become interesting. I have blogged about the implications here at:

  2. To date we have had technology silos: connectivity (networking), compute and storage. Clearly, with this announcement, Cisco is blurring the lines between connectivity and computing. This is no different than collapsing the silos of parallel networks, whether it is data/voice/video (via unified services network) or ethernet/fibrechannel/infiniband (via unified I/O). Unified computing (or connected computing) is the next logical step in this technology evolution.

    More details on connectivity versus computing at


  3. whether cisco takes the so called ‘server’ markets is not the right question to ask. imho, the right question is who will drive market *transformation* for the new private, public, enterprise data center systems. virtualization across Compute, Store, Network creates a new market space. it is this new space that cisco will (hopefully) dominate and is betting it grows in to a big market.

  4. As I see it there are two options:

    1> The servers take over the networking, replacing it with performant, malleable (and often open) software.
    2> The networking takes over the servers, pulling them down into expensive, proprietary hardware.

    I know which of these two options makes more sense on first inspection (hint: a server can easily be a router but a router can never be a server).

    I expect there will be announcements from competitors during this critical window between initial announcement and production launch and I imagine it will be hard to say for sure how this will pan out until then – pricing would certainly help though. The main risks I see is from virtual networking built into virtualisation platforms and operating systems (as well as “cloud networking” providers like Avastu, and also from alienating existing resellers like IBM and HP who now have significant incentive to deliver more open, modular but still “unified” hardware stacks.


  5. Anonymous Reseller

    I sincerely doubt Cisco’s ability to penetrate the server market in any significant way. A company that aloof and disconnected from user’s needs cannot possibly compete with the modern server powerhouses. Their website is a shambles from an organizational and technical support point of view. They charge you a service contract to download a patch to their own firmware for security issues. When was the last time anyone paid for patches to HP, Dell, other hardware? These aren’t matters of procedure that can just be changed. It’s a company culture and attitude and I doubt that Cisco has the ability to “grow” out of their aloof attitude towards users.

    Besides we won’t have to worry about Cisco selling any server products for at least 2 years. It will take that long for them to roll out an extremely expensive certification requirement that will take another year to study and pass, and then you will need to hire at least 3-4 $150K/year certifiedd server engineers so that you can qualify to resell something that can only be programmed using a command line interface from the 1980’s and costs 3x what the rest of the industry gets for the same product. By that time HP and everyone else will have moved on to something better.

  6. Quote of the year:)

    …Saavis CTO Bryan Doerr, he reiterated that point and said that one of the reasons he was excited about Cisco’s data center moves was because they were finally making service provider class equipment….

    Correct me if I’m wrong. But, Cisco is generating $40 BILLION in revenues. Selling to xSP is nothing new to Cisco.

    • @ALex

      if you think about their sales – very few products are being sold to true service providers. routers – yes, some switch products yes. optical stuff – maybe. otherwise it is still an enterprise heavy company.