Lippis Report 119: Are Cisco, HP and IBM on Data Center Collision Course?
For this Lippis Report Research Note I talked with Cisco’s Mark Fulgham, VP Marketing Data Center Emerging Technologies at Cisco on Unified Computing, and Jim Ganthier, VP HP BladeSystem Marketing, Metrics and Solutions. Scheduling difficulties precluded IBM from participating; thus we’ll focus primarily on Cisco and HP in this Research Note. IBM is rumored to shortly be announcing a tighter relationship with Juniper Networks and Brocade to bolster its Dynamic Infrastructure to be more competitive with HP’s Adaptive Infrastructure and Cisco’s Data Center 3.0 with Unified Computing initiative. Look for more information as it occurs; follow us on our Twitter account and join our cloud computing/networking Facebook group.
During this economic cycle a larger concentration of dollars is being spent among the largest IT suppliers, i.e., HP, IBM, Cisco, Microsoft, CA, et al. Similar to the dotcom bust in 2001 IT leaders are flocking to the safety of large IT suppliers with broad product portfolios, healthy balance sheets, financing and staying power; companies such as Cisco, IBM, HP, et al. As more dollars flow to these firms they are compelled to enter adjacent markets once occupied by friendly partners. In short the lines of market delineation are changing with the largest of IT suppliers finding that their once friendly partners are now fierce competitors. This dynamic is most pronounced in the data center market where HP, Cisco and IBM are increasingly on a competitive collision course as they position for a larger share of overall IT and in particular data center spend.
Data center rationalization/consolidation, virtualization, green data center technologies and cloud computing are all healthy market segments, albeit challenged. HP and IBM are the two data center powerhouses providing blade servers, storage, data center switches, virtualization and professional services solutions while Cisco is the networking giant who recently announced its unified computing strategy; more on this below. All have been in the data center market for years providing solutions around servers, storage and networking. But there are some huge changes taking shape.
First Some Background
In November of ‘08 HP integrated its HP ProCurve networking group into its Technology Solutions Group (TSG). TSG represented some $41B in FY 08, 35% of HP revenue and contributing over $5B to net income which excludes EDS. TSG is the largest business segment of HP, providing servers, storage, software and information technology services for enterprise and mid-market business customers. TSG includes Enterprise Storage and Servers (ESS), Services including EDS and Technology Services (TS), HP Software and HP ProCurve Networking serving HP’s business customers of all sizes in more than 170 countries.
TSG markets its Adaptive Infrastructure (AI) as its strategy and portfolio for accelerating adoption of next-generation data center technologies and services. AI enables the delivery of a ‘service-ready’ infrastructure to ensure IT supply readily meets business demand; and for IT Operations to maintain effective and efficient resource utilization. To that end, AI offers a range of modular, standards-based products and services including BladeSystems, its recently announced and delivered Virtual Connect, Insight Dynamics-VSE for physical and virtual server management and the AI Maturity Model tool and process, offered in addition to advisory and implementation services. Last month HP added Insight Orchestration (embedded Operations Orchestration functionality) and Insight Recovery options to Insight Dynamics – VSE and announced new AI Discovery centers plus ProCurve switches, software, and services to aid in network orchestration. It’s clear that HP is executing on its AI strategy to deliver the vision of a next-generation data center – with deep product and professional services underpinnings that are available today, a unique position.
TSG Integrates ProCurve
Back to ProCurve and TSG. TSG’s sales organization is now selling HP ProCurve networking products while HP ProCurve maintains its existing two-tier distribution structure. ProCurve products are integrated into the TSG portfolio, making it more compelling for HP’s enterprise sales staff to sell ProCurve in an enterprise solution than from competing vendors. With TSG sales organization compensated to sell HP ProCurve, TSG will open doors for ProCurve in very large accounts. Further, the inclusion of ProCurve 6600 series top-of-rack switches into TSG’s Performance Optimized Datacenter (POD), a datacenter in a 40-foot container equipped with nearly 4,000 servers, 12,000 LFF hard drives, cooling, etc., will almost certainly boost their market share, thanks to its reach and distribution. Also, EDS represents an opportunity for ProCurve to gain a significant presence in the world of large enterprise companies. Since the completion of HP’s acquisition of EDS on August 26, HP ProCurve has been working with EDS to introduce ProCurve products into their network services portfolio qualification process.
Furthermore, ProCurve’s new SVP and GM Marius Haas reports into TSG head Ann Livermore where previously, Haas and before him John McHugh reported into chief strategy and technology officer Shane Robison. This is a huge change from when Carly Fiorina, previous HP CEO, sat on John Chamber’s Cisco Systems CEO board where the two companies were friendly competitors. Not any longer. TSG is focused on competing with Cisco as HP ProCurve will increasingly have access to large enterprises. ProCurve has always been a lower cost and margin provider of networking solutions. ProCurve recently announced its 6600 series of five top-of-rack switches for the data center, ProCurve ONE ecosystem and ProCurve Data Center Connection Manager network orchestration software. The ProCurve ONE ecosystem includes partners such as Microsoft, Avaya, Riverbed, F5, McAfee and many others.
In addition HP Network Solutions has teamed with ProCurve Networking to develop a modular suite of technology services for networks – the HP ProCurve Environment Direct Access Service (EDAS). The ProCurve EDAS program offers customers the advantage of 24×7 direct access to remote expert-level support, with value-added features that includes a high-touch customer relationship via an assigned remote Technical Account Manager. This service enables customers to manage their ProCurve environment by receiving remote technical assistance to improve their network performance and reduce the risks associated with unplanned downtime. This service complements a full range of services that meet the end-to-end networking needs of customers. Network lifecycle services form the core foundation of network consulting, assessments, planning, design, integration, deployment and management. HP Network Solutions Group’s complete set of initiatives span Unified Communication Solutions, Data Center Networking, Wireless and Mobility as well as Network Security/Adaptive Network Architecture (ANA). A main theme of HP is choice and options, which it clearly is delivering.
Cisco’s Data Center 3.0 Initiative
Cisco’s Data Center 3.0 initiative is its vision to orchestrate virtual IT. The strategy is to sense changes in application demand, facilities, servers and virtual machines by enabling all IT assets to respond in a coordinated fashion within seconds to change and extend the reach of data centers. The execution of this strategy is based upon virtual datacenter infrastructure including storage, servers, networks and network services. To meet that end Cisco has produced products and services that unify front- and back-end networking with a unified fabric and I/O, delivered data center class platforms, service orchestration systems and deep application intelligence products.
Its products include the Nexus family of data center switches including the Nexus 7000, a high-density 10Gbs Ethernet core switch; Nexus 5000, a modular, low latency 10Gbs Ethernet/Fibre Channel/FCoE top-of-rack access layer switch; the Nexus 2000 Fabric Extender for 1/10Gbs Ethernet server consolidation; and the soon-to-be released Nexus 1000V, a software switch for server virtualization and part of Cisco’s VN-Link portfolio of virtual machine-aware network and storage services. The Nexus switches link servers and storage into a unified data center fabric via lossless 10Gbs Ethernet and support for Fibre Channel over Ethernet (FCoE). The Nexus 1000V will enable the virtual network infrastructure to deliver the same visibility, security, management and diagnostics tools that are available today with Cisco’s physical networking equipment while preserving the dynamic nature of a virtual machine environment.
The entire Nexus family shares a common operating system, NX-OS, which has been optimized for the data center, providing resiliency with support for process restartability and modularity for service upgrades. Cisco Nexus family provides customers with a granular path to add capacity and capabilities to the data center network while allowing customers to have the ability to leverage their existing and continued investment in Catalyst. The Cisco Catalyst 6500 & 4900 Series products provide industry leading investment protection and feature rich services support, while the MDS 9000 family of storage area networking (SAN) switches support the customer path to virtualized SAN environments; the ACE (Application Control Engine) and Wide Area Application Services (WAAS) portfolio deliver leading application delivery and WAN Optimization, and Data Center Network Manager (DCNM) provides integrated management, topology visualization and provisioning.
During the past two weeks Cisco has been discussing its Unified Computing initiative, which is its strategy to provide a wider data center offering into the computing market. Cisco’s primary focus is on virtualized data centers, a new growth market and departure from existing data center design. This one theme transcends its Data Center 3.0 initiative. The main point here is that Cisco sees an opportunity to offer a wider range of products which enable virtualized storage, compute and networking. As networking speeds in the data center increase from 1Gbs to 10Gbs to 40Gbs and 100Gbs the boundaries between storage, networking and computing are starting to be redefined as virtualization is starting to now show. High-speed networks with very low latency will accelerate this trend, which Cisco sees as an opportunity to expand its role and place in data center design and prominence.
While I have no inside information on Cisco’s Unified Computing, when connecting the dots it does seem fair to assume that Cisco will create a new offering that accelerates data center virtualization in the server market which could be a higher margin product space than traditional blade servers, rack servers, etc. Cisco has always entered adjacent markets based upon an architectural transition occurring; it sees virtualized data centers as such to the point that existing suppliers, those being HP and IBM will be painted as legacy data center players. While HP is the market leader in blade servers and virtualization, the opportunity that Cisco is hoping for is that it will be faster to gain virtualized blade server market share than its competitors by dominating this segment.
HP, IBM & Cisco Head Toward Greater Competitive Positions
Now HP sells a lot of Cisco gear as does IBM and neither are pleased with Unified Computing and Cisco’s expansion into the data center. In the past Cisco has always done well to break away from competitors such as 3Com, Nortel, Extreme, Foundry/Brocade, et al., during down markets. When it entered the SNA market and competed with IBM for networking, it won over a much larger competitor. When it entered and defined the IP telephony market competing with long time established firms such as Lucent (now Avaya), Nortel, Siemens, Mitel et al., Cisco now holds the number 1 or 2 market share position. Now as the industry has both a major technology transition occurring, that being virtualization, and a severe economic recession Cisco finds itself in a place it thrives in: two environments – a bad economy where its financials are competitive differentiators and a major technology transition.
But HP is different than previous Cisco competitors. It’s massive with FY08 revenues of $118B and 13% Y/Y growth with projections to grow in 2009 to some $130B; yes that is growth and we’ll see on Feb 18th when HP announces last quarter’s earnings. It’s responsive to competitors in markets where margins are thin (25 to 30%) such as PCs. It’s now the largest IT firm in the world, recently pushing IBM to second in revenues and beating rival Dell in the PC market. It’s not clear if Cisco’s financial strength will be an advantage over HP, even though Cisco has the largest cash and equivalents war chest in the industry of nearly $30B as both are valued at nearly $90B.
But here’s the rub: business models. HP is clearly looking to gain some of Cisco’s $12 to $15B networking leadership. HP operates happily on 25-30% margins while Cisco enjoys 65-75% margins. Entering the server market unless Cisco’s product includes VMWare software is a low margin business model. Even if Cisco does generate $1B at 30% GM that’s $300M profit, but they could lose $1B and $650M of profit too in switching. That’s why it’s a fair bet that Cisco will opt for the virtualized blade server market, to make sure that its risks are fairly rewarded.
No matter how you look at it, these once friendly companies seem destined for a major confrontation in the data center. The question is will the boundaries being changed in storage, computing and networking, thanks to virtualization tilt toward a network platform to the point where Cisco can control much of the data center? Or will HP and IBM be able to react and respond to the same technical shifts with innovations of their own blunting, Cisco’s surge? For IBM, they are getting very close to Juniper and Brocade as they look to bolster their Dynamic Infrastructure offering to stay competitive with HP’s AI and Cisco’s DC 3.0. Stay tuned.