Lippis Report 133: Cisco, HP & IBM Make Up New Top Tier of IT Industry

nicklippis.jpgThe market crash of 2008 had a similar effect to a long drought on a once lush ecologically diverse and thriving environment. Only the strong survive such harsh conditions. With hardware sales down some 25 to 30% over the past year the revenue drought in the networking and communications industry brought large changes. We have seen the once huge Nortel go bankrupt and be sold off in pieces; Siemens Enterprise, Enterasys and Avaya were brought private; Foundry Networks was sold to Brocade and now Brocade may be up for sale; HP ProCurve was integrated into the large HP group TSG; 3Com re-emerged in the enterprise market while many start-ups closed shop.

The Post Great Recession IT Industry Structure

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Our industry has dramatically consolidated over the past year and as the economy improves a new concentrated order is emerging filled with winners, losers and dark horses. Layered on top of macro-economically caused shifts are new IT buying patterns plus a new technology wave of virtualization and cloud computing which promises to alter IT delivery. The IT industry is now an upside-down pyramid with a few very large players at the top garnering the lion’s share of revenue followed by many smaller firms.

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The Big Three: Cisco, HP & IBM

At the base of this upside-down pyramid is Cisco, HP and IBM, all of which offer a suite of computing, storage, networking and applications. One could argue that Microsoft should be at the top too, but their exclusive focus on software relegates them to partnering with these top three IT suppliers. In fact, Microsoft could hold the keys to which one of the top three is most successful during this difficult business cycle, as all are forced to collaborate with it. In this regard, HP has the best and longest relationship with Microsoft as the two companies’ product portfolios barely overlap.

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It’s easy to point to Cisco, HP and IBM as competitors since Cisco introduced its Unified Computing System that propelled it into the data center server market; core markets for HP and IBM. But the three firms are very different as are their core competencies.

New Markets Always Seem To Come To Cisco

Cisco is by far the largest networking company on the planet and as a result its core competency is grounded here. Networking, once seen as providing simply a connectivity service, has evolved into a major IT architectural component along with servers, storage and applications. This is due to a technical shift driven by Moore’s Law, which is propelling older IT technologies to fold into an IP network architecture. For example, communications used to be based upon Time Division Multiplexing; now it’s IP packets. Video conferencing used to be a service provided on top of the phone system, but now it’s an IP service. Just as mainframes and mini computers gave way to PCs, laptops, notebooks and smartphones, the national entertainment system, non-IT electronics, etc., are being folded into an IP network. The networked smart grid is a good example of an older technology, i.e., the national grid that is on the path to being folded and transformed into an IP network. All of these markets are transforming into Cisco’s strength, IP networking, versus Cisco having to change technology horses to catch them.

The same is occurring in the datacenter, which is the area of increasing competitive pressure between Cisco, HP and IBM. Consider the following trends. Virtualization is minimizing the need for servers as more applications reside on a single server. 10Gbs Ethernet is a huge change agent as it allows the first generation of networking and storage to share a common network that, over time, will cannibalize storage switches. New blade systems that package compute, networking and storage access allow the sales forces of the big three to sell units of IT versus being experts in networking, computing and storage. This IT packaging change alone is where competitive pressure stems from between the big three. Cloud computing, depending upon how you define it, threatens existing application suppliers by re-writing application licensing arrangements. In short, the datacenter is undergoing the most fundamental change since the glass house gave way to mini and microcomputers.

Big Three Positioning

So who is best positioned? After IBM sold off its PC business, its main focus has been services, software and datacenter technology. This is its core market and value proposition. It enjoys relationships with top business leaders who value IBM’s financial, support and technical prowess. IBM’s systems and technology segment groups generate nearly $36B annually. HP with its recent acquisition of EDS has become a services powerhouse to augment its Enterprise Business. HP segments its business into services, enterprise storage and servers, software, then Technology Solutions Group, personal computing, imaging and printing. HP unlike IBM has retained a large consumer computing position. Its datacenter focus is primarily found in its Technology Solutions Group (TSG) which generates approximately $52B per year. As mentioned above Cisco comes to the datacenter and IT from a different direction, that being a network direction. Cisco’s switching, routing and other advanced technology segments generates some $34B annually.

It may seem like comparing HP, IBM and Cisco is like comparing apples, oranges and cumquats and there is some validity in that argument, but all three are huge IT companies with a common value proposition to IT leaders: we have financial stability, are world class IT suppliers who invest huge dollars in R&R, offer excellent support and we will be around for a very long time.

While the snapshot today does not offer a wide product portfolio crossover, you have to extrapolate a few years and each of these firm’s directions. It’s getting harder to find the next $1B market so each of them has to look at each other’s market and enter into them to grow; this was part of Cisco’s UCS strategy. Each is competing in security, networking, unified communications, blade systems, and video conferencing (more HP and Cisco than IBM here). The question is which firm will be able to manage technical and customer buying pattern transitions faster? In short who will be quicker to market with innovations that ride a new multi-billion dollar market wave? This is clearly a strength they all possess. HP’s EDS acquisition was brilliant as was IBM’s acquisition of Lotus while Cisco can be an acquisition machine as its buys are mostly right on. Cisco’s 1994 acquisition of Kalpana and 1997 acquisition of Crescendo Communications, Inc., were both brilliant as is its 2009 purchase of Tandberg.

As I write this HP is beefing up its networking product line with Brocade and its own ProCurve line while IBM is working with Juniper Networks and Brocade. Brocade may be up for sale too as reported in the Wall Street Journal with HP and Oracle showing preliminary interest. It’s clear that in the next five years the product lines of these three will increasingly overlap; time will tell which one will break away.

8 Debates over Lippis Report 133: Cisco, HP & IBM Make Up New Top Tier of IT Industry

  1. Gerry Van Zandt said:

    Interesting essay on #HP, IBM and Cisco from Nick Lippis:

  2. JohnSimonds said:

    RT @gerryvz: Interesting essay on #HP, #IBM and Cisco from Nick Lippis:

  3. Jake Tracy said:

    The Lippis Report » Download Library » Lippis Report 133: Cisco …

  4. Nick Lippis said:

    Lippis Report 133: Cisco, HP & IBM Make Up New Top Tier of IT Industry

  5. Wayne Clark said:

    Great article, Nick. I really like your analysis of the IT market.

    One minor correction … Crescendo was cisco’s first acquisition (1994) followed quickly by Grand Junction and Kalpana.

  6. peterhughes said:

    Interesting Nick Lippis article on the new order of It following the downturn things are getting interesting ;-)

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