Cisco Takes on HP and Others in New Data Center War

Cisco’s jump into the server market has certainly put the spotlight on the battle for the data center and HP was the first competitor to respond by cutting prices 30 to 50 percent on its network equipment — a shot across Cisco’s bow.  This is war, and IT departments will benefit from more options and/or better prices.  However, as I take a closer look, I’m not even sure that Cisco and the traditional vendors in the data center space (HP, IBM, EMC and Juniper Networks) are fighting on the same battlefield. But one thing is certain: with $30 billion in the bank, Cisco is a force to be reckoned with and the other companies will have to get busy to refine their own go-to-market strategies.

How, exactly, will the new Cisco server be differentiated? We’ll know soon enough.  Probably the most astounding aspect of this is how well Cisco has kept its real strategy and many of the important details out of the mainstream.

The New York Times coverage last month only touches the surface: “A Cisco-branded server with virtualization.”  Trust me, there’s got to be much more to it than that because several questions immediately leap to mind: Will their servers be sufficiently differentiated to command a premium in the cutthroat server market?  Will these systems be cheap enough to manufacture to be priced competitively against the incumbent vendors, who know all too well about the need for massive scalability and squeezing costs out at every opportunity? 

Except for its consumer-oriented acquisitions like Linksys, Cisco has never been known for its low cost of goods or optimized manufacturing. After all, with the 65 percent margins it’s been able to maintain in its core networking business, it really hasn’t had to think about that stuff.

So, while I don’t see this as a profitable move for Cisco in the short term, it’s most certainly looking for a long-term payoff. After all, if there’s one place Cisco should be able to succeed in the server market, it’s with central IT, and the data center is a good place to start. This is where Cisco is strongest and expanding from a position of strength certainly makes sense. 

Now suppose Cisco succeeds in the server market.  What will that mean?  Its gross sales should increase but most likely its profit margin will go down.  Maybe this is Cisco’s tax shelter strategy for the next few years … make less money (which is probably not a bad idea based on the current administration’s apparent plans for redistributing the wealth). If Cisco can remain strong in their core, this is probably the best time for it to expand into the server market.  But grabbing a chunk of this market will not be quick and it will not be easy; it will be a long slog.

The Empires Strike Back. Or Do They?

Was it a knee-jerk response by HP to reduce its prices on network equipment that competes with Cisco’s?  Actually, this follows HPs encroachment on Cisco territory with the launch of the ProCurve line of switches. So this is not HP’s first shot at attempting to take share away from Cisco, and I don’t see this one succeeding either. It does have the potential, however, to chip away at Cisco’s profit margins as the two companies compete on price.  And this illustrates the clash of approach: Cisco wants the battle to be fought on features; HP wants to bring everything back to cost.

So what about IBM, EMC and the other gorillas in the data center?  I don’t see any real advantage for IBM or EMC to join this battle. IBM would prefer to continue its march toward applications and services.  EMC will hunker down in its sweet spots of storage, information management and virtualization.  EMC’s component approach to security (through the RSA division) will be unaffected by Cisco’s initiative as IT department generally avoid “all in” deployment strategies.

 In fact, this is a huge hurdle for Cisco’s main challenger in high-end networking, Juniper Networks, which is betting the market will buy into a centralized approach to security. This is not a good bet. 

If there’s one place where compartmentalization, independent systems and overlap makes sense, it’s in security.  History has proven that no company can stay on top of the market across all security areas – firewalls, encryption, remote access, compliance, information security, etc.  And even if one could, it would be a bad IT decision.  Security professionals don’t want one system for the bad guys to defeat; having many is better.  And being committed to a sole source supplier also virtually assures that prices eventually will increase for a captive customer with no way out. This is one big concern for CIOs with the emerging Juniper approach.

In the end, I’ll wait to see whether Cisco can be a game changer in the server space.  I am, however, convinced that Cisco ultimately will develop unique differentiation and that it hasn’t played or revealed all its cards yet.  Whether Cisco’s servers end up delivering the necessary advances in performance, TCO or leapfrog benefits to take market share is the unanswerable question. But regardless of how it all plays out, more competition will translate into better value for CIOs, their IT departments and their enterprises. And if that isn’t part of Cisco’s strategy, then it really isn’t worth bothering about. 

As always, thank you for sending comments, tips and topic suggestions to me at CIOblog@TransitionalData.com.

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Michael Bullock is the founder and CEO of Transitional Data Services (TDS), a consulting firm helping clients implement energy saving green data center solutions, data center relocations, web based enterprise applications and 24/7 technical operations.