Cisco pushes ahead with server plans

AS PUBLISHED IN the INQ back in early December, Cisco is pushing ahead with plans to release server hardware and advanced virtualisation software which will see the networking giant entering the ring with HP and IBM, its erstwhile partners.

Cisco has been selling switches and routers for donkey's years, ensuring the smooth flow of inter-computer data and near monopolising the networking market, raking in $40 billion a year in revenues in the process with healthy, 65 percent gross profit margins.

But now the firm is seeking to make a market transition, a move as fraught with risk as it is brave, especially coming in the midst of an economic crisis.

Cisco, however, feels this is exactly the right time to make such a transition, with virtualisation software growing ever popular by allowing firms to run a plethora of business apps on a variety of physical servers, cutting down on whopping electricity bills and getting bang for buck on hardware purchases.

VMware, of which Cisco owns two per cent, has long been at the forefront of virtualisation, making it near effortless to shift apps around data centres and almost obliterating the need for old-fashioned, linear connections between computers, storage systems and networking hardware.

This is where Cisco can slip into the $50 billion server market, peddling hardware and software management systems to span whole data centres, and possibly deal in storage too.

A source close to Cisco told the INQUIRER the beauty of the system was that a single control point could manage hundreds of blades, compared to HP and IBM blade servers which managed only 14-16 blades. Likewise, all interfaces would be 10 GE and storage connections would employ FCoE technology.

For a company like Cisco, used to 65 per cent profit margins, taking the plunge into the colder waters of the server market, where gross margins are closer to 25 per cent, may come as a shock. But sources at the firm told the INQ that, although margins may be low on the servers themselves, bundled together with software and network equipment, Cisco can still expect to see 40 to 50 per cent margins on that product line.

INQ sources close to Cisco also dismiss the notion that entering the server market is the first step in declaring war on former partners HP and IBM, claiming the battle has been raging for some time already.

For instance, IBM has long been strengthening its ties to Cisco competitors Juniper and Brocade for storage networking products as well as developing its own networking hardware projects, whilst HP under the CEO-ship of Marc Hurd has been actively pushing its ProCurve networking gear, a direct competitor to Cisco's bread and butter. This was not the case when Carleton Fiorina (who also sat on Cisco's board) was in charge of the HP ship.

Both HP and IBM have also been rumoured to be mulling the possibility of snapping up their own networking start-ups to directly compete with Cisco, possibly forcing the Networking giant to consider this move into new markets.

To have $27 billion in cash to play with at a time most tech giants are tightening their belts plays to Cisco's advantage, allowing the firm to push forward with its vision of 'unified computing', marrying together network virtualisation, storage virtualisation, and server virtualisation, using the network as a platform.

Indeed, sources close to Cisco told the INQ this product was "not just another blade server" and that the notion "virtualization happens in network, servers and storage" was central to the firm's vision for this new product.

There is already speculation Cisco could decide to make its life even easier by buying VMware or EMC. Of course, such a move would completely change Cisco's investor profile and possibly even its profitability, but it would be a brave move, and one with more than a little chance at success.

If all goes according to plan, we should be seeing the new Cisco product line launched in mid March with shipment set to begin in early May. µ

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