Monday, October 12, 2009

McNealy's Keynote Dovetails with Industry's Fascination with Integrated Stacks

Both Sun Microsystems Chairman and co-founder Scott McNealy and Oracle CEO and founder Larry Ellison took the stage to deliver keynotes that kicked off Oracle OpenWorld last night.

In keeping with the industry's fascination with stacks, McNealy made the case for why Oracle is keen on Sun's technology. According to McNealy in his keynote address,

"If you think about the Sun technology that we're bringing to the party here, it's the data center. It's the servers, the storage, the networking, the infrastructure software, all the pieces, all of the executable environment within the cloud, the data center, the distributed computing environment, whatever else you want to say, and then you bring in the database, and the applications and ERP and middleware capabilities and developer tool capabilities of Oracle, and you have a very nice data center. A very robust, very scalable... enterprise data center."

Like the other big players in the enterprise IT market, IBM, HP, and Cisco (via its VCE alliance), Sun-Oracle recognizes the power of owning all the pieces of the end-to-end stack. There are clear advantages in a company being able to offer its customers fully integrated cross-domain bundles and be a one-stop shop to the enterprise data center. One of the biggest advantages is having a sticky reason for customers to want and value you that's not based on price.

Clearly, the major vendors are seeing a shift among enterprise customers toward a focus on higher level application value and services rather than a focus on specific technologies and products at the bits and bytes level. This shift is partly due to the economic downturn and the pressure on IT to cut costs and add tangible value to the business.

When it comes to the single integrated stack concept, analysts say they've seen this movie before. Back in the dotcom era, a lot of industry pundits talked about the "God box" in the networking space. It was basically a big, intelligent network switch that functioned as a router, switch, PBX, VPN, and firewall integrated within a single device. In the end, no customers wanted to go there. For the networking vendors, it was sufficient to articulate the vision as part of their corporate strategy, and have the majority of the individual components within their product portfolio.

Time will tell whether the integrated stack concept is a remake of this movie. For now, we're watching industry consolidation in action and having a fascination with stacks.

Monday, October 5, 2009

HP Should Buy Brocade

Shares of Brocade Communications jumped nearly 19% today due to a report in the Wall Street Journal the company has put itself up for sale. Based on today's closing price, Brocade has a market capitalization of $3.8 Billion, which is a relatively low multiple for a company that holds a strong market position in the data center LAN and SAN switching segments to ride the next wave in the transition to a converged network.

Not surprisingly, the WSJ report included speculation on the potential buyers, siting HP and Oracle as the most likely suitors. IMHO, Oracle is a very unlikely suitor given it's preoccupation with the Sun Microsystems acquisition, and the unlikelihood Larry Ellison wants to own a LAN and SAN hardware business.

HP, however, could gain a lot from the acquisition of Brocade's business, particularly in light of its heightened competition and bitter rivalry with Cisco Systems since the networking behemoth entered the market for blade servers this Spring. Let's take a closer look at the various dynamics at work that make an HP-Brocade marriage a good bet:
  • With the trend toward IT industry consolidation heating up, many of the large, enterprise IT vendors are finding it cheaper and less risky to buy and control their own destiny than build R&D and/or forge partnerships with companies that might one day be their fiercest competitor... Precisely what happened to HP when it once enjoyed being a 10% customer for Cisco as a reseller of its switches and routers, only to later become its biggest target in the server market.
  • There is a large push towards a converged IT infrastructure to deliver more agility and less complexity to IT operations. The converged network (aka Unified Fabric) is a big piece of this vision, bringing together IP, Ethernet, Fibre Channel, CNAs and switch ports. When it comes to networking, Cisco is in a position of strength, both in market share and driving the standards bodies. The only other networking and storage interconnect company with great technology and the FC installed base to compete with Cisco is Brocade.
  • Although HP has recently beefed up its networking business with its own ProCurve line of Ethernet switches, it's rarely deployed in the core of the network, and to date, HP has yet to articulate a comprehensive roadmap or a compelling story around FCoE or DCB to its enterprise customers who are keenly interested in hearing about its converged network vision.
  • HP ProCurve could be repositioned for the access and aggregation layers of the network while Brocade's Foundry Ethernet/IP switches could be positioned in the core along with its FC Directors and FCoE convergence products so there would be very little product overlap and the merged technologies would be a genuine challenger to Cisco.
One of the potential areas of concern would be around the impact to Brocade's OEM business should HP acquire Brocade. Reportedly, IBM is a 15%-20% revenue customer for Brocade and EMC is a 10% customer. Worst case scenario, it could mean a 25 -30% hit to revenue if the IBM and EMC OEM business went away entirely. Perhaps EMC could funnel all its FC switching business to Cisco in retaliation, but that would be unlikely given Brocade's FC installed base. As for IBM, they have multiple reseller agreements, including Brocade, Cisco, and Juniper, and they are currently supporting Juniper's development of an FCoE switch, so a change in control with respect to Brocade probably wouldn't make much of a difference.

In summary, I think HP and Brocade would be a terrific match. It would be great for the two companies as well as the industry, and it would certainly give Cisco a force to be reconned with in its quest for domination of the data center.