The market for computer gear that directs traffic on storage networks had always been hotly competitive. But by the summer of 2002, it had consolidated down to two players who dominated their segments: McData (MCDT ), with its high-end "director" class switches, and Brocade (BRCD ) with its less expensive "fabric" switches. One-time hot growers, including Ancor Communications, Inrange Technologies, and Gadzoox Networks were no longer seen as major players and were all soon gobbled up by larger tech outfits.
Then, in August of 2002, the emerging order was thrown into disarray when Cisco Systems (CSCO ), the titan of Internet networking, announced that it was entering the $1.2 billion storage-switching market -- obviously with the intention of taking over. Shortly after Cisco's announcement, industry sales stalled, as corporate information-technology departments delayed purchases until they could try out Cisco's new line, which hit the market at the end of 2002.
In response, McData suddenly got much more aggressive -- debuting new, lower-price products and acquiring two software companies whose technology it needed to make more intelligent switches. And Brocade redoubled its efforts in the high end of the market, acquiring software-maker Rhapsody to help it make switches with more features and slashing prices to match McData. In this year's second quarter, prices of fabric switches fell by 10%, while shipments (on a per port basis) increased 25%, according to Dell'Oro Group, a networking research firm in Redwood City, Calif.
RISING AND SLIPPING.
In short, the competition between the three most aggressive players is intensifying: They're all introducing new high-end switches that promise to make storage area networks (SANs) more powerful and easier for corporate tech departments to manage. McData announced its latest advances on Oct. 20, Cisco on Oct. 22, and Brocade on Oct. 28.
These new switches will determine who's the class of the field. In the early handicapping, analysts, resellers, and industry veterans are betting that Cisco and McData will end up setting the pace. Brocade, for now, is slipping in stature -- at least until it readies its next assault on the high-end market.
Most telling, however, is that so far Cisco has failed to take the switching market by storm. Its equipment features plenty of innovations, such as being able to connect into both an Ethernet and a SAN, and create what Cisco calls "a virtual SAN." But its sales haven't taken off as fast as expected. "Most of the bells and whistles are things customers will eventually probably want to do but aren't things they're doing now," says Phil Sauvageau, executive vice-president for products and services at MSI Systems Integrators in Omaha.
Cisco originally expected to double its revenues from storage switches each quarter. But after doing $10 million in sales in this year's first quarter (Cisco's third fiscal quarter), it sold just $14.5 million in its fourth quarter -- 45% growth, but well short of the $20 million it targeted. Cisco reset its goals and now forecasts double-digit growth each quarter sequentially.
"The one thing that people tend to miss when they look at storage from the outside is that storage customers are very conservative when it comes to adopting new things," says Jay Kidd, vice-president for technology at Brocade. "Cisco has seen that."
Yet, it would be a mistake to discount Cisco's efforts. It tripled its market share in the first half of 2003, albeit to a modest 6%, according to Dell'Oro Group. In its fourth quarter, Cisco's customer base grew from 43 to 140. "We are pleased with how deployments are going," says Soni Jiandani, vice-president of Cisco's storage group. "We want to raise the bar."
Cisco is making inroads fastest with customers that already have Cisco local area networks (LANs). Most of these are companies that want to pull servers from individual departments into larger storage networks and like the fact that Cisco's products work both on networks that use the Internet protocol (IP) and on the storage industry's traditional Fibre Channel protocol. Companies are also using Cisco storage switches to create backup data centers in remote locations for use in disaster recovery, says Jiandani.
None of which has kept McData from coming on strong: So far this year, it has increased its market share in both the market's high end -- from 54% to 57% in the second quarter-- and in the low end, to 21% from 15%, according to Dell'Oro Group.
One reason, says Merrill Lynch analyst Shebly Seyrafi, is that McData may be the only one of the three industry leaders whose high-end gear will work with storage hardware giant EMC's (EMC ) newest products. On the low end, where pricing is essentially identical, what matters is who has the best support. "I think that McData is leading the pack" there, says Sauvageau of MSI Systems Integrators.
LOSING OR TAKING SHARE?
Brocade, meanwhile, has gone from being industry hotshot to whipping boy. Its director-class switches are often criticized. Sauvageau says its 2002 entry into the high-end market "didn't pan out," with the result that Brocade's director share fell in the second quarter from 33% to 28%. And in fabric switches it lost three points of share, to 67%. Merrill Lynch initiated coverage of Brocade's stock on Oct. 14 with a sell rating, citing new competition from McData's line of fabric switches.
Brocade's Kidd says one quarter's market-share numbers don't make a trend -- and that it gained a great deal of share in high-end switches in 2002. In its battle with McData, he says, "each of us is taking a little bit of share from the other in its home court. We believe we're taking more share overall than we're giving up."
Cleary, the battle over the storage-switching market hasn't been decided. Even if Cisco has started more slowly that it planned, few industry observers doubt that it'll be tough to beat eventually, mainly because it has the size, the resources, and the will to dominate storage networking the way it dominates Internet networking. McData and Brocade will have to perform at progressively higher levels to stay on top. "We've got to stay focused, humble, and execute," says Mike Gustafson, McData's senior vice-president for marketing.
Gustafson believes that the heightened competition has been good for the switch market. Price-cutting at the low end is fueling more demand for storage switches because small and midsize businesses can now afford to put in a SAN. Plus, Cisco's entry has shown the rest of the tech world that storage networking is a market worth fighting for. It may not be apparent who the winner will be, but it seems more certain than ever that the fruits of victory will be sweet.
By Amey Stone in New York