Cisco "Crosses The Rubicon"

That’s how Juniper Networks CEO Kevin Johnson put it, in describing Cisco’s full-scale assault on the enterprise computing market. The networking giant is clearly no longer content to provide only the networking gear that strings together computers and other kinds of equipment within and between data centers. Rather than be the tail on that dog, they want data centers to be built largely around the network—not the server platform, as has typically been the case until now.

It’s a risky move, but Cisco certainly isn’t fording that symbolic stream on its own. The most remarkable thing about the event (other than the fact that we journalists got no coffee, despite the 8:00 AM start) was the cast of marquee names that took part in the 14-city video conference extravaganza. I’d known that Intel Corp., Microsoft, VMWare and BMC would be there. But EMC’s Joe Tucci and Accenture’s Bill Green were also on hand. And the partner list goes far beyond that, including important players such as Oracle and NetApp.

Getting five top-shelf CEOs (and Microsoft executive vice president Bob Muglia) to all take two hours to sit in John Chambers’ virtual wigwam is more than a PR coup. I don’t think it happens unless these companies really smell profits. And if there’s anything Cisco knows how to do, it’s make hardware profitable. While servers command margins of maybe 15% (or 30% for pricier “blade” models), Cisco hardware margins never dip below 60%. I’m guessing Cisco is sharing some of those points with its new partners. Says Forrester Research analyst James Staten: “There’s more margin dollars for them to share.”

That is, for everyone but the server companies. It’s not just that they could lose unit sales to Cisco. It’s that Cisco is pushing an approach that could reduce the absolute number of servers that data center operators need. For starters, the company has found a way (a patented way, Cisco senior vice president Rob Lloyd points out) to pack more memory onto each of the blades within a Unified Computing System rack. But one of the overriding advantages of virtualization is that it increases utilization of the underlying hardware. If you’re able to use 60% of the power of a machine rather than just 20%, that’s two machines you don’t need. Cisco’s (probably totally unsubstantiated guess) is that customers can reduce their capital spending on data centers by 20%, and reduce the operating costs by 30%—in part because there are less machines for IT workers to monitor. Customers will be able to get by with “way fewer servers,” says Lloyd.

But any server revenues are upside for Cisco. In fact, Lloyd says that “we have probably doubled or possibly tripled our addressable market” in the data center. Currently, Cisco has eight to ten percent of data center spending, he figures.

Of course, the computer companies have many strengths—huge installed bases of customers, great sales and marketing reach, deep and decades-old customer relationships. But Cisco is as good as anyone at selling, and has developed plenty of C-level partnerships as well as it has expanded its portfolio in recent years. Forrester’s Staten thinks Cisco can achieve 10% market share in the $50 billion server market in the years ahead, and maybe 25% if it executes.

Normally, I’d say that was a preposterously wild claim. But given Cisco’s many strengths — not to mention the fact that most of the innovation in tech these days is in fact taking place in networks and the interconnections between things, rather than inside computers themselves — I’d say it’s only mildly wild. If sales reps from EMC, Oracle, Intel, Microsoft and the others really do push Cisco’s vision while on their rounds, it may be only a matter of time before computer makers feel compelled to make servers that that comply with that vision as well.

A major question will be whether these rivals take the fight to Cisco as well. While Cisco’s mostly small networking rivals have so far failed to gain enough share to force Cisco to bring down those margins much, the computer companies have massive scale and technology. And they know how to survive just fine on lower-margins.

So far, Lloyd doesn’t seem concerned about whether Cisco can maintain its traditional profitability in the data center market. Asked whether the profits from the Unified Computing System would be more like typical server margins than like Cisco’s luxuriant networkign margins, he said that “If we left the impression that we’re going up and down the street selling blade servers [like everyone else’s], we’ve left the wrong impression. We’re selling a full system, and it has a very attractive marign proposition for Cisco.”

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