Will Cisco's Project California Rock the IT Sector?

It's been a long time since servers were a sexy topic in tech circles. These powerful computers that run corporate data networks make up a market that was red-hot in the 1990s and has since settled into a plodding shoving match amid IBM (IBM), Hewlett-Packard (HPQ), Dell (DELL), and Sun Microsystems (JAVA).

But the computing industry is once again buzzing over servers—this time from a new entrant, Cisco Systems (CSCO).

Cisco's device, dubbed Project California, takes servers into new territory by cramming computer power into the very box that contains storage capacity and the networking tools that are Cisco's specialty. Demands on data centers are rising as jobs move from PC software to the Internet and customers are looking for more efficient ways to build those data centers. Today companies must cobble together thousands of discrete servers, storage banks, and networking products—a time-consuming, complex arrangement that often leaves a lot of capacity unused and sends power consumption through the roof.

Cisco's approach could help companies use fewer machines—saving money not only on hardware, but also on power and IT staffing. Cutting costs is paramount as the demand slump compels companies to slice budgets. San Jose (Calif.)-based Cisco is due to unveil details of the new devices on Mar. 16.

Chambers Intends Cisco to lead in IT

If it works, Project California could also disrupt the very structure of a corporate computing market in which Cisco has traditionally acted as a partner rather than competitor to the big server makers. For decades there was more than enough room for growth within separate gargantuan niches, letting Cisco focus on the switches and routers that direct network traffic while other manufacturers concentrated on the computers that process and store users' requests. But with the economy in shambles and growth not likely to return for years, tech titans have increasingly been eyeing each other's territory. Project California is a clear sign that Cisco is invading in a big way. "They are clearly crossing the Rubicon, and they are now in direct competition with these other large tech companies," says Kevin Johnson, CEO of networking rival Juniper Networks (JNPR).

Cisco is well-girded to take this step. It has more than $30 billion in cash, more than any other tech company. CEO John Chambers prides himself on taking advantage of tech slumps to widen share and expand. The company is moving into no fewer than 28 different markets, including digital music in the home and public surveillance systems. Chambers outlined his ambitions in a recent interview with BusinessWeek. "As a company, we can come out of this [downturn] with a stretch goal of being the leader not just in communications, but in IT on a global basis," Chambers said.

If anyone is to take the lead in IT these days, they must conquer what's known as the cloud—the delivery and storage of programs and services over the Internet vs. traditional software in CDs or shrink-wrapped boxes. In a sign of the increased emphasis on cloud computing, the proportion of the eight million servers sold each year that reside in Internet data centers has risen to 50% today from 20% in 2003, says Jayshree Ullal, a former Cisco executive who is now CEO of startup Arista Networks.

An eight-blade virtualized box?

Cisco could play a strategic role in helping companies make their data centers run more efficiently, experts say. In recent years companies have used so-called virtualization technologies to make racks of servers behave as a single pool, able to run as many or as few programs as necessary. Storage and networking gear have also been virtualized to varying degree. But nobody has figured out how to virtualize the server, storage, and networks all together. That's one reason data centers remain terribly inefficient, with utilization of gear often running below 15%. "It takes too long to move an application from one virtual server to another," says James Yaple, a chief technology officer with the U.S. Veterans Administration, who has been briefed by Cisco. "Cisco could be a very dangerous competitor."

The company intends to effective erase those arbitrary distinctions between server, storage, and networks. According to sources, the first Project California box will be a rack that can hold eight "blades." These would include up to seven very densely packed servers featuring Intel's (INTC) new Nehalen processor, all tied together into one pool using server virtualization software from either VMware (VMW) or Microsoft (MSFT). The eighth blade would be a year-old Cisco networking switch called Nexus that will help the machine deliver the information over a wide range of communication technologies, offering varying degrees of bandwidth.

Cisco declined to discuss details of the system ahead of its splashy introduction, which includes video conferences in eight cities worldwide and featuring Intel CEO Paul Otellini and VMware CEO Paul Maritz.

Juniper moves to take advantage

Cisco's entrance into the server market pits the company against some of its most important partners, IBM and HP. Big Blue resells more than $2 billion of Cisco gear a year to consulting and services customers. Cisco tends to play down the significance of rivalries with partners. The company has long competed with Microsoft for so-called unified communications systems that let office workers integrate their phones, computers, and other devices; Cisco works in tandem with Microsoft in other areas. Yet it will be tough to brush off the significance of the company's server move. "Instead of being 5% or 10% overlap [with the big computer companies], it will now be more like 50%," Arista's Ullal says.

Cisco's rivals are already seeking to take advantage. Indeed, IBM recently announced a research and development compact with Cisco nemesis Juniper, whose CEO Johnson hopes the deal will lead to expanded sales through Big Blue. Johnson won't provide specifics, but says: "We're having conversations with many of these companies" in the server business.

For some, relying on a provider other than Cisco may not be easy. Most companies use Cisco gear, so server companies that resist providing it run the risk of losing contracts. Some Cisco rivals nonetheless have big hopes. "Everything chips away at the glacier," says Ron Sege, president of networking company 3Com. "And because of the recession, everyone is even more ready to consider alternatives" that may be cheaper.

That's just the bet Cisco is making: that customers will see it as a smarter, more economical alternative in servers.

Editor's note: Author Peter Burrows is one of the reporters whose private phone records were sought by investigators for Hewlett-Packard.

    Before it's here, it's on the Bloomberg Terminal. LEARN MORE