Cisco's Chambers: Tough Talk on Data Centers

Cisco Systems Chief Executive John Chambers had pointed words for journalists skeptical of his company's foray into equipment for big corporate data centers, an area of technology traditionally dominated by computer makers. "We've taken on big peers in the past," Chambers said over a bento-box lunch for members of the media at Cisco's financial analyst conference on Dec. 8. He was referring to Cisco's move early this decade into corporate telephony, a market where it now has a 33% share. "We didn't know anything about that market when we got started," he said. By contrast, data centers are run by big companies, which have been relying on Cisco (CSCO) for networking gear for 25 years. "That's our home," Chambers noted during the break in a series of presentations for analysts. Tough talk for a company that's just nine months into an ambitious—and some say risky—incursion into this $40 billion market. The first step was to enter the cutthroat market for servers, the powerful computers that handle Web traffic and hefty IT jobs. On Mar. 16, Cisco unveiled its first server, the centerpiece of a "unified computing" vision that placed the networking company in competition with computer giants Dell (DELL), Hewlett-Packard (HPQ), and IBM (IBM), all longtime partners that have resold billions of dollars' worth of Cisco gear each year. Cisco's servers began shipping in August. Unified Computing SystemCisco says it has landed several $20 million deals for its Unified Computing System, or UCS, which makes the network the most important element of the data center. "We won't get 500 customers moving [to Cisco's vision] tomorrow in the data center," Chambers said. "But we will get a couple of dozen. And if that goes well, we'll get the next hundred, and then a thousand." For now, more than a hundred companies are using UCS, says Cisco. That includes three phone companies and Internet service providers including Savvis (SVVS), which plan to use the gear to provide so-called cloud computing services to businesses or consumers, says Cisco Executive Vice-President of Worldwide Operations Rob Lloyd. "There's a lot of interest from big corporations," says Pacific Crest Securities analyst Brent Bracelin. Cisco designs its servers so they work closely with data center networks. Each server includes high-speed links to Cisco network switches. That way, the network automatically knows where to route traffic, rather than simply sending jobs to a server only to have them reassigned. Fans of the approach say it lets companies manage an entire data center as though it were a single computer—not hundreds or even thousands of discrete programs, computers, and other types of gear. "It's a game-changer," says Brian Denton, chief technology officer of Atlanta-based consultancy ExamWorks, an early Cisco customer. Because the approach enabled him to get by with fewer servers, Denton says opting for Cisco has helped him shave $300,000 in capital expenses. ExamWorks is using two Cisco servers to serve all 11 of its locations. The Cisco machines are less complex to run and require fewer IT staff than systems sold by computer makers, Denton says. The setup also lets Denton give employees years-old PCs rather than pricey new models, since all of the actual computing happens inside the Cisco servers in an Atlanta hosting center. "I call around to companies and ask for their old computers," which cost money to dispose of, Denton says. Then he gives the employees a nice flat-panel display, keyboard, and mouse, "and they don't know the difference," he adds. Data Center Cost SavingsAnother Cisco UCS customer is Terremark (TMRK), a hosting company that runs the federal government's site, among others. Terremark Chief Strategy Officer Marvin Wheeler says his company will rely on the UCS machines because they will help his company more easily shift jobs between its data centers around the globe—say, to provide disaster-recovery backups. And James McGibney, an IT manager for construction giant Tutor Perini (TPC), says Cisco's technology has helped him consolidate five big data centers into one. He says the company, which had sales of $5.6 billion in 2008, now has just 22 servers, down from 480 in the past. "We've definitely cut our [data center] costs by more than 50%." Another customer is Taser International (TASR), maker of the stun gun, which is planning to expand beyond this flagship product to become a provider of cloud computing services to police departments and law enforcement agencies. Taser guns now include video cameras that law enforcement officials can use to record parts of their shifts. Processing hours of video chews up huge amounts of storage and server capacity. So Taser created a service called that charges a set fee—about $5,700 per officer over three years—to handle the tasks. Yogesh Saini, a Taser senior vice-president, says he chose Cisco's servers because they have massive amounts of memory, making them a more efficient way to process all that video. As a result, the company thinks it will need 25% fewer servers than if it had gone with one of the traditional server makers. Taser Chairman and co-founder Thomas Smith says the company has already saved $900,000 as a result, plus another $40,000 in reduced power bills to run the machines. While Taser now has only two racks containing eight Cisco servers each, it will need 300 racks within a few years if hits its growth targets. Server Market LeadersWhile Cisco's server effort is just ramping up, Cisco Vice-President Soni Jiandani says, the trends are heading in the right direction. She says more than 70% of customers have come back to buy more. "We are very pleased at the pace at which we've been able to convert trials into production, but we're especially happy about the rate at which people are coming back to give us more business," she says. No doubt, the company is not going to challenge the server market leaders anytime soon. IBM, Hewlett-Packard, and Dell together controlled more than 75% of the worldwide server market in the third quarter, according to market researcher Gartner (IT). HP's $2.7 billion acquisition of network equipment vendor 3Com (COMS) on Nov. 11 accelerates competition with Cisco in its core market, and HP says it plans to attack Cisco on price—including 3Com models that are also used in the data center. "Customers get upset if they feel they've been overcharged by their current supplier," says Dave Donatelli, an executive vice-president at HP, in a recent interview. The computer companies have decades-old customer relationships and can provide their products efficiently on a large scale. And Cisco may not have the necessary breadth to be a true soup-to-nuts player. IBM and HP, for example, sell their own storage gear. Cisco recently announced a partnership with storage provider EMC (EMC), but many tech executives think Cisco needs to make some other large acquisitions to fill out its product line. "If Chambers really wants to whip HP, he better get real busy, real fast," says the CEO of a leading corporate software maker. "Companies are looking for a small number of giant players who are willing to take major project responsibility," says Tom Nolle, president and founder of consulting firm CIMI. "Cisco doesn't really qualify. The earth is going to have to take a few whirls before they have enough history" to make big customers comfortable, he says. But some analysts think the networking giant—flush with more than $30 billion in cash, and an ambitious strategy to maintain annual growth of around 15%—will be a player.

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