In this blog I look beyond the obvious and try to find out why people and companies do what they do - and what it means for the rest of us. 
Some random thoughts on some coming wars.
IBM–has been too quiet during the downturn economically but now seems intent on changing that. They are diligently working to develop messaging that works–to tell the world what they are and what they want to be. They do great at high-end esoteric junk like “Smart Planet” but have been terrible at arming their soldiers and partners and customers with product and solution rationalization. Granted, it’s a hard problem when you have a billion products, but they haven’t been able to do it at the macro level (between storage, networking, servers, services)–or micro level (when do I sell/buy XIV vs. DS5000 vs. DS8000?). Until this is fixed, IBM garners no efficiency in the selling motion, and will continue to sub-optimize. The good news is they are massive and entrenched, and if/when they do fix this, they will see immediate benefit. IBM’s biggest battle near term will be fought amongst itself.
Oracle–the biggest threat to the majority of the big players is Oracle now that they have a whole stack approach. We’re watching it in the “level 2 big iron” world–those app environments that use the same stuff as the level 1 transaction systems–but in much greater quantity. Exadata is just the first instantiation of this for the big O. What happens is companies run big iron mainframes or mega-huge Unix boxes, Cisco, Symm/HDS/DS8000s and Oracle in as their transaction systems–at a huge cost. They then build data warehouses, BI systems, decision support systems, etc., by replicating those same transaction systems–only much bigger (10X is normal). This level 2 business is HUGE for those who sell stuff into it. Now Oracle is screwing up a cash cow by coming into your company, finding you out of compliance on your Oracle Dbase licensing, and making the whole problem go away by ripping out what you have and replacing it with a $7m all Oracle stack–hardware and software. And, it’s working. If you are EMC or NetApp or even IBM, this is bad news. IBM can play the game as they have the pieces, but I’m not sure they have the sales muscle or focus. HP is in the same boat. There are BILLIONS at stake just in the level 2 big iron world. Look for those under threat to be forced to partner or buy in order to negate the threat–namely the Dbase function itself. You won’t beat Oracle as long as they control the rules–and the Dbase controls the rules. You’ll need to find a better/cheaper way – Vertica, Greenplum, etc. are suddenly looking very appealing. This is not lost on VMware either, as Oracle will try to do their own virtualization thing and keep VMware out. SpringSource looks like a brilliant buy suddenly. The BI/Analytics guys are going to have to find HW partners to play as well. Oracle can wipe out an entire ecosystem worth 30B clams if they aren’t challenged.
Make no mistake about it – Oracle has the potential to be the most disruptive force in this IT universe, bar none.
HP v. Cisco. This one is going to be awesome. It boils down to this: Cisco walked into HP’s bread and butter by hopping into the server space. I’m not sure they really thought this through all the way.
HP countered by buying 3Com–wanting to become #2 (for now anyway) in the enterprise networking space.
HP is going to win this battle. Here’s why:
It’s all about the margin structure. Cisco has enjoyed roughly 70% margins in core networking forever, because they have had no real competition for the last 15 years. They have not pushed the commodity envelope and passed on savings to the market–because they didn’t have to. Now, they are addicted to that contribution margin–it funds everything else they do.
IF (note the big IF) they become successful in servers, they will only do so by changing their margin profile. They will not ultimately be able to sustain margins in excess of HP or IBM or Dell–because they simply can’t buy at anywhere near the levels of the big server guys. Nifty packaging is just that–packaging. It’s not a sustainable value proposition that justifies a huge margin profile. Cisco has sold about 1,000 UCS systems over the last year, I think. HP ships 8,500 servers a DAY.
To get to scale, Cisco is going to have to buy someone. Dell? That would be awesome and give them scale–but awfully expensively. Who else? They can’t buy IBM or HP, or Intel, so who else is there? That means they have to do it organically–which will cost a fortune and drag down earnings in my estimation–let alone the distraction it will cause.
Best guess is Cisco tries for another year then suddenly gets very quiet. They will package up bigger and bigger packages for fewer and fewer customers, and eventually be out of the business in any real sense. VCE (VMware, EMC, Cisco) packages at the top of the pyramid could be a sustainable ecosystem, but not at volume scale. I can’t see a continual R&D investment at a high level if it’s only going to be a boutique business.
Now for HP and networking, the opposite is true. Networking margins for HP will be GREAT! They will be closer to 50%–twice that of servers–even if they price at 50% of Cisco. HP already has 5,000 people trained on the products and is aggressively hiring salespeople. HP will find no real trouble convincing shops to let them start as a legitimate number 2–their brand value alone pretty much guarantees it. Once they are in, who knows? No matter what, Cisco will be forced to either A: lower their pricing and eat margin or B: cede market share. I suspect they will be forced to cede share, as once they drop pricing their whole model breaks–and the street will slaughter them.
- HP only has to show minor, consistent share gains to win.
- HP has a much deeper overall portfolio versus Cisco. Cisco has networking and telepresence. HP has everything and the kitchen sink.
- Cisco can be outsold. Their dominance has allowed them to move from hunters to farmers over the years, to the point where they are a salesforce of order takers/account managers versus deal assassins. They can rectify this, but it will be costly.
- If Cisco is committed to the server space long-term, they almost are forced to pick up the last big piece–storage.
Final thought here–HP has always pushed the commodity envelope. They always push cost reductions all the way to the buyer. They never really have been the ones who “gouge” the market when they are seated. Their servers, storage, and networking have a long history of this–whereas Cisco (and many others addicted to the margin crack simply don’t operate that way). The only way to avoid this is to augment that margin structure–similar to what EMC did when HDS came on strong and forced pricing corrections in the high-end storage market. EMC reacted by being forced to price lower but made up for it with CLARiiON and ultimately lots of other things. What does Cisco add to their mix? It will be bad enough that HP gets a foothold in core networking and forces a one time price correction–but they won’t stop there. They will keep on forcing it year over year. At least that is what history tells me. Even after they dominated the printer market, they didn’t try to artificially float margins–they forced costs to the buyer down. Hard to do if it’s not part of your DNA. Maybe Telepresence becomes so huge it can offset those margin hits, but that’s a pretty big gamble.
Bring on the battles!
Related posts:
- EMC Buys Greenplum – Welcome to the Thunderdome
- HP Counters Dell for 3PAR
- The Politics of (Dirty) Dancing – HP, Cisco, and EMC
- Fail Factors – Why Startups Die: The Golden CEO
- Come Learn Some Interesting Stuff about Virtualization – Right Down the Street
Tags: Cisco, Dell, EMC, Greenplum, HDS, HP, IBM, Intel, NetApp, Oracle, SpringSource, Vertica, VMware
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“HP v. Cisco. This one is going to be awesome. It boils down to this: Cisco walked into HP’s bread and butter by hopping into the server space. I’m not sure they really thought this through all the way.”
I take the view the HP went offensive on Cisco with the ProCurve networking products which made it clear that Cisco would have to move up the stack or get stomped. They certainly have taken a of market share from Cisco in the edge switching space and drastically reduced the pricing (esp. maintenance).
I don’t see Oracle being successful, for reasons I can’t explain. Probably because they will value themselves too highly and customers will move to Linux instead. You can’t fight “free” as Microsoft knows.
Steve:
Overall, some good analysis on the IBM and Oracle front. Their quietude should not be taken lightly. However, as you might guess, I have a different take on competing with HP in the data center space.
It would be a mistake to think Cisco’s leadership did not “think this one through.” If you look at how our management team shepherded the company through this downturn when measured by things like financial performance or workforce reductions compared to our peers, you will see that they spend a lot of time thinking things trough. Cisco would not have moved into the space if we did not believe it could bring value to the customers there. If you look at our track record, you’ll see we are pretty good at it. Sure it takes a while, and we will surely skin our knees along the way, but one of the reasons I like working here is because our mgmt team has a long-haul mentality.
Looking at your specific points:
1. HP only has to show minor, consistent share gains to win.
> Perhaps, but if you want to keep your logic consistent, the same is true for Cisco in the compute space with the UCS.
2. HP has a much deeper overall portfolio versus Cisco. Cisco has networking and telepresence. HP has everything and the kitchen sink.
> If by deeper portfolio, you mean Cisco doesn’t sell printers, ink and laptops, then you are correct–although it is useful to point out that HP generates more revenue from printer/ink division and personal computing divisions then their enterprise storage and servers unit. So perhaps this is a time when focus is better–after all GM has a “deeper overall portfolio” than BMW, but….well, you get my point. While we are the topic of portfolio, on the Cisco side, you forgot security, application delivery, blade and rack servers, storage networking, and services. That being said, the portfolio discussion is a little misleading because the two companies have different approaches. HP seems intent on building a vertically integrated solution stack where everything has an HP logo on it. We are very much committed to an ecosystem approach to our solution stack, hence the strong partnerships with EMC and NetApp as examples. At the end of the day, our customers can exert a higher level of control over their solution stack. If they want highly integrated, they have vBlocks, if they want moderately integrated, they have UCS, and if they want to roll their own, they have access to all the components individually.
3. Cisco can be outsold. Their dominance has allowed them to move from hunters to farmers over the years, to the point where they are a salesforce of order takers/account managers versus deal assassins. They can rectify this, but it will be costly.
> Much like the earlier comment about management, it would be unwise to take either our direct sales force or our partner community lightly. They have a demonstrated ability to grow business when entering normally entrenched markets (voice, security and storage networking come to mind) and as a result they have the experience on how to do so. I don’t see them taking their collective foot off the gas any time soon.
4. If Cisco is committed to the server space long-term, they almost are forced to pick up the last big piece–storage.
> Simply disagree with you on this one–see my earlier comment regarding integrated stack vs. ecosystem stack. Ultimately, this seems like flawed logic to me. Its like saying we should also go buy a Cat6 cable company because cables are central to networking.
So, it may be true that HP has pushed the commodity envelope, but Cisco pushes the innovation envelope. If you have ever run a business or owned a P&L, you know that reducing costs only gets you so far–at some point, you need to find areas of growth–that’s where the innovation comes in. Ironically, HP is a great example of this–as well run as their PC and server business might be, they had to spend a lot of money on 3Com to open up a new avenue for growth. We, on the other hand are focusing on the delivering better mousetraps, not just cheaper mouse traps–for example, the introduction of extended memory servers or the HP server mgmt stack versus UCS Manager bring tangible benefits to customers by reducing overall TCO, not just CapEx. At the end of the day, I think the commoditization mindset (how do I make it cheaper) will lose out to the innovation mindset (how do I make it better).
Finally, lets correct the revisionist history that Cisco threw down the gauntlet–HP signaled their intent to expand their ProCurve business (I believe the quote was $2B in 2 years or the like) long before we announced any intention of getting into the compute business.
All that being said, I do agree–exciting and entertaining times ahead.
Regards,
Omar Sultan
Cisco
Howdy. Few points/clarifications. First, don’t take my commentary as negative to the great and mighty Cisco – you don’t get to be that big for that long by being lucky.
2. UCS getting a few points of share is not the same as HP doing it in networking. Every point HP picks up establishes them more firmly as the legitimate #2. Cisco has a LONG way to go before they are even in the conversation about being #2 in servers.
3. I look at the great Fibre Channel experiment with the MDS vs. piddly little Brocade as an example of thinking you could kick ass just because your name is Cisco – and look what has happened. 5+ years later and that pesky Brocade still dominates the FC space. Whether anyone cares or not isn’t the issue – my point is adjacent markets require committed and dedicated efforts, not hype associated with the bigger (better) brand. HP has a wide portfolio of IT stuff – including the primary reason why anyone buys networking gear – APPLICATIONS. Cisco is a fantastic plumbing supplier with some nice functional specialities (security, etc.) but those are still a small part of the overall IT spectrum that HP covers.
4. I’ll agree Cisco has innovated – but so has H3C/Huawei in the networking space. I’m an idiot but it’s very hard for me to see any real advantages in Networking on the core technologies at play. In this game, innovation will be secondary. Economics will drive it.
5. I also concede HP picked the fight first with ProCurve, but all’s fair in love and IT. HP felt it could (rightfully) become a major player in networking with limited downside risk. That has proven out. Cisco’s response, however, still makes me question the move. Servers? Hell, couldn’t they have picked a more mature market with more giant incumbents to take on?? They might have been better off building cars – at least those big U.S. companies have proven fallible.
Thanks for the great commentary!
Hey Steve:
Good threads you have going here–enjoying the conversation. To your points…
2. I think this is less of a market share question and more of a mind share question–which company is driving the conversation. HP has been #2 in networking for a while–the question is if they will be able to gain share. I think it will take more than lower costs to gain ground. If you look at some of the other folks in the space, at least you have to give them credit for bringing new thinking to the table. I guess I am saying I think HP and Cisco will be held to different standards on this one in terms of what meaningful penetration looks like.
3. On the storage front, the last Dell’Oro numbers I saw on the director front would not indicate Brocade “domination”, but that is beside the point and I agree with you on the committed effort part. So the applications are the key, but as you note in the initial post, I think both HP and Cisco take a back seat to IBM and Oracle’s potential in this area. From our perspective, its all about the ecosystem strategy.
4. We will have to agree to disagree on this one.
Regards,
Omar
Steve,
Very interesting read… I agree with most of what you said, but disagree on a few points as well… mainly with Oracle.
1. Oracle- They may have the potential to be a disruptive force, but in the end I don’t think they will make much noise. One of the problems I see is with the sales force. They are too broken down. In one account you have Database, Middleware, Systems, Storage and others calling on you. Relationships still do matter and with this model they aren’t going to have any. Plus, they are crapping all over former Sun partners and taking deals away from them. I know of more than a few former Sun partners that have a chip on their soldier (self included). I don’t think the specialized “salesperson” model works all that well and you can see it in other companies. Especially when you don’t have a partner ecosystem helping to manage relationships for you. Second problem is with certain parts of their technology stack. Mailny the 7000 series storage. There is potential in the 7000 series, but it is years behind EMC, NetApp, HDS etc.. In mid-large enterprises it can’t compete. Third, as Greg already pointed out is with customers moving to Linux. Nehalem-EX are beasts and customers want to virtualize whether Oracle likes it or not. And as they have said, they don’t want to compete in the “commodity” x86 server market and selling servers for virtualization.
@Omar, I think Steve is right that Cisco has to show more significant gains in the server space than HP in network. After all, it is part of the Cisco mission to be number one or two in every market they compete in. That is what Wall Street expects of you and for you to do it with tremendous margins. As for the depth of portfolio you are right in that they are difficult to compare, but the way I read Steve using the term “networking” was in a very generic sense which would include Security, Application Delivery, Storage Networking etc… I don’t think you can really compare Cisco services to HP though. EDS alone was a $25B company. Cisco is nowhere near the maturity of HP/EDS in terms of services. Also, isn’t a vBlock your answer to that full stack you admonish? And HP customers still have access to that same eco-system you speak of.
Thanks,
Mike Dunn
ConRes IT Solutions
@Mike:
I think it would be fodder for a great debate over some beers: would Wall St have more heartburn if we lost a point of network share to HP or if HP lost a point of server share to us. I am guessing we may see at least one of those scenarios (or even both) in the coming year.
Agreed, HP Services (aka EDS) is a bigger org than Cisco Services, but on the other hand, when I look at services strategies, it mirrors the larger difference between the two companies. Services for HP is HP Services while services for CIsco is Cisco Services + the full diversity of our channel partners.
Finally, yes, vBlock would be our equivalent of a fully integrated solution stack. The point I was trying to make is that is not the only option we bring to market–customer can get a full stack solutions with options like vBlocks or SMT, or build their own stack with access to the same underlying technologies–the choice is in their hands.
Regards,
Omar
Oracle is one of the very few companies that doesn’t have to CARE about how shitty it is to do business with them. And you can’t say vBlock is the whole stack – it’s a big stack of hardware with virtual services – but it isn’t the dbase nor the BI application nor the analytics, etc. Oracle controls the WHOLE enchilada.
So, ego, plus outrageous leverage, plus an insatiable desire to own the world makes Oracle a bad ass to be reckoned with.
Please forgive some of the typo and grammar errors in the last post. Just re-read that… ouch.
The Cisco vs. HP war is being fought in the midst of the largest data center transformation since the advent of X86 computing. Virtualization/private cloud completely alters the objectives, economics and supporting architecture of computing. The UCS is not simply a “server”, it was built from start to finish over a number of years as the optimal platform for hosting virtual infrastructure. Indeed, the UCS and virtualization eliminates the requirement to purchase traditional servers – designed for the physcial world. Both industry technical experts and customers alike are increasingly showing huge enthusiasm for the technology and its unique capabilities to support the transforming data center. HP has nothing like it, and has a very long way to catch up.
Agree – but will it matter long term? How many UCS’s can Cisco sell really – 100,000? A million? No matter what, unless it goes down market, which it really can’t, it will be a 2% share player. I’m a fan of the UCS – but I’m a realist too.
Steve,
Good analysis. The first thing that jumped out at me was that you never mentioned Microsoft. Have you written then off as a major Enterprise player going forward?
In the HP vs. Cisco analysis, I might suggest a slightly different model.
- From a risk perspective, a failure in the network could effect 100s, 1000s or 10,000s of users and devices. The failure of a server might not be noticeable to users or devices, especially in a virtualized environment (HA/FT, vMotion, DRS, Vplex’ing). CIOs will pay premiums to reduce broad risks for their business. They are more willing to switch servers, even from big companies, as we’ve seen over the last five years (http://www.eetimes.com/news/latest/showArticle.jhtml?articleID=225400039)
- Comparing “systems” (eg. UCS) to “servers” in terms of quantity is like comparing apples to oranges. The trends towards unified systems (UCS, Blade Matrix, etc.) should be the thing to start counting and measuring. You’re right that the Cisco vs. HP numbers are not yet comparable, but the important measurements will change over the next couple years.
- Competition in the networking space has been very strong over the last 15yrs. The tombstones of Cabletron, FORE, 3COM (multiple times), Wellfleet/SynOptics, Nortel, Lucent, Redback, etc. can attest to this. Companies such as Huiwei, Juniper, Arista, Force10, Riverbed, Bluecoat and others probably wouldn’t take kindly to you calling them “nobody”. Just because another networking option is now available does not signal the immediate shift in market pricing. Even free/open-source options, available for years, have not radically changed the market pricing.
- Diversification allows businesses to have a mix of margins as they innovate in new markets. Cisco already has “non-traditional” businesses such as Linksys, FlipVideo, WebEx, so they have some experience with businesses that don’t make “70% margins”. And unlike HP, which has to cover all 300k employees on their vertical-integration margins, Cisco’s partner-centric model allows for diversification of costs and value-add for sales, marketing, training, service, etc.
- It will be important to keep an eye on M&A strategy, as even companies with broad portfolios will want to leverage their cash balances (CSCO – $39B; HPQ – $17B) to both fill holes and advance innovation in new markets. Cisco acquires innovation (Nuova, etc.) or market leaders in new markets (Scientific Atlanta, WebEx, FlipVideo, Linksys). HP’s recent acquisitions of 3COM and Palm tend to signal other strategies. The market will decide which is strategy is most effective.
As other have stated, it’s going to be a Wild West ride of thrills and fun for the next 3-5 years. We’re looking forward to the challenge.
Brian Gracely
Cisco
Steve,
Isn’t the Oracle “stack” just a mainframe in wolf’s clothing? I mean would people still choose to run a proprietary stack over an open stack if
1) The price is right?
2) Maintains performance?
3) Offers more flexibility? (Is totally transparent to process)?
The Storage Alchemist
I’d be interested to see the ui to the UCS platform because based on everything cisco they get an F- in ui design. Imagine if Microsoft had the same ui now they had from windows 3.1 like Cisco does with their cli.
HP iLO is great!
Trolling aside.. I think Cisco needs to change their model on the licensing on the chassis to be competitive and get a foot in the door with new companies. Right now it looks like they charge the same price for the chassis whether you’re using it for servers or switch modules or routing modules. Buying a cisco chassis and slapping x86 gear in it isn’t cost effective for most with their current model.
hi – i’ve been watching/reading this. i love that you stir the pot like this. one thing i notice when we talk about things like this, is why arent we smarter about it. heres what i mean. you said ‘cisco buy dell’. why do we only think internal, us based? why not ‘cisco buy fujitsu’. or ‘cisco buy siemens’? people comment that the world is a small place. i think its roughly ~26k miles across the middle… i dont know if that is small or not. but i can tell you, it seems like we dont think as swimmers.
(must get to the other side, perhaps the grass is greener, etc.) i know there are regulatory things that happen for m and a activities and such when going internationally, but it does happen. sometimes, the solution isnt in your backyard. i think people tend to hypothesize ‘locally’. and by doing so, they limit their independent thought. and… for the record… my two cents – the best battle of them all, is the one with the trojan horse. hope you are well. m.
@Scott L – one minor point of clarification around “Cisco chassis”. Previous multi-purpose network platforms (Catalyst, Integrated Services Router, etc.) had a chassis that would support multiple types of services (routers, switches, firewalls, etc.). The Cisco UCS chassis (http://www.cisco.com/en/US/products/ps10279/) is purpose built for the x86 blades as well as highly efficient power and cooling. It eliminates the need for specific switching and management models that typically come with blade-server enclosures, significantly reducing the complexities of managing the system.
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