Cisco's Ambitions Swamped By Consolidation Wave?

Cisco could be thrown of course in its ambition to become the single supplier in the data center because of a coming wave of consolidation in the networking industry, the first sign of which is Broadcom's bid for networking component vendor Emulex.

Cisco's strategy is dependent on being able to convince IT administrators that it can move data quickly and efficiently through the corporate networks that link servers and various storage devices. This is ostensibly why it decided to introduce its own line of servers, rather than continuing to partner with the likes of HP, Dell and IBM. But it's still dependent on niche vendors like Emulex and QLogic for specialized components known as host bus adapters (HBAs) that speed along data transfers at the switch level. That's why Cisco mentioned both companies prominently during its Web cast introduction of its ambitious Unified Computing System last month. If the supply of that equipment were to dry up, Cisco would be forced to find other suppliers or partner with the very companies it's trying to lock out of the data center.

Broadcom's unsolicited $764 million offer for Emulex scrambles the playing field, and is the harbinger of further consolidation in the space. Broadcom's bid is motivated by its inability to break into the old boy's club with its own HBA; new entrants face a significant barrier to entry because established players have already proven themselves to the storage vendors, who test HBAs to ensure they work smoothly with storage and server equipment. "The [storage] vendors only have so much time to go though the certification process, and the interoperability matrices are very expensive," noted Bob Laliberte, an analyst with the Enterprise Strategy Group. "It's not like they're going open up their door to every newcomer who says they've got a new widget," he told me.

Emulex may try to fight this bid -- its recent rejection of a friendly offer from Broadcom, and a thirty-year history of independence, suggests it might. If that happens, Broadcom has hinted it will look elsewhere -- Broadcom CEO Scott McGregor told Bloomberg, "there are always other options." Those other options a pretty much limited to QLogic. Either way, the independence of both companies is compromised; other networking vendors like Juniper, not to mention IBM, HP and Dell, which have been spurned by Cisco, are unlikely to resist the opportunity of scooping up the remaining HBA vendor, thus putting Cisco in a bind.

IBM has already struck a deal with Juniper for its cloud computing platform, and with the Sun deal falling through, has money burning a hole in its pocket that could be used to pick up not only a component vendor like either Emulex or QLogic, but Juniper as well, putting itself in a position to compete with Cisco in the data center on equal footing.