After a blockbuster year of storage acquisitions in 2010 with over $1B spent each on 3PAR, Isilon, Compellent, many have predicted that 2011 would be the year of networking acquisitions. Many look at Cisco’s entrance into the server business as having a ripple effect of server vendors expanding into the networking space, most notably with HP’s acquisition of 3COM and to a lesser extent IBM’s BNT purchase. This week, Intel signed an agreement to acquire merchant silicon vendor Fulcrum Microsystems and Dell announced the intent to acquire networking equipment vendor Force10. While financial terms have not been disclosed, both of these deals are estimated to be in the hundreds of $Ms and complement existing portfolios rather than changes in market direction or severing of existing partnerships.
Continued rise of merchant silicon
Intel is known for being the technology “inside” many solutions and Fulcrum Microsystems expands this strategy. For those that are not intimately familiar with the chip business, there are many markets that require specialized chips. Intel is already well known as the market leader of compute chips and also is the leader in 10Gb Ethernet adapters, but as Brad Casemore points out, a previous attempt to move into the networking ASIC business failed. In the last decade, merchant silicon has passed in-house designed solutions; even Cisco started to use Broadcom ASICs in the recently announced Nexus 3000. The purchase of Fulcrum Microsystems is a smart one for Intel; the company should be able to leverage partnerships and technology between various product lines. Expanding its chip capabilities does not compete with the systems vendor partners (i.e., no competition with Cisco, HP or IBM). The competition for Fulcrum are Broadcom and Marvell; initial checks with the vendor community is that Marvell has the most to lose from this move and that Broadcom has a strong position that could be bolstered if the market drives towards two primary suppliers of this technology.
Dell rounds out its stack
Last year, Dell brought Dario Zamarian on board to be VP/GM of a newly created Networking Business unit. As I wrote last year, Dell was not looking to purchase one of its larger partners like Brocade or Juniper, but rather looking for something to complement its server and storage businesses. Just as Dell has transitioned its storage business from OEM to in-house (through the acquisitions of EqualLogic and Compellent), Force10 can complement the SMB PowerConnect product line to create full solutions (compute/network/storage) of Dell owned technologies. Networking is a complicated space and the addition of Force10 should not close Dell from working with existing partners. My early take on this is that Juniper will have negligible impact from the move and that Brocade will be more affected. Dell will continue to use Brocade for FC, but on the Ethernet side, will favor internal products to Brocade/Foundry or Cisco (which most server vendors are already pushing out of the rack). Foundry’s top-of-rack switches do support FCoE (uses the Broadcom ASIC that is also used by Juniper and others).
Competition in the Networking Space
So now all of the major server vendors (IBM, HP, Dell) have Ethernet networking technology as part of the internal portfolio. This does not mean that networking will disappear; core switches are currently considered separately from server or storage purchases. Cisco is in the midst of corporate restructure and under attack from competitors; its market leadership is not in jeopardy. The server vendors can gain market at the edge through bundling and price pressure. HP, IBM and Dell all have server and storage positions that can be leveraged to try and gain a modest 1% of networking marketshare which would be a significant revenue opportunity. Juniper and Brocade are well positioned in the #3/4 spot (each at about 2% marketshare today) to leverage independent positions to partner across many areas and deliver solutions that are not tied to other pieces of the stack. As more solutions move to merchant silicon, it is the software (firmware and management) that will differentiate the switches. New solutions such as OpenFlow have the potential to commoditze the software also, but investment in new technologies will separate the leaders in the space. Cisco has maintained a high marketshare for over a decade and it the convergence trend (which it is an active participant in) is shifting dollars between the various infrastructure components. Just as Cisco has taken some hits in marketshare for networking, HP has declined in bladeserver share. Ultimately, customers will spend dollars where they have relationships and get value from the product lines. Healthy competition in the networking space is good for the advancement of technology and if market forces prevail should reduce the cost for customers.