IBM net gear set to go Cisco

Deal gives Cisco access to prized IBM accounts.

By Jeff Caruso
Network World, 09/06/99

Last week's deal between Cisco and IBM will change the game for other network hardware vendors as Cisco consolidates its position, new competition ensues and IBM partners lose business.

After years of struggling in the network arena, IBM declared it is drastically scaling back its network business, and selling its switching and routing technology to Cisco. IBM says it will continue to sell and service SNA products, and Token Ring and Ethernet adapters. The deal was part of a far-reaching announcement in which Cisco also agreed to buy $2 billion worth of parts and chips from IBM over the next five years.

IBM's withdrawal helps Cisco punch further into Big Blue-dominated data centers, but competitors are scouting for opportunities to steal business during the transition.

3Com and Alcatel-owned Xylan will feel the most immediate impact from the IBM decision because IBM resells gear from both companies and plans to reduce those sales.

3Com wasn't advised of the changes ahead of time. "I heard the same time you heard," says Jean Myer, manager of strategic relationships at 3Com. IBM brands 3Com's CoreBuilder 5000 switch as the IBM 8260 and several SuperStack II Ethernet switches as members of IBM's 8271 line.

Xylan, for its part, had already decided to get out of the OEM business, according to a Xylan spokesman. At the beginning of 1998, IBM sales brought in 21% of Xylan's revenue, but it was down to 13% by year-end. Sales to IBM were already expected to decrease to zero by the end of this quarter. IBM resold Xylan's OmniSwitch as the IBM 8274 and sold some models of Xylan's OmniStack line.

The safe choice?

Cisco and IBM were already strong in mainframe environments, and this move "effectively locks out any competing vendors" in those areas, says John Armstrong, director and principal analyst at Dataquest. Most large enterprise users at this point have purchased Cisco or Nortel Networks hardware and are unlikely to shift from their decisions, he says.

Because of the large consolidation, Cisco will have to wait 30 days while the U.S. Department of Justice reviews the deal, says Selby Wellman, head of Cisco's InterWorks business division. But the integrated data, voice and video market is wide open, and "the leaders have yet to be established," he says, so he doesn't believe the deal will present an antitrust problem.

Cisco and IBM are vendors that appeal to large enterprises interested in buying from large, established, safe companies, says Craig Johnson, a principal analyst with Pita Group, a consultancy in Portland, Ore. "Cisco and IBM - gee, sounds like a safe purchase to me," he says.

But competitors smell opportunity. 3Com will try to win over former IBM customers before they migrate to Cisco gear, Myer says. Many IBM customers may be put off by the suddenness of the move and could be willing to go with the original manufacturer of the equipment they have been using, she says.

Nortel Chief Marketing Officer Bill Conner hints that he sees a chance to sell gear to former IBM customers as well, noting that Nortel has had success against IBM's Nways switches and Cisco's BPX switches. "They've got an interesting road ahead of them to migrate the Nways to BPX," he says.

Conner says IBM threw in the towel because its network business wasn't as large as that of its competitors. Network giants such as Alcatel, Cisco, Lucent and Nortel have been gobbling up smaller network players in an attempt to broaden their network product lines. "Networking scale has come of age," Conner says.

Numbers not there

IBM's enterprise network revenue doesn't show up in the list of top 10 vendors in most categories, according to Dataquest's Armstrong. Last quarter, IBM made the top 10 with $22 million in the branch-office router market and $14 million in the token-ring switch market. "They've been off our radar screen for a while," Armstrong says.

Analysts agree that Cisco is in an even better position than before and will continue its dominance of the enterprise network hardware market. One aspect of this is that Cisco has traditionally lacked good management products, but it will now get them through IBM's Tivoli management software, Johnson says.

Where Cisco might have a conflict is with its relationship with Microsoft, he says. Cisco has said it will build policy-based management around Microsoft's upcoming Active Directory. But IBM has been pushing its SecureWay directory.

"Where does that leave Microsoft?" Johnson asks. "Cisco is going to have to play both sides."

Senior Writer Marc Songini contributed to this story.