Implications of the IBM/BLADE deal to Cisco

Could lose hundreds of millions in switch revenue, firm estimates

Cisco gained another competitor is data center switching this week with IBM's acquisition of BLADE Network Technologies, a specialist in blade and top-of-rack switches. The value of the deal for the privately-held BLADE was not announced by Big Blue but reports in Barron's Tech Trader Daily have it at $400 million.

Not that BLADE was a not a competitor to Cisco already: BLADE is the No. 2 vendor of 10Gbps Ethernet blade switches for the data center, behind HP and ahead of Cisco, according to Dell'Oro Group. Gartner also placed BLADE No. 2 in terms of port shipments of data center Ethernet switches in 2009, with a 17.4% share of the 10 million ports shipped. Cisco was No. 1 in both port shipments (53%) and revenue share (48% of the $1.9 billion market) in data center Ethernet in 2009, according to Gartner.

And IBM was already a BLADE customer. IBM is an OEM reseller of BLADE's switches and has been aligned with the company since 2002. IBM says 50% of its System x BladeCenters server racks currently attach to or use BLADE switches.

But ownership puts considerable heft behind BLADE. Going forward, make that now 100% of System x BladeCenters server racks attached to or using BLADE switches...

The impact on Cisco? Potentially hundreds of millions of dollars, according to Oppenheimer & Co. Cisco and IBM were already seen winding down their longstanding relationship following Cisco's recent entry into the data center server market, long an IBM - and HP - stronghold. Cisco and HP already vanquished their partnership over it, with HP acquiring 3Com to fill out its data center switching portfolio.

Here's how it breaks down according to Oppenheimer, which released a bulletin on the deal today:

If IBM is just focused on blade switching (BLADE already has ~70% share of IBM's blade switches), we estimate ~$100M at risk for Cisco. However, if IBM intends to aggressively move into top-of-rack switching, we approximate $250-$350M at risk for Cisco. Regardless, it's been expected Cisco's business with IBM would decline over time.

IBM also has a switch/router resale and data center/cloud computing development effort with Juniper Networks. And Juniper is an investor in BLADE and resells its top-of-rack switches as the EX2500.

But the acquisition of BLADE by IBM could strain relations between IBM and Juniper as well, Oppenheimer notes:

We're a bit surprised IBM didn't push Juniper to acquire BLADE. We see minimal implications to Juniper if IBM is just focused on blade switching. However, if IBM plans on pursuing top-of-rack switching, it raises significant questions to Juniper's OEM relationship with IBM.

Juniper says all is fine and dandy. In an e-mailed statement on the IBM/BLADE deal, Juniper says:

"This deal is beneficial for Juniper.  As an investor in BLADE Network Technologies and a strategic alliance partner with IBM, this will enable us to collaborate more closely when our products and services are deployed together. All three companies are aligned in our commitment to addressing customers' most challenging connectivity needs for next-generation data center networks."

Our thinking is that the products under development by IBM and Juniper in their joint data center/cloud computing Project Stratus initiative will trump anything Juniper loses from IBM buying BLADE. Indeed, with Juniper investing in BLADE and IBM licensing patents to the company, the two were already nurturing BLADE for Stratus duty anyway.

A side deal under the acquisition may be that IBM just assumes the OEM deal that BLADE and Juniper had for top-of-rack switches; or that IBM just sells that business to Juniper outright while concentrating on the blade switches.

Or IBM could just buy Juniper.

Whatever happens, this is yet another blow to Brocade. IBM and Brocade have an OEM deal whereby IBM private-labels Brocade's Ethernet switches. But that deal has had virtually zero traction while IBM resells Juniper gear and develops the Stratus fabric with the company. IBM was also rumored to be a potential acquirer of Brocade but so have HP, Dell, Cisco, Oracle... and Juniper.

The potentially negative ripple effects to Cisco and Juniper notwithstanding, Brocade might be feeling those ripples as an aftershock. Says Oppenheimer:

Similar to Juniper, Brocade would see minimal impact if IBM is focused on blade switching. But if IBM expands into top-of-rack switching, this could put potential upside from Brocade's OEM deal with IBM (no material traction thus far) into question.

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