Glenn, re:brcd
>Fibre Channel on the Way Out?
Just when it looked like the NAS-SAN combination was strengthening the long-term outlook for SAN stocks, improving Ethernet technology emerged as a contender to destroy the futures of companies that rely on Fibre Channel. In other words, specialized Fibre Channel may be replaced by abundant Ethernet as the backbone of choice for SANs. John William Toigo, a storage industry consultant and author of The Holy Grail of Data Storage Management, says "there is a lot of momentum building within the industry to build SANs out of traditional components: gigabit Ethernet and IP rather than Fibre Channel. Powerhouses like EMC {EMC}, IBM {IBM} and Cisco Systems {CSCO} are already lining up behind it." If Ethernet does eliminate the use of Fibre Channel for data storage, several SAN companies that are dependant on Fibre Channel face possible extinction. That is a bold statement, but worthy of serious consideration. There are several SAN companies that focus only on Fibre Channel products like switches, hubs, and routers. It would be wise not to count on these pure-play SAN companies making a big impact on a mainstream network with the dominance of Cisco Systems in Internet Protocol (IP) and Ethernet-based networks.
In the Brocade {BRCD} article, the risk of Cisco entering in the SAN market in some capacity was discussed, and, that perceived risk looks now like it will become a reality. Basically, Cisco and other networking giants want a piece of the SAN pie, and they will probably capture the lion's share of the SAN market if SANs go strictly to Ethernet or IP backbones. Brocade is the dominant player in Fibre Channel with its Fibre Channel Fabric switches that facilitate connectivity among any Fibre Channel-based SAN devices. Brocade's switches maintain high bandwidth as additional devices are added to a SAN, but Brocade is no match for Cisco in Cisco's territory. If the dominant Fibre Channel-based SAN company with the best performing stock price (see the scoreboard in part one of this update) and technology of all current SAN companies is no match for Cisco, second tier SAN companies like Vixel, Gadzoox {ZOOX}, and Ancor Communications {ANCR} certainly do not stand a chance against Cisco or any other major networking company, for that matter.
How can investors take advantage of this crucial development within the SAN industry? Currently, one of the biggest beneficiaries of this development is a little-known private company, but investors who watch for new IPOs may want to write down this company's name, NetConvergence, for future reference. Toigo says that a "... big winner will likely be startup vendor, Netconvergence (Santa Clara, CA), which offers a universal storage gateway product called Matrix USG. With Matrix, companies can readily connect together SANs based on FC (Fibre Channel) with those based on GE (Giga-bit Ethernet), or extend storage across Telco-provided broadband pipes such as SONET." The any-to-any connectivity capability of Netconvergence's Matrix should be the benchmark for which all SAN stocks should aim in the future.
One of the companies that could be hurt the most from the demise of Fibre Channel, Gadzoox, has recently taken a promising step in the direction that NetConvergence is pursuing with the storage industry's first Fibre Channel-to-gigabit Ethernet router. This product could be a homerun for Gadzoox as more SANs move to gigabit Ethernet, and it certainly puts the company in a better position than the other pure Fibre Channel-SAN companies.
General Outlook
Unless for some reason Ethernet does not become prevalent as the backbone of SANs, Brocade could, in time, become a fallen angel. Brocade appears to be too dependant on Fibre Channel to extend its dominance into the realm of Ethernet. Without prospects of continued market dominance, Brocade's stock will not likely command the high premium that it has exacted form investors. Hence, Brocade's stock price has a long way to fall. Nevertheless, Emulex {EMLX} and Qlogic {QLGC} are two SAN companies that will likely stand up the best in this situation, since they are not pure Fibre Channel plays. NAS stocks like Procom {PRCM} and Network Appliance will probably do significantly better though, since Ethernet is their playground - not Fibre Channel. Flash memory companies should not be affected by a move to Ethernet or IP-based SANs, since they cater primarily to devices instead of networks. Finally, storage management software's importance should increase as companies make the transition from Fibre Channel to Ethernet; storage management software will also play a crucial role in the NAS-SAN combination. With that being said, storage management software's dominant player, Veritas, should be a stock for investors to keep an eye on. In fact, both Veritas and Network Appliance look to be the storage stocks with the best chance to ascend to higher levels of success. EMC will likely continue to be a dominant force in storage for years to come, but Veritas and Network Appliance have far more growth ahead of them. |
