Sorry, Eric. That should have been....
herring.com
March 2000 issue
but who do you see as the greatest threat on the horizon
The ESCON optical interconnect was invented by 1990 or 1991 by IBM for the S390 mainframe market. The S390 mainframe environment is widely considered to be the original SAN environment. Fibre Channel is the standards-based interconnect technology developed for the open systems market by the storage industry. In many ways, it uses the ESCON mainframe storage area network as the template for a much more powerful storage networking platform: a dynamic many-to-many point-to-point connection topology designed to drop into the core of the typical enterprise networking environment.
McDATA was the exclusive supplier to IBM for the ESCON/FICON market. The companies with competitive ESCON/FICON or Fibre Channel-based director switch technology are Inrange (using Ancor/Q-Logic's ASICs), Q-Logic (using Inrange's director switch platform), and CNT (ticker: CMNT).
MCDT has dominated the ESCON director switch market for the last 6 years with over 85% market share. The ESCON installed base consists of 6,000+ sites in more than 65 countries so McDATA's 85% market share translates to about 5,100 sites. In the S 1/As, McDATA disclosed that the installed base for its fibre-channel storage networking products currently consists of more than 400 customers outside of IBM and EMC, which both have their own global network of direct sales force, resellers and distributors. That means that McDATA's natural market is relatively untapped and as that natural market deploys fibre channel-based SANs, McDATA, through its reseller agreement with IBM and its OEM agreement with EMC, stands a good chance of duplicating its dominance of the ESCON/FICON market.
Put another way, because of its dominating position in the ESCON/FICON market, McDATA is the prohibitive favorite to be the lead backbone and edge switch supplier (FICON/FC) to about 5,100+ ESCON sites especially since its August introduction of a the $5,000 8-port edge switch ($625 per port assuming no ISL, or interswitch-links) indicates its willingness to be more aggressive in terms of pricing. That also expands its addressable market, particularly in the middle market.
Currently, McDATA identifies Brocade as its main competition, but as it gradually rolls out its own ASICs (disclosed in the S 1/A), Brocade is faced with the prospect of competing against a formidable opponent with a superior and field proven technology platform, the most desired installed base in the business and quite possibly, pricing and industry leadership (OSFI - McDATA-led 4 vs Brocade).
Is that right...I thought it was spun off from EMC this year...or is that just the IPO?
EMC (1995 revenues: $1.6B) paid the stock equivalent of about $230M (13+M 1995 EMC shares), or about 14% of revenues, for McDATA in late 1995 just a year after McDATA's director switch technology earned it an exclusive supplier relationship with IBM. It has raked in over $1 billion in revenues from the ESCON market since 1994 -- at a remarkably consistent rate of over $1 million in revenues per employee -- so it has been very profitable and most definitely, cash-flow positive; although, it constitutes too small a part of EMC's overall business (TTM sales: $7.7 billion) to stand out.
After getting the lay of the land in the emerging fibre-channel industry from 1996-1997, EMC and McDATA agreed to reorganize McDATA in 1997 -- after McDATA had acquired HWP's CNO (Canadian Networking Operations)) and after McDATA had entered into an OEM and technology agreement with Brocade. Under that 1997 reorganization, EMC -- through its wholly owned subsidiary, McDATA Holdings, which owns 100% of McDATA Class A shares -- recognizes all ESCON sales from the IBM-McDATA agreement while McDATA gets a service fee (effectively a predetermined portion of ESCON margins) for designing and building ESCON switches and McDATA gets all revenues from its FICON and Fibre Channel based products.
That reorganization also allowed Jack McDonnell and McDATA employees to buy 10-15% of McDATA Class B. I believe they've enjoyed relative autonomy since then although, very clearly, it remains in McDATA's interest to maintain close ties with EMC and IBM, which together control over 70% of the ESCON+Open Systems subset of the heteregeneous storage system market. |
