BRCD dominated the first-generation fibre-channel based SAN market, but McDATA now has its own ASICs out and that allows them to use its dominant position (99.8%) of the director switch market as a platform for wresting control of the Fibre Channel switch business from Brocade over the next few quarters as the market moves from the 2-4 switch configurations to larger switched fabrics.
EMC captured 40% of the 1999 SAN market, which is not surprising because of its dominating postion (50%) in the ESCON market, the original SAN environment, and the way that it also wrested lead of the storage management software market from IBM (Tivoli) in 1999. EMC is on track to log more than $1.5 billion in SAN sales and more than $1.5 billion in Storage Management Software this year and the way they are positioning McDATA's Directors at the core of their software-intensive switched fabrics strongly supports the view that McDATA will exhibit the same growth patterns. As you know, under the 5 year OEM agreement between EMC and McDATA, EMC takes an active part in designing McDATA's products into Symmetrix and Clariion, and EMC takes sole responsibility for beta testing the product. My own sense is that it took them about 6-12 months to beta test McDATA's ASICs, which if you look carefully, are based on heavily on technology with 1997/1998 patent application dates.
The issue about the willingness of EMC's rivals to buy technology from an EMC company is very real, but here's where it gets really interesting.
EMC bought McDATA in late 1995. As soon as the deal closed, EMC gave McDATA room to explore the fibre channel technology that was just beginning to emerge from the standards committees. McDATA quickly entered into an OEM and technology development relationship with Brocade in 1996.
In early 1997, McDATA agreed to buy the CNO (Canadian Networking Operations) of HWP for about $5 million. As part of that agreement, MCDT acquired about 15 employees, a development lab near Toronto, and HWP's patents related to fibre channel including two patents that apparently form part of the basis for Brocade's technology. Soon after this, EMC and McDATA agreed to reorganize the company to sharpen its fibre channel focus and EMC allowed Jack McDonnell and McDATA employees to re-buy into McDATA Class B.
Kumar Malavalli is one of the co-founders of Brocade and he was apparently an employee of HWP's CNO prior to his joining Brocade. Now, as of early 2000, Brocade only has 2 enclosure design patents, 3 provisional patents (no official patent office scrutiny, one year to file regular patent application) and 5 pending patent applications so, as far as I can tell, the only basis for Brocade's fibre channel switch technology were patents that previously belonged to HWP and which were subsequently assigned to McDATA in 1997 as part of the sale.
Here are the two patents in question.
US5748612: Method and apparatus for implementing virtual circuits in a fibre channel system
OWNER: McDATA - assigned by HWP to McDATA on May 30, 1997.
patents.ibm.com
Inventors: Kumar Malavalli (Canada), Bent Stoevhase (Canada) - assigned to HWP on August 14, 1995.
FILED: August 8, 1995
ISSUED: May 5, 1998
patents.ibm.com
US5519695: Switch element for fiber channel networks
OWNER: McDATA - assigned by HWP to McDATA on May 30, 1997
patents.ibm.com
INVENTORS: Kumar Malavalli (Canada), Bent Stoevhase (Canada), Robin Purohit (Canada) -- assigned to HWP on August 9, 1995
FILED: October 27, 1994
ISSUED: May 21, 1996
patents.ibm.com
Based on the latest SEC filings, McDATA has 16 patents and 20 patent applications. Brocade has 2 design patents, 3 provisional patents and 5 patent applications. As far as I can tell, Kumar Malavalli's co-inventors are still with McDATA.
Bent Stoevhase is listed as a sole inventor of one patent and a co-inventor of 6 patents, all originally issued to HWP and assigned to McDATA in 1997. The latest patent was issued on January 11, 2000.
Robin Purohit is listed as a co-inventor of 4 patents, all originally issued to HWP and assigned to McDATA in 1997. The latest patent was issued on May 11, 1996.
Kumar Malavalli is listed as a co-inventor of only 2 patents, all originally issued to HWP and assigned to McDATA in 1997. The latest patent was issued on May 5, 1998.
This probably explains why McDATA sued Brocade in early 1998 for patent infringement, which prompted Brocade to countersue McDATA for infringing on its enclosure design patents.<g> Both parties agreed to settle the cases a few weeks later; although, the 2-year settlement agreement involving ASIC licensing and support only came into effect one month before Brocade's May, 1999 IPO. HWP apparently had a hand in brokering the settlement agreement which expires in April 2001.
Now, fibre channel is an open standard so many parties will have all kinds of intellectual property related to this open standard. Because of the architectural nature of this technology, the key, obviously, is getting the switch technology into the SAN offerings of the most successful RAID vendors. What the above clearly shows is that McDATA's patent position is genuinely stronger than Brocade's because McDATA already had intellectual property in crossbar switching and intelligent cluster controllers before it decided to buy HWP's CNO unit, which apparently owned the basis for a lot of Brocade's fibre channel switch technology.
Going back to the issue of EMC's rivals buying from an EMC subsidiary, the arguable point is the switch technology is not going to provide them any with any competitive edge because those switches are only as good as the disk array technology. For example, EMC has already qualified Symmetrix with the IP-based optical networking technology of the major players (Nortel's Optera, Lucent's OptiStar, etc) so McDATA's probably going to be a player there as well if you look at the considered way that EMC is transforming the SAN (as part of its ESN) into a carrier-class network element that is going to be a key part of the outsourcing bridge between the largest companies in the world and the strongest global carriers/xSPs.
Both Brocade and McDATA were clearly involved in pioneering and validating the fibre channel switch market so there's a certain amount of goodwill there, but the release of McDATA's own ASICs, I think, signifies an escalation of the competion between the dominant director switch vendor and the heretofore dominant switch vendor, which has made a sport of publicly bullying the other switch vendors like Ancor, Vixel, and Gadzoox and which has been privately referred to as an obstacle to the standardization and commercialization of fibre channel by its rivals.
EMC has had a relationship with Inrange dating back to 1993. Like CMNT, Inrange was an alternative source to McDATA, which has controlled over 85% of the ESCON/FICON director switch market for the last 6 years. I think Inrange is second only to CMNT in the long distance ESCON market and both Inrange and CMNT will probably specialize in the long distance SAN market as well in addition to being alternative sources to McDATA in the mainstream SAN market.
Fibre Channel is clearly an early stage market that is gaining a lot of momentum. A lot of players will thrive in that winner-takes-most environment. All McDATA has to do is execute well, post the numbers and avoid infringing on those dang Brocade enclosure design patents.....again.<g> |
