Will Big Blue Make Brocade and EMC Sing the Blues?
by Chris Connor
Senior Technology Analyst, WallStreetCity.com
wallstreetcity.com
A Technology Revolt within the Storage Industry
As mentioned in last week's article entitled SAN Sell-Off: Has the Alamo of the Technology Sector Finally Fallen?, there is a movement afoot in the storage area network (SAN) industry to build SANs with common IP and gigabit Ethernet products instead of specialized Fibre Channel. Building SANs with regular networking components instead of Fibre Channel makes a lot of sense for several reasons such as the fact that Fibre Channel SANs are more expensive and harder to build, the divergence of performance between Fibre Channel and Ethernet has narrowed considerably with the advent of Gigabit Ethernet, and Ethernet or IP SANs are more open-system oriented (less proprietary) than Fibre Channel.
Now, the movement within the industry has finally reached the surface with IBM's {IBM} recent announcement that it was introducing new storage products targeting SANs built with TCP/IP, which is what that the Internet is built on (Ethernet is the dominant networking technology for local area networks or LANs). IBM's new storage products will be based on the iSCSI standard, which is what will allow companies to build SAN's with TCP/IP hardware instead of Fibre Channel switches, hubs, adapters etc. This product announcement is pivotal to the storage industry because it finally gets the ball rolling on finding alternatives to Fibre Channel. There has been talk about Fibre Channel being replaced in SANs for some time, but no major company has really stepped up to the plate and delivered a product until now. With this in mind, don't be surprised when more major companies come out with products targeting Ethernet-based SANs as well.
What effect will this have on Brocade?
Keep in mind that Fibre Channel is the primary reason that Brocade {BRCD} has become one of the four horsemen of storage along with EMC {EMC}, Veritas {VRTS}, and Network Appliance {NTAP}. Brocade appears to be too dependant on Fibre Channel to extend its dominance into the realm of Ethernet or IP. If Fibre Channel is replaced by IP and/or Ethernet, BRCD's competitive advantage could be destroyed leading to a potential erosion of not only future growth, but profitability. Given that the stock continues to sell at rather expensive valuation (P/S multiple of 20.81, which is far above the S&P 500's multiple of 4.85), the downside risk is very material.
It's worth noting, however, that the demise of Fibre Channel and the collapse of Brocade business model are just the extreme possibilities of what could happen over the next year or two. The more probable scenario is for Fibre Channel and the two more common networking technologies to coexist for sometime until it gets to the point that Fibre Channel can not compete with Ethernet and IP anymore.
What about EMC?
Although EMC obviously does not have as much to lose as Brocade does because of its product diversity, EMC is definitely not embracing more open IP or Ethernet SANs, yet. The storage titan is the leader of the entire SAN industry and Fibre Channel has been a big part of this success largely because of Fibre Channel's proprietary nature and EMC's recent Fibre Channel spin-off, McData. Nevertheless, EMC does believe in the long term future of more open-system SANs, because the company's CTO Jim Rothnie recently stated that it will take two years before storage via TCP/IP will be a serious alternative to Fibre Channel. The bottom line is that EMC knows that the storage industry is moving to a more open standards and it wants to be a major part of that; however, IBM has clearly attempted to gain to first-mover advantage. Big Blue's announcement is particularly interesting given the history between the two companies.
Is the announcement IBM's revenge for losing its storage hardware top spot to EMC many years ago? Only time will tell, so stay tuned as this story continues to unfold.
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