Cisco: Grist for the Mill
byteandswitch.com
Little by little, Cisco Systems Inc. (Nasdaq: CSCO - message board) is patching up its storage networking strategy. And while it's publicly downplaying its new relationship with QLogic Corp. (Nasdaq: QLGC - message board), it's a different story behind closed doors, where the two companies are said to be as thick as thieves (see Cisco Turns to QLogic, Cisco and Brocade: This Means War).
Some background details on the Cisco/QLogic connection are worth keeping in mind: Larry Carter, Cisco's CFO, has been on QLogic's board of directors since 1999, and Denis Maynard, VP of worldwide sales at QLogic since September 2001, was formerly director of worldwide field operations at Cisco, having worked there for almost 10 years.
Were Maynard and Carter able to influence Cisco's decision to strengthen ties with QLogic? Undoubtedly. Is this an example of high-level executives forming murky business relationships for personal gain? That's unlikely, analysts say. Both Carter and Maynard declined to be interviewed for this story.
"Carter probably doesn't have a financial incentive," says Harsh Kumar, analyst with Morgan Keegan & Company Inc. "He's independently wealthy and wouldn't risk tarnishing his reputation for this... QLogic won this deal on merit, and because Brocade Communications Systems Inc. (Nasdaq: BRCD - message board) messed up" (see Cisco SAN Plans Get Tangled).
Why might Maynard be particularly interested in improving QLogic's link with Cisco? One industry analyst, who declined to be named, suggests Maynard "might be interested in any buyout Cisco might do to get into the storage area, and ultimately get back to Cisco."
That's an interesting thought, but the likelihood of Cisco acquiring QLogic is slight, given Cisco's rigid position on not buying component suppliers. QLogic's principle business is selling chips and boards.
Still, Cisco could go for just QLogic's switching group (formerly Ancor), a business that has for the most part been an anchor (pun intended) around QLogic's neck. Trying to sell components to companies against which it's also competing -- i.e., switch vendors -- is not an easy task. That's why this unit at QLogic is not growing, analysts say. Talk of QLogic selling or spinning off this unit has been going around for a while.
A source close to QLogic tells Byte and Switch that the company is holding on to the unit in the hope that the market for embedded switches inside storage arrays takes off. If this doesn't happen, it will consider selling the group, the source says. Embedded switches are expected to account for only 2 percent of the total market for storage switches by the end of 2002, although this space is gaining momentum.
"Embedded switch arrays are so much less hassle for customers," says Morgan Keenan's Kumar. "It's $500 cheaper on a per-box basis, as both products share a power supply, cooling, the chassis, and implementation costs... It is a more elegant, integrated solution overall." But, he adds, "it is still a brand-new market and will take time to develop."
That seems to put aside the buzz on Cisco acquiring this unit from QLogic, at least for now. So what else is going on between these two firms? According to Kumar, the chip deal between Cisco and QLogic is also thought to extend to Andiamo Systems Inc., Cisco's in-house storage switch startup (see Cisco Owns Up to Andiamo ).
Kumar believes it was pressure from Cisco that led QLogic to break off its chip deal with Inrange Technologies Corp. (Nasdaq: INRG - message board), possibly because Andiamo may be targeting the same high-end director market as Inrange (see Inrange Nixes 2-Gig QLogic Chip).
Then there is speculation among analysts that Cisco might acquire Gadzoox Networks Inc. (Nasdaq: ZOOX - message board), located just down the road from Cisco in San Jose, Calif., to beef up its Fibre Channel expertise. Market analysts are fairly certain Gadzoox is about to lose its best OEM, Compaq Computer Corp. (NYSE: CPQ - message board), to Brocade (see Compaq to Carry Brocade's 12000). The OEM deal with Compaq was Gadzoox's lifeline, raising the question yet again of how long it can last (see Gadzoox Twitches, Gadzoox Wields Axe).
Cisco maintains it is sticking to its plan of driving revenue from storage networking. But after the embarrassing fiasco with Brocade, it must be hungry to demonstrate some positive results in this market. Cisco has billions in cash to throw around and could well turn to its acquisition team to make something happen (see Cisco Reaffirms SAN Strategy).
— Jo Maitland, Senior Editor, Byte and Switch
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