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Strategies & Market Trends : Gorilla and King Portfolio Candidates -- Ignore unavailable to you. Want to Upgrade?

To: Bruce Brown who wrote (18472)	2/23/2000 11:35:00 PM
From: Greg Hull	Respond to of 54805

RE: Fibre Channel Switch Companies Bruce, <<Is it possible that the 'inside the tornado' strategy that Ancor is currently executing by going after the niche market of the larger switches is an actual survival adjustment strategy? If this is the case and Brocade or the others do not enter the space because of the lack of a larger market share potential, then how does that alter the game?>> Brocade is the King today of the 8 and 16-port FC switches. It is my expectation that switch customers will drive this to a two or more Prince market. They have the power to do this by demanding interoperability of FC switches across switch vendors. As soon as a Compaq or Dell or IBM decide there is at least one viable second supplier, they can pit the vendors against each other. A second segment of the FC switch market is the "Director Class". The size of this market today is very small, and is filled only by McData. At least one analyst does not think this market will stay small. Ashok Kumar from Piper Jaffrey has issued reports on both Ancor and Brocade recently. I think his views are noteworthy because he and his company have no underwriting ties to either company. Here is what he has to say about the large port-count switches: "However, when we get to a director class product, 64-port solutions, a single backplane (Ancor) is a superior solution to a cascade (Brocade). We expect large installations to be aggregated on 64-port rather than 16 port modules. Ancor recently announced that they will begin marketing Inrange's 64-port solution by summer. Furthermore the incumbent in this segment, EMC (McData) has a director product that is a weak approximation to a FC switch. It does not feature any E_ or FL_ports. Ancor is well positioned to gain share at the high end. Furthermore, we expect the director class product to represent over half the FC switch revenue market by 2003.<[emphasis mine]" Lest one think he is just a rabid Ancor fan, here is a snippet from his report on Brocade last week: "In our view, Brocade is one of the best-positioned companies to emerge as a principal FC switch vendor, having demonstrated its capability by capturing 70 to 80 percent of the major OEM business in the second product round," said Kumar. "In addition, we believe Brocade possesses the most balanced corporate effort, as the company continues to execute well on its development programs and maintains its technical lead in storage-interconnect implementations. We believe the company has a substantial, but not unfair, advantage with its sales and marketing skills, its understanding of the overall market, and its dedicated and superior execution-oriented management. We believe that it was primarily these initiatives that drove its initial success." Here are a few other noteworthy points from his reports: The FC switch market will grow from $150M in revenue in 1999 to $5.6B in 2003 (CAGR=160%) "Bottom line is we expect Ancor and Brocade to control dominant share in the mainstream switch market. The losers will be Vixel and Gadzooks." ..."Notwithstanding the proceeding, we believe Brocade faces three immediate challenges," said Kumar. "First is the company's ability to grow with market demand that appears to be as high as 50 percent per quarter. Thus, the company is faced with the challenge of putting into place additional infrastructure to complement its OEM partners. Secondly, on the hardware front, the company needs to execute flawlessly on its roadmap to maintain technology parity with Ancor Communications (ANCR-(a)) and McData, or risk losing share. Lastly, we believe interoperability standards for storage hardware, network components and software are still under development. There is also a real potential that Brocade, as well as the other participants in the FC space, will eventually be impacted by IP-based solutions." Closing comments. I think Brocade is doing extremely well and is in the better position to be the premier supplier 12 months from now. From an investment perspective, though, will they be able to maintain the 10:1 market cap over Ancor? The nimble and observant among us may be able to jump from one to the other, but I've never been very good at timing. Just about everyone here perceives BRCD as the better investment, but I think I'll remain in that outlier group who thinks that the better FC switch play for the next 24-36 months will be ANCR. Unless someone has specific questions I'll let this subject rest. Greg