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

To: Bruce Brown who wrote (25031)	6/4/2000 5:33:00 PM
From: Greg Hull	Read Replies (2) \| Respond to of 54805

RE: SAN / Brocade Bruce, About two weeks ago you posted some thoughts on SANs. I did not respond then because the post came right before I took a several day internet hiatus. I like to ignore the market periodically, especially when things aren't going the direction I like. When I returned and caught up with subsequent posts I was happy to see buck had returned. Other matters distracted me from posting until this weekend. One of the observations you made was: "Part of the reason that the discussion is not carried out on this thread is that the criteria leans toward games that have already been decided. This raises the annual revenue requirements from the companies discussed and is designed to create a more risk averse environment for investing. However, since I am one that does invest in early games, I will happily discuss with you the little bit that I know. My apologies to the thread for discussing a game that is early in the technology adoption life cycle." It is my impression that thread bloat has abated in the last couple months. This may be a good reason to avoid SAN/Fibre Channel discussion, or maybe it is acceptable to discuss them periodically and briefly. I'm guessing very few of the regular posters and lurkers are interested in every company/industry discussed here, but unless the opportunity is enormous the less popular topics should be discussed infrequently. From the Gorilla Game perspective, Brocade seems to me to be the only company worth discussing as a potential Gorilla in the FC switching arena today. Other companies should be discussed as evidence pro or con the existence of a GG or Royalty Game. I say this as an owner of Ancor for four years. When I first became interested in Fibre Channel technology there were very few companies trading publicly with an extensive concentration in FC. Brocade, Gadzoox, and Vixel would not be public for another 3 years. FC host bus adapter companies were available, but I did not pay any attention to this side of the technology. Had I an awareness of GG principles at that time I would have invested in this arena when I did. There is a lot of bad blood between Ancor and Brocade management, supporters, and investors. I don't think much (if any) has crept into G&K and I hope it remains that way. Perhaps there is a parallel to QCOM/NOK or CDMA/GSM. I don't follow those threads to know how close the parallel. Brocade is the only FC switch company to demonstrate strong financials, though there are examples of other FC (non-switch) companies who have also done well. The FC market is projected to grow enormously in the next 4 years. As you point out in your post the RFM has the following to say: "Once a company or sector starts down the path with one of these vendors, it becomes increasingly unlikely that it will even consider the other one. Since tornadoes always distribute their market shares asymmetrically, once Cisco had the lead, which they did in part due to their first mover advantage, the game was over really even before it picked up full steam." - page 222 As a FC investor I want to know how likely is it that Brocade will follow the Cisco path. The 90% market share they claim seems to put them in a good position for the pending/imminent tornado. IDC recently published the following projections for this space: Worldwide Fibre Channel Hub and Switch Factory Revenue, $M, 1999-2003 CAGR 1999-2003 1999 2000 2001 2002 2003 (%) Hubs, entry $15.6 $17.1 $17.8 $18.4 $18.6 4.5% Hubs, managed 53.8 64.2 84.1 107.6 139.9 27.0% Switches, loop 14.1 67.1 108.2 148.4 180.1 89.2% Switches, fabric 100.7 186.8 387.0 693.3 1020.7 78.4% Switches, directors 52.4 197.2 441.6 867.9 1428.9 128.6% ---- ----- ----- ----- ------ ----- Total $236.4 $532.3 $1038.7 $1835.7 $2788.2 85.3% ------ ------ ------- ------- ------- ---- Growth % 227.8% 125.1% 95.1% 76.7% 51.9% Brocade currently participates in the loop switch and fabric switch segments. These segments have a 5-year CAGR of 89% and 78%, respectively. If they maintain their 90% share of the combined $1.2B segment projected for 2003, they may be mentioned as another Cisco. A related segment in which Brocade does not participate today is FC directors, currently dominated by McData. (McData has just announced their intention to go public.) The director segment is even more impressive than the loop and switch segments combined. This segment will grow at 128% annually to become a $1.4B market in 2003. What is the likelihood Brocade will be a Gorilla in FC switching? Paul Johnson, one of the authors of the RFM, has intimated such a possibility but I have not seen a rigorous defense of that position. My personal opinion is that it will be a Royalty game. I just do not see IP upon which Brocade can defend their turf without relying on superior execution, though I'm interested in hearing arguments to the contrary. If there is any further discussion of this topic, I would suggest the following issues are some of the points we could address: - Can Brocade dominate loop and fabric switches without being a dominant player in the director segment? - EMC and Datalink were Brocade customers exclusively until recently. How likely is it other major customers will implement dual sourcing, what fraction of their business is at risk, and what impact, if any, will this have on Brocade's margins? - Industry consolidation has begun. Qlogic announced an agreement to acquire Ancor. Do further consolidations make it more or less likely Brocade will become a Gorilla? With which other companies would a merger involving Brocade increase the chance of Gorillahood? - When is the earliest we can confirm or deny Gorillahood? - Merlin introduced the possibility of two Gorilla Games in this space when this topic was discussed months ago. Are the markets for loop and fabric switches sufficiently distinct from director switches to support this distinction? - What are the major impediments to achieving the growth rates IDC projects? Finally, are there more than 2 or 3 people on this thread interested in this topic? Greg