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Technology Stocks : EMC How high can it go? -- Ignore unavailable to you. Want to Upgrade?

To: Bob Frasca who wrote (10514)	6/21/2000 9:31:00 AM
From: JDN	Read Replies (1) \| Respond to of 17183

Dear Bob and Gus: I read with increasing admiration the professional and technical discussion the two of you have had on McData and competitors. Both of you seem very well versed in your subjects. I wouldnt presume to argue with either of you on the merits of the technology. But, I would take issue with one of your comments, Bob. "In my opinion, McData is too far behind and that's why EMC is spinning them off." I was a business man and I can tell you there could be a very good business reason for spinning off McData. That is as follows: Presume McData does in fact have new products coming out that will compete with the latest generation. In order to generate the maximum amount of sales (and thus spread out the costs of developing) it would behoove McData to be independent of EMC. Many vendors would think twice before buying a product from their competitor if a seperate source were available. That is my only meager comment to both of yours arguements. JDN

To: Bob Frasca who wrote (10514)	6/21/2000 2:52:00 PM
From: Gus	Read Replies (1) \| Respond to of 17183

Your 99% figure is a little misleading as there really hasn't been a market yet. 99.8% is an IDC number. The FC director switch business is a natural progression from the ESCON director switch business. Director-class switches are increasing at a rate faster than all other segments combined - a compound annual growth rate (CAGR) of 129 percent between 1999 and 2003. In addition, the director-class switch will take over fabric switches in 2001, and by 2003 they will account for 52 percent of the market's revenue.... "The worldwide Fibre Channel hub and switch factory market is red hot. In fact, it is one of the fastest growing of any market that we cover, reaching nearly $2.8 billion by 2003," said John McArthur, vice president of IDC's Worldwide Storage Systems research. "McDATA is at the heart of the fastest growing segment with 99.8 percent of the director-class switch segment." mcdata.com I must reiterate, because you didn't acknowledge the point, that McData's director product is the previous generation I don't understand your point. Mcdata has been selling the ED5000 since 1997 or 1998, BEFORE anybody else. It posted revenues of $33M in 1997, $36.3M in 1998 and $95.3M in 1999. The ED5000 accounted for 43% of revenues in 1999. ESCON director switch revenues peaked in 1997. EMC was the sole customer for the ED5000 in 1998 and 1999 reflecting its substantial first mover lead in SANs, but both IBM and Hitachi qualified the ED5000 earlier this year. mcdata.com mcdata.com Mcdata's last 5 quarters show how the FC director switch market is progressing: 1Q2000 - $13.2M 2Q2000 - $21.0M 3Q2000 - $22.7M 4Q2000 - $38.4M 1Q2000 - $47.1M It's clear, from what you've posted that McData is following in the footsteps of Ancor and putting the brains on the ASIC. It has been discussed on the Ancor board for many months that the reason EMC liked Ancor's product was because of it's hardware bent. Well, let's not overstate the case for Ancor here. What you have described is not that unique. Take EMC's own approach: Mosaic:2000. EMC's common hardware architecture on which its Symmetrix products are based is called MOSAIC:2000, a modular design and interface that allows new technologies to be rapidly incorporated. This hardware architecture enables EMC to deliver advanced technologies to market quickly while maintaining a consistent platform upon which its customers can expand capacity, performance, connectivity and functionality. Having been part of EMC for the last 5 years, it wouldn't be surprising to see Mcdata also adopt EMC's approach and for EMC to favor vendors like Ancor using similar approaches. My understanding is that McData has NEVER been a player in the switch market. (Who are their OEM partners besides EMC?) The IBM annoucement qualifying the ED5000 indicates that Mcdata has considerable switch ASICs experience in large scale switching environments through EMC and IBM: For six years, IBM has relied on McDATA for the design and manufacture of the ESCON Director and the FICON bridge in the original SAN environment, S/390 ESCON. More than 6,000 ESCON units have been installed in over 65 countries. EMC bought Mcdata in 1995 and it surpassed IBM in mainframe storage in 1996. As mentioned earlier, the ESCON director switch market peaked in 1997 and is on a steady downward decline as the FICON bridge card product -- also an IBM exclusive -- started to sell. I also think that you need to make a distinction between the FC director switch market and the FC switch market because of the different ways those products are sold. From the Mcdata prospectus: A SAN incorporates one or more classes of networking devices that enable the interconnection of the SAN with server and storage devices. These devices are: - Storage Director -- the backbone device that enables the broadest connectivity of servers and storage devices in a SAN configuration. It has the highest bandwidth performance and provides the highest number of ports per size of device (which is referred to as port density) of all SAN networking devices. A director class switch, unlike other types of SAN networking devices, has fault tolerant technology and redundancy built throughout its design. Storage directors support a fabric configuration and provide a highly available platform for a centralized SAN management system. Directors can be used in configurations that connect large numbers of servers with multi-terabyte storage arrays in either a fabric or arbitrated loop configuration. - Storage Switch -- a device that addresses typical department level requirements to connect a range of server and storage devices with less capability than a director. Storage switches provide increased flexibility in building larger SAN configurations and higher performance than storage hubs. Typical configurations connect a limited number of servers with multi-hundred gigabyte storage arrays. Ancor's expertise may be designing actual FC switches, but their partnership with Inrange clearly shows that they don't have the technical expertise or marketing organization to move up the food chain and sell director switches. Mcdata, on the other hand, has been an exclusive ESCON and FICON supplier to IBM for the last 6 years despite the fact that EMC owns it so that should tell you something about their strenghts. The bottom line is that McData is TRYING to build a competitive product that hasn't been released yet and may never be released. After that, they face stiff competition from the firmly entrenched veterans in the switch market who are currently working on yet another generation. If they'd had a viable current generation product, EMC would have used it instead of Ancor and Brocade. After all, EMC is an OEM. The customer, in most cases, could care less whether the switch inside is Ancor, Brocade, or McData and may not be able to tell in the finished product anyway. In my opinion, McData is too far behind and that's why EMC is spinning them off. The acceleration in Mcdata's revenues belie your point. Again, your thesis falls apart when you look at the facts that show that EMC retains control of the declining ESCON business while Mcdata retains control over the niche FICON bridge cards and the fast-growing director switch business. Furthermore, I think your point about Mcdata being too far behind to catch up seems to ignore that technical leapfrogging is the norm in technology. I think you also ignore the value of Mcdata's understanding of the EMC and IBM installed base, not coincidentally the most complex computing environments in the market. As Ancor proved, Brocade's lead in the FC switch business was not insurmountable and Ancor's current lead won't be insurmountable. And as I have indicated, FC director switches sell very differently from ordinary FC switches because they are sold as part of a solution with more than 50% expected to be sold eventually through the reseller channel.