A bunch of CEO’s promising to play ‘nice’ with each others toys is not a convincing marketing exercise. Cisco and EMC/VMware need to merge to get big enough to compete with HP / IBM. In the last fifteen years, I have seen so many partnerships that come and go. I take a long

Merger or Buyout

EMC is too big for Cisco to buy and Wall St doesn’t look favourably on mergers of IT companies at the moment. The HP / Compaq merger proved that merging big companies isn’t a great idea.

There is little to no overlap between the companies, Cisco already owns 5% of VMware stock (and Intel owns a goodly percentage of VMware as well).

Servers don’t make a lot of margin, and Storage margins are under threat

Cisco likes big fat margins. EMC loves big fat margins. Servers make very little margin. . I take the view that Cisco is selling servers because HP is selling switches, and can see the market is currently moving away from Cisco’s strength in the network.

Cisco doesn’t own the smarts in their servers, Intel does. Cisco just glues the latest Intel chipsets to a board like every other server manufacturer and Intel makes the big profits. This is a big change for Cisco’s business strategy and signals how desperate they must be to enter this market. Specific concerns around the HP ProCurve and it’s penetration into their existing markets must be very worrying.

Cisco has product differentiation strategy for UCS is mostly built around a hybrid storage strategy using FCoE- a technology that isn’t ready for full market adoption yet. FCIP and significant market penetration of FCoE is still years away, and the supporting Ethernet standards (not even software and hardware) won’t be ready until the middle of next year.

Sure, Cisco can build metal boxes, power supplies and marketing material like anyone else. But they also market their ability to make their own silicon in their routers and switches and how this is ‘competitive advantage’. When they don’t have their own silicon, what is their value to customers ?

Whither EMC ?

EMC owns a fairly good sized chunk of the Storage market, but their position is being threatened in the long term by commoditisation in the storage market. The cost of ganging hard disk drives together with some metalwork and a power supply is now within reach of a moderately well funded startup, and the speed of software development means that EMC’s core business is being marginalised. Witness Lefthand and 3Par as examples. At the very least, EMC profits are going to a lot slimmer over the next five years as their technology becomes commoditised.

VMware is the magic sauce

EMC owns VMWare which is the glue. They did a deal with Intel for something 10%, and Cisco got 5% a while ago. Now we know why.

But there are alternatives to VMware. Microsoft’s Hyper-V, while generally laughed at, is a contender and the Citrix XenSource could still make a comeback from it’s current position.

Balkanisation

EMC needs to make sure they don’t ‘choke the chicken’ here. By aligning with Cisco, alternatives to VMware could become viable. That’s an unlikely scenario, and VMware must be praying that customers continue to demand VMware, and not turn to HP/IBM for other virtualisation systems. Even Sun Microsystems has a very good virtualisation strategy (of course, no one’s gonna touch that until Oracle comes up with a convincing message).

If the virtualisation market separates into a two sided battle, VMware on one side and everyone else on the other then we could see HP/IBM acting as frenemies with VMware, but really focussing on some other product that meets their own product goals.

One Throat to Choke

HP and IBM are a one stop shop for hardware, software and services. The “one throat to choke” or “one arse to kick” means that HP and IBM will be considered the strongest contenders for Private Clouds. Neither Cisco or EMC are getting traction with customers because they can’t guarantee and end to end solution. Remember we are talking about multi-million dollar purchases here and typically happen when a strategic shift occurs. The CIO/CTO isn’t going to sign off on a hugely political choice unless they are comfortable with the vendor.

One thing to note – Public Clouds don’t matter here. Most companies are years, and probably a decade away, from looking at actually using Public Clouds for anything serious. Don’t let a few articles on popular websites lead you astray, or a few Tweets from some loud mouth bonehead in a marketing team give the feeling that Clouds are anything but a bright idea. Things like reliability, liability, pricing, legal ownership and title are not even being discussed yet and solutions are a long way off. Customer acceptance and use, jeesh, not anytime soon. At least, not in a big way.

Resellers should be very worried

HP and IBM will be working directly with customers and reassuring them that they will have the full attention. Given that HP and IBM already manufacture and sell the most visible assets of a cloud (servers and storage) they have a very credible pitch.

When the price war starts, Cisco/EMC will HAVE to remove the reseller from the sale to remain competitive. The reseller needs between five and ten percent margin and many customers don’t see the value of a reseller in any case. Most customers have their own expertise and don’t need a reseller for ongoing maintenance. The value and influence of the reseller is diminishing at the top end of the market.

And resellers don’t have a market in pitching external clouds because that is a specialist business well funded by the VC market or covered by existing players such as Amazon or Rackspace.

Resellers will continue to eke out a living working with Medium to Small Businesses, but there probably isn’t enough money for many to survive. Indeed, Cisco’s willingness to partner has made them popular in the reseller community, but Cisco isn’t really giving them enough profit to survive.

Living together isn’t the same commitment as being married

No matter how much a couple of fancy CEO prance around claiming to have partnered to someone, proclaiming their unending love for each other, I frankly no longer believe it. The last ten years of ‘partnerships’ showed how transient, temporary and downright false that is.

The only way two companies can show they are serious about the relationship is to get married. Living together does work for some people, but marriage shows a real commitment.

Frankly it won’t matter

HP and IBM are going to run rings around Cisco/EMC/Acadia when it comes to closing deals. They are going to be spreading Fear Uncertainty and Doubt in the minds of customers:

Who is going to be the salesman ? Which engineer will do the design ? Who do I sue if it goes wrong Cisco or EMC ? Who do you call for tech support ? What is the escalation strategy ? Who is handling the training ? Do you want to be a three way argument ?

These questions are false of course. Acadia will have infrastructure and resources so,ewhere, but the emotions will resonate and be taken seriously when you deciding to spend a couple of million kwacha on a 1000 servers in a virtualisation farm.

Think about this:

Your typical CIO is comfortable buying servers and services from HP and IBM, and is going to want a much better story about minimising the risk of choosing Cisco/EMC.

CTO: “Yessir, I’m buying servers from Cisco”
CEO: “Cisco, who are they ? We haven’t used them before. Don’t they do firewall and routers ? ”
CTO: “Umm, yes. Forget I mentioned it.”

So, until Cisco and EMC can find the guts to merge, or Cisco buys EMC outright, it hard to see how this is going to go well.