Daily Archives: July 19, 2011

Intel’s Fulcrum Buy Validates Merchant Silicon, Rise of Cloud

When I wrote my post earlier today on Cisco’s merchant-silicon dilemma, I had yet to read about Intel’s acquisition of Fulcrum Microsystems, purveyor of silicon for 10GbE and 40GbE switches.

While the timing of my post was fortuitous, today’s news suggests that Intel has been thinking about the data-center merchant silicon for some time. Acquisitions typically don’t come together overnight, and Intel doubtless has been taking careful note of the same trends many of us have witnessed.

Data Center on a Chip

In announcing the deal today, Intel has been straightforward about its motivations and objectives. As Intel officials explained to eWeek, Fulcrum’s chip technology will not only allow network-equipment vendors to satisfy demand for high-performance, low-latency 10GbE and 40GbE gear, but it also will put Intel in position to fulfill silicon requirements for all aspects of converged data centers. With that in mind, Intel has stated that it is working to integrate a portfolio of comprehensive data-center components — covering servers, storage, and networking — based on its Xeon processors.

With converged data centers all the rage at Cisco, HP, Dell, IBM, (and many other vendors besides), Intel wants to put itself in position to meet the burgeoning need.

Intel did not disclose financial details of the acquisition, which is expected to close in the third quarter, but analysts generally believe the deal will have only modest impact on Intel’s bottom line.

Strategically, though, the consensus is that it offers considerable upside. Intel apparently has told Deutsche Bank analysts that it now captures only about two percent of overall expenditures dedicated to data-center technology. Fulcrum is seen as a key ingredient in helping Intel substantially boost its data-center take.

Unlikely to Repeat Past Mistakes

The deal puts Intel into direct competition with other merchant-silicon vendors in the networking market, including Broadcom and Marvell. Perhaps a bigger concern, as pointed out by Insight64 analyst Nathan Brookwood, is that Intel failed in its previous acquisitions of network-chip suppliers. Those acquisitions, executed during the late 90s, included the $2.2-billion purchase of Level One.

Much has changed since then, of course — in the market in general as well as in Intel’s product portfolio — and Brookwood concedes that the Fulcrum buy seems a better fit strategically and technologically than Intel’s earlier forays into the networking space. Obviously, data-center convergence was not on the cards back then.

Aligned with March to Merchant Silicon, Rise of Cloud

To be sure, the acquisition is perfectly aligned with the networking community’s shift to merchant silicon and with the evolution of highly virtualized converged data centers, including cloud computing.

One vendor that’s enthusiastic about the deal is Arista Networks. In email correspondence after the deal was announced, Arista CEO Jayshree Ullal explained why she and her team are so excited at today’s news.

Arista Thrilled 

First off, Ullal noted that Arista is one of Fulcrum’s top customers. Intel’s acquisition of Fulcrum, Ullal said, “validates the enterprise-to-cloud networking migration.” What’s also validated, Ullal said, is merchant silicon, as opposed to “outdated clunky ASICs.” Now there are three major merchant chip vendors serving the networking industry: Intel, Broadcom, and Marvell.

Ullal also echoed others in saying that the deal is great for Intel because it moves the chip kingpin into networking/switch silicon and cloud computing. Finally, she said Fulcrum benefits because, with the full backing of Intel, it can leverage the parent company’s “processes and keep innovating now and beyond for big data, cloud, and virtualization.”

Even though, monetarily, there have been bigger acquisitions, today’s deal seems to have a strategic resonance that will be felt for a long time. Intel could play a significant role in expediting the already-quickening commoditization of networking hardware — in switches and in the converged data center — thereby putting even more pressure on networking and data-center vendors to compensate with the development and delivery of value-add software.

Set-Top Box Logic Doesn’t Hold

I’m not that close to the cable market — though, once upon a DOCSIS moon, I worked for a company that sold transceivers to cable-device vendors — so perhaps I am missing a nuance or subtlety that might have tempered the opinion I am about the express.

Still, I feel relatively confident asserting that Cisco’s acquisition of Scientific Atlanta ranks among the worst buys the networking giant has ever done.

Misstep Followed by Tumble

Yes, the acquisition of Pure Digital Technologies and its Flip video camcorders must rate at the top (or is that bottom?) of the charts. Whereas Cisco paid $6.9 billion for Scientific Atlanta and only $590 million in stock — plus about $15 million in retention-based compensation — for Pure Digital, the former is still lumbering along a wayward path while the latter has been shuttered outright. When an acquired company is shut down with prejudice, as opposed to sold to a third party, a little more than two years after the purchase was announced, well, you have to count it as a misstep — perhaps followed by a severe tumble down a long staircase.

That said, Scientific Atlanta also has fallen well short of the winning mark for Cisco, and its future as a going concern is murky. While Cisco yesterday announced that it has sold a Scientific Atlanta manufacturing facility in Juarez, Mexico, to Foxconn Technology Group, Cisco apparently will remain in the consumer-facing cable set-top business, at least for now.

Puzzling Decision

That’s a puzzler for at least a couple reasons. First, commercial prospects for the cable set-top box in developed markets are uncertain at best, as the devices increasingly are rendered less valuable — and potentially obsolete — by the proliferation of Internet-connected televisions and mobile devices such as smartphones and tablets, all of which detract from the consumer-controlling power of the cable box. In developing markets, moreover, other vendors, including a number of Chinese and Asian players, are getting more than their share of the cable set-top market in jurisdictions where it’s still a growing business.

Even Cisco itself has voiced ambivalence about the future of the set-top box.

Oh, there’s no question cable MSOs want to keep the boxes in subscribers’ homes for as long as possible. There’s also no doubt that vendors, such as Cisco, will try to adapt the boxes for new purposes and applications. Still, consumers ultimately will call the tune, and many MSOs seem to acknowledge that reality, looking to jack up the price of bandwidth to compensate for any loss of control as media-content gatekeepers.

Zeus Kerravala, an analyst with Yankee Group Research Inc., has put forth the following argument in favor of Cisco keeping Scientific Atlanta:

 “Everybody looks at set-top boxes and says Cisco should cut the set-top box. But that’s often part of a bigger sale to a cable company, with switches and routers. It would be detrimental to their relationships.”

Questioning the Logic

I question that line of reasoning. Several years ago, it might have had some merit, but circumstances have changed. I don’t think Cisco needs to be in the consumer-facing part of the cable business to succeed as a vendor of switches and routers to MSOs.

An appropriate analogy, though somewhat inverted, is to Nokia and its Nokia Siemens telecommunications-equipment joint venture. Once upon a time, Nokia realized value, through mutual reinforcement, in selling both networking gear and handsets to its carrier customers. Now, well, not so much. Ever since the advent of the iPhone, consumers rather than carriers drive handset selection. Tossing a bunch of handsets that nobody wants into a telecommunications-equipment deal isn’t going to seal the bargain.

Sell . . . Before It’s Too Late

I would argue that the same separation will occur, if it already hasn’t, in the cable world. Increasingly, as consumers resist set-top boxes and choose to consume their content through other devices, it won’t matter that Cisco can offer both network infrastructure and set-top boxes. The value propositions will have to stand on their own.

So, I will offer Cisco some admittedly unsolicited but free advice: Get out of the cable set-top box business. It’s more pain that it’s worth, it’s not your forte, and you need to focus your efforts and resources on bolstering other parts of your business.

Besides, Huawei might take the business off your hands for a pretty penny. You just have to persuade the US government to let them have it.

Cisco: The Merchant-Silicon Question

As reported by MarketWatch yesterday, Lazard Capital analyst Daniel Amir has written a note suggesting that Cisco Systems, “long a proponent of in-house solutions, has begun the shift to off-the-shelf Broadcom parts.”

Amir added that he expects Broadcom and, to a lesser extent, Marvell to benefit from Cisco’s move to merchant silicon, as well as from an intensification of an industrywide trend toward off-the-shelf parts.

Staying the ASIC Course

Many of Cisco’s networking rivals already have made the switch to merchant silicon. Cisco, along with Brocade Communications, has stayed the course with custom ASICs, believing that the in-house chip designs confer meaningful proprietary differentiation and attendant competitive advantage.

It’s getting harder for Cisco to make that case, though, as the company suffers market-share losses and margin erosion at the low end of the switching market, which is being inexorably commoditized, and as it also meets increasingly strong competitive headwinds from vendors such as Juniper Networks and Arista Networks in the some of the largest and most demanding data-center environments.

As Cisco’s recently announced layoffs attest, the company is under unprecedented pressure from shareholders to reduce costs. It’s also under the gun to raise its top line, but that’s a tougher problem that could take a while to remedy.

Need to Cut Costs

On the cost front, though, Cisco clearly cannot jettison employees indefinitely. It needs to look at other ways to reduce capital and operating expenditures without compromising its ability to get back on a sustainable growth trajectory.

Given the success of its competitors with off-the-shelf networking chips, one would think Cisco would stop swimming against the merchant-silicon tide. It’s likely that merchant silicon would help reduce Cisco’s development costs, allowing it to at least mitigate the margin carnage it’s suffering at the hands of HP and others in an increasingly price-sensitive networking world.

But even though Amir suggests that Cisco’s apparent dalliance with merchant silicon might not be a “one-time experiment,” it’s not a given that Cisco will ardently transition from home-brewed ASICs to off-the-shelf chips.

Mixed Signals

Just last month, Rob Soderbery, senior vice president and general manager of Cisco’s Unified Access business unit, contended that Cisco’s profits and market share in switching revenue might be taking a hit, but that it was holding its own it port-based market share. What’s more, Soderbery made the following statement regarding whether Cisco was considering adoption of merchant silicon over its custom ASICs:

 “There’s tremendous scale in our portfolio. We have competitive ASIC development. We always evaluate a make/buy decision. ASIC development is a core part of our strategy.”

Maybe Cisco, upon further review, has decided to change course, or perhaps Amir has misread the situation.

Next Setting Sun?

Nonetheless, EtherealMind.com’s Greg Ferro argued persuasively earlier this year that merchant silicon will dominate the networking-hardware market. If you haven’t read it, I advise you to read the whole piece, but here’s a money-shot excerpt:

 “I have the view that Merchant Silicon will dominate eventually, and physical networking products will become commodities that differentiate by software features and accessories – not unlike the “Intel server” industry (you should get the irony in that statement). As a result, any argument between “which is better – merchant or custom” is just matter of when you ask the question.

One interesting feature is that John Chambers continue to publicly state that custom silicon is their future. The are parallels with Sun Microsystems who continued to make their own processors in the face of an entire market shift, and that doesn’t appear to have worked out very well. In this another wrong footed innovation from Cisco? Time will tell.”

Besieged now by its shareholders as well as by its competitors, Cisco CEO John Chambers and his executive team are finding that time does not appear to be on their side.