HP’s Latest Cuts: Will It Be Any Different This Time?

If you were to interpret this list of acquisitions by Hewlett-Packard as a past-performance chart, and focused particularly on recent transactions running from the summer of 2008 through to the present, you might reasonably conclude that HP has spent its money unwisely.

That’s particularly true if you correlate the list of transactions with the financial results that followed. Admittedly, some acquisitions have performed better than others, but arguably the worst frights in this house of M&A horrors have been delivered by the most costly buys.

M&A House of Horrors

As Exhibit A, I cite the acquisition of EDS, which cost HP nearly $14 billion. As a series of subsequent staff cuts and reorganizations illustrate, the acquisition has not gone according to plan. At least one report suggested that HP, which just announced that it will shed about 27,000 employees during the next two years, will make about half its forthcoming personnel cuts in HP Enterprise Services, constituted by what was formerly known as EDS. Rather than building on EDS, HP seems to be shrinking the asset systematically.

The 2011 acquisition of Autonomy, which cost HP nearly $11 billion, seems destined for ignominy, too. HP described its latest financial results from Autonomy as “disappointing,” and though HP says it still has high hopes for the company’s software and the revenue it might derive from it, many senior executives at Autonomy and a large number of its software developers already have decamped. There’s a reasonable likelihood that HP is putting lipstick on a slovenly pig when it tries to put the best face on its prodigious investment in Autonomy.

Taken together, HP wagered a nominal $25 billion on EDS and Autonomy. In reality, it has spent more than that when one considers the additional operational expenses involved in integrating and (mis)managing those assets.

Still Haven’t Found What They’re Looking For

Then there was the Palm acquisition, which involved HP shelling out $1.2 billion to Bono and friends. By the time the sorry Palm saga ended, nobody at HP was covered in glory. It was an unmitigated disaster, marked by strategic reversals and tactical blunders.

I also would argue that HP has not gotten full value from its 3Com purchase. HP bought 3Com for about $2.7 billion, and many expected the acquisition to help HP become a viable threat to Cisco in enterprise networking. Initially, HP made some market-share gains with 3Com in the fold, but those advances have stalled, as Cisco CEO John Chambers recently chortled.

It is baffling to many, your humble scribe included, that HP has not properly consolidated its networking assets — HP ProCurve, 3Com outside China, and H3C in China. Even to this day, the three groups do not work together as closely as they should. H3C in China apparently regards itself as an autonomous subsidiary rather than an integrated part of HP’s networking business.

Meanwhile,  HP runs two networking operating systems (NOS) across its gear. HP justifies its dual-NOS strategy by asserting that it doesn’t want to alienate its installed base of customers, but there should be a way to manage a transition toward a unified code base. There should also be a way for all the gear to be managed by the same software. In sum, there should be a way for HP to get better results from its investments in networking technologies.

Too Many Missteps

As for some of HP’s other acquisitions during the last few years, it overpaid for 3PAR in a game of strategic-bidding chicken against Dell, though it seems to have wrung some value from its relatively modest purchase of LeftHand Networks. The jury is still out on HP’s $1.5-billion acquisition of ArcSight and its security-related technologies.

One could argue that the rationales behind the acquisitions of at least some of those companies weren’t terrible, but that the execution — the integration and assimilation — is where HP comes up short. The result, however, is the same: HP has gotten poor returns on its recent M&A investments, especially those represented by the largest transactions.

The point of this post is that we have to put the latest announcement about significant employee cuts at HP into a larger context of HP’s ongoing strategic missteps. Nobody said life is fair, but nonetheless it seems clear that HP employees are paying for the sins of their corporate chieftains in the executive suites and in the company’s notoriously fractious boardroom.

Until HP decides what it wants to be when it grows up, the problems are sure to continue. This latest in a long line of employee culling will not magically restore HP’s fortunes, though the bleating of sheep-like analysts might lead you to think otherwise. (Most market analysts, and the public markets that respond to them, embrace personnel cuts at companies they cover, nominally because the staff reductions result in near-term cost savings. However, companies with bad strategies can slash their way to diminutive irrelevance.)

Different This Time? 

Two analysts refused to read from the knee-jerk script that says these latest cuts necessarily position HP for better times ahead. Baird and Co. analyst Jason Noland was troubled by the drawn-out timeframe for the latest job cuts, which he described as “disheartening” and suggested would put a “cloud over morale.” Noland showed a respect for history and a good memory, saying that it is uncertain whether these layoffs would bolster the company’s fortunes any more than previous sackings had done.

Quoting from a story first published by the San Jose Mercury News:

In June 2010, HP announced it was cutting about 9,000 positions “over a multiyear period to reinvest for future growth.” Two years earlier, it disclosed a “restructuring program” to eliminate 24,600 employees over three years. And in 2005, it said it was cutting 14,500 workers over the next year and a half.

Rot Must Stop

If you are good with sums, you’ll find that HP has announced more than 48,000 job cuts from 2005 through 2010. And now another 27,000 over the next two years. But this time, we are told, it will be different.

Noland isn’t the only analyst unmoved by that argument. Deutsche Bank analysts countered that past layoffs “have done little to improve HP’s competitive position or reduce its reliance on declining or troubled businesses.” To HP’s assertion that cost savings from these cuts would be invested in growth initiatives such as cloud computing, security technology, and data analytics, Deutsche’s analysts retorted that HP “has been restructuring for the past decade.”

Unfortunately, it hasn’t only been restructuring. HP also has been an acquisitive spendthrift, investing and operating like a drunken, peyote-slathered sailor.  The situation must change. The people who run HP need to formulate and execute a coherent strategy this time so that other stakeholders, including those who still work for the company, don’t have to pay for their sins.

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Direct from ODMs: The Hardware Complement to SDN

Subsequent to my return from Network Field Day 3, I read an interesting article published by Wired that dealt with the Internet giants’ shift toward buying networking gear from original design manufacturers (ODMs) rather than from brand-name OEMs such as Cisco, HP Networking, Juniper, and Dell’s Force10 Networks.

The development isn’t new — Andrew Schmitt, now an analyst at Infonetics, wrote about Google designing its own 10-GbE switches a few years ago — but the story confirmed that the trend is gaining momentum and drawing a crowd, which includes brokers and custom suppliers as well as increasing numbers of buyers.

In the Wired article, Google, Microsoft, Amazon, and Facebook were explicitly cited as web giants buying their switches directly from ODMs based in Taiwan and China. These same buyers previously procured their servers directly from ODMs, circumventing brand-name server vendors such as HP and Dell.  What they’re now doing with networking hardware, then, is a variation on an established theme.

The ONF Connection

Just as with servers, the web titans have their reasons for going directly to ODMs for their networking hardware. Sometimes they want a simpler switch than the brand-name networking vendors offer, and sometimes they want certain functionality that networking vendors do not provide in their commercial products. Most often, though, they’re looking for cheap commodity switches based on merchant silicon, which has become more than capable of handling the requirements the big service providers have in mind.

Software is part of the picture, too, but the Wired story didn’t touch on it. Look at the names of the Internet companies that have gone shopping for ODM switches: Google, Microsoft, Facebook, and Amazon.

What do those companies have in common besides their status as Internet giants and their purchases of copious amounts of networking gear? Yes, it’s true that they’re also cloud service providers. But there’s something else, too.

With the exception of Amazon, the other three are board members in good standing of the Open Networking Foundation (ONF). What’s more,  even though Amazon is not an ONF board member (or even a member), it shares the ONF’s philosophical outlook in relation to making networking infrastructure more flexible and responsive, less complex and costly, and generally getting it out of the way of critical data-center processes.

Pica8 and Cumulus

So, yes, software-defined networking (SDN) is the software complement to cloud-service providers’ direct procurement of networking hardware from ODMs.  In the ONF’s conception of SDN, the server-based controller maps application-driven traffic flows to switches running OpenFlow or some other mechanism that provides interaction between the controller and the switch. Therefore, switches for SDN environments don’t need to be as smart as conventional “vertically integrated” switches that combine packet forwarding and the control plane in the same box.

This isn’t just guesswork on my part. Two companies are cited in the Wired article as “brokers” and “arms dealers” between switch buyers and ODM suppliers. Pica8 is one, and Cumulus Networks is the other.

If you visit the Pica8 website,  you’ll see that the company’s goal is “to commoditize the network industry and to make the network platforms easy to program, robust to operate, and low-cost to procure.” The company says it is “committed to providing high-quality open software with commoditized switches to break the current performance/price barrier of the network industry.” The company’s latest switch, the Pronto 3920, uses Broadcom’s Trident+ chipset, which Pica8 says can be found in other ToR switches, including the Cisco Nexus 3064, Force10 S4810, IBM G8264, Arista 7050S, and Juniper QFC-3500.

That “high-quality open software” to which Pica8 refers? It features XORP open-source routing code, support for Open vSwitch and OpenFlow, and Linux. Pica8 also is a relatively longstanding member of ONF.

Hardware and Software Pedigrees

Cumulus Networks is the other switch arms dealer mentioned in the Wired article. There hasn’t been much public disclosure about Cumulus, and there isn’t much to see on the company’s website. From background information on the professional pasts of the company’s six principals, though, a picture emerges of a company that would be capable of putting together bespoke switch offerings, sourced directly from ODMs, much like those Pica8 delivers.

The co-founders of Cumulus are J.R. Rivers, quoted extensively in the Wired article, and Nolan Leake. A perusal of their LinkedIn profiles reveals that both describe Cumulus as “satisfying the networking needs of large Internet service clusters with high-performance, cost-effective networking equipment.”

Both men also worked at Cisco spin-in venture Nuova Systems, where Rivers served as vice president of systems architecture and Leake served in the “Office of the CTO.” Rivers has a hardware heritage, whereas Leake has a software background, beginning his career building a Java IDE and working at senior positions at VMware and 3Leaf Networks before joining Nuova.

Some of you might recall that 3Leaf’s assets were nearly acquired by Huawei, before the Chinese networking company withdrew its offer after meeting with strenuous objections from the Committee on Foreign Investment in the United States (CFIUS). It was just the latest setback for Huawei in its recurring and unsuccessful attempts to acquire American assets. 3Com, anyone?

For the record, Leake’s LinkedIn profile shows that his work at 3Leaf entailed leading “the development of a distributed virtual machine monitor that leveraged a ccNUMA ASIC to run multiple large (many-core) single system image OSes on a Infiniband-connected cluster of commodity x86 nodes.”

For Companies Not Named Google

Also at Cumulus is Shrijeet Mukherjee, who serves as the startup company’s vice president of software engineering. He was at Nuova, too, and worked at Cisco right up until early this year. At Cisco, Mukherjee focused on” virtualization-acceleration technologies, low-latency Ethernet solutions, Fibre Channel over Ethernet (FCoE), virtual switching, and data center networking technologies.” He boasts of having led the team that delivered the Cisco Virtualized Interface Card (vNIC) for the UCS server platform.

Another Nuova alumnus at Cumulus is Scott Feldman, who was employed at Cisco until May of last year. Among other projects, he served in a leading role on development of “Linux/ESX drivers for Cisco’s UCS vNIC.” (Do all these former Nuova guys at Cumulus realize that Cisco reportedly is offering big-bucks inducements to those who join its latest spin-in venture, Insieme?)

Before moving to Nuova and then to Cisco, J.R. Rivers was involved with Google’s in-house switch design. In the Wired article, Rivers explains the rationale behind Google’s switch design and the company’s evolving relationship with ODMs. Google originally bought switches designed by the ODMs, but now it designs its own switches and has the ODMs manufacture them to the specifications, similar to how Apple designs its iPads and iPhones, then  contracts with Foxconn for assembly.

Rivers notes, not without reason, that Google is an unusual company. It can easily design its own switches, but other service providers possess neither the engineering expertise nor the desire to pursue that option. Nonetheless, they still might want the cost savings that accrue from buying bare-bones switches directly from an ODM. This is the market Cumulus wishes to serve.

Enterprise/Cloud-Service Provider Split

Quoting Rivers from the Wired story:

“We’ve been working for the last year on opening up a supply chain for traditional ODMs who want to sell the hardware on the open market for whoever wants to buy. For the buyers, there can be some very meaningful cost savings. Companies like Cisco and Force10 are just buying from these same ODMs and marking things up. Now, you can go directly to the people who manufacture it.”

It has appeal, but only for large service providers, and perhaps also for very large companies that run prodigious server farms, such as some financial-services concerns. There’s no imminent danger of irrelevance for Cisco, Juniper, HP, or Dell, who still have the vast enterprise market and even many service providers to serve.

But this is a trend worth watching, illustrating the growing chasm between the DIY hardware and software mentality of the biggest cloud shops and the more conventional approach to networking taken by enterprises.

HP Adds OpenFlow Support to Switches, Sets Stage for SDN Plans

Hewlett-Packard (HP) points to its long history as an OpenFlow proponent, and it’s true that HP has been involved with the protocol almost since its inception. It’s also true that HP continues to be heavily involved with OpenFlow, active in the academic-research community and as a sponsor and member in good standing of Indiana University’s SDN Interoperability Lab.

In that respect, it wasn’t a surprise to see HP announce last week that it is providing OpenFlow support on 16 of its switches, including the HP 3500, 5400 and 8200 series switches. Interestingly, these all come from what was once known as HP ProCurve, not from the 3Com/H3C side of the house. HP says it will extend OpenFlow support to all switches within its FlexNetwork Architecture by the end of the year.

Campus Angle

While the early focus of software-defined networking using OpenFlow has been on data centers and service-provider deployments — as represented by the board members of the Open Networking Foundation (ONF) — HP also sees promise for OpenFlow in enterprise campus applications. That’s an area not many other vendors, established or startups, have stressed.

As of now, HP has not disclosed its plans for controllers or the applications that would inform them. In relation to a controller platform, HP could build, buy, or partner. It could work with more than one controller, depending on its market focus and business objectives. HP’s involvement in the SDN community gives it good visibility into individual controller capabilities, controller-related interoperability challenges (which we know exist), and application development on controller platforms.

Saar Gillai, vice president of HP’s Advanced Technology Group and CTO of HP Networking,  indicated that the company would reveal at least some of its controller and application plans later in the year.

More to Come

When Gillai spoke about OpenFlow last fall, he said the critical factor to OpenFlow’s success will be determined by the SDN applications that it supports. HP was and remains interested in those applications.

Last fall, Gillai lamented what he viewed as OpenFlow hype, but he foresaw“interesting applications” emerging within the next 12 to 24 months. In enabling a growing number of its switches to support OpenFlow, HP still seems to be working according to that timeline.

U.S. National-Security Concerns Cast Pall over Huawei

As 2011 draws to a close, Huawei faces some difficult questions about its business prospects in the United States.  The company is expanding worldwide into enterprise networking and mobile devices, such as smartphones and tablets, even as it continues to grow its global telecommunications-equipment franchise.

Huawei is a company that generated 2010 revenue of about $28 billion, and it has an enviable growth profile for a firm of its size. But a dark cloud of suspicion continues to hang over it in the U.S. market, where it has not made headway commensurate with its success in other parts of the world. (As its Wikipedia entry states, Huawei’s products and services have been deployed in more than 140 countries, and it serves 45 of the world’s 50 largest telcos. None of those telcos are in the U.S.)

History of Suspicion

The reason it has not prospered in the U.S. is at primarily attributable to persistent government concerns about Huawei’s alleged involvement in cyber espionage as a reputed proxy for China. At this point, I will point out that none of the charges has been proven, and that any evidence against the company has been kept classified by U.S. intelligence agencies.

Nonetheless, innuendo and suspicions persist, and they inhibit Huawei’s ability to serve customers and grow revenue in the U.S. market. In the recent past, the U.S. government has admonished American carriers, including Sprint Nextel, not to buy Huawei’s telecommunications equipment on national-security concerns. On the same grounds, U.S. government agencies prevented Huawei from acquiring ownership stakes in U.S.-based companies such as 3Com, subsequently acquired by HP, and 3Leaf Systems. Moreover, Huawei was barred recently from participating in a nationwide emergency network, again for reasons of national security.

Through it all, Huawei has asserted that it has nothing to hide, that it operates no differently from its competitors and peers in the marketplace, and that it has no intelligence-gathering remit from the China or any other national government. Huawei even has welcomed an investigation by US authorities, saying that it wants to put the espionage charges behind it once and for all.

Investigation Welcomed

Well, it appears Huawei, among others, will be formally investigated, but it also seems the imbroglio with the U.S. authorities might continue for some time. We learned in November that the U.S. House Permanent Select Committee on Intelligence would investigate potential security threats posed by some foreign companies, Huawei included.

In making the announcement relating to the investigation, U.S. Representative Mike Rogers, a Michigan Republican and the committee’s chairman, said China has increased its cyber espionage in the United States. He cited connections between Huawei’s president, Ren Zhengfei, and the People’s Liberation Army, to which the Huawei chieftain once belonged.

For its part, as previously mentioned, Huawei says it welcomes an investigation. Here’s a direct quote from William Plummer, a Huawei spokesman, excerpted from a recent Bloomberg article:

“Huawei conducts its businesses according to normal business practices just like everybody in this industry. Huawei is an independent company that is not directed, owned or influenced by any government, including the Chinese government.”

Unwanted Attention from Washington

The same Bloomberg article containing that quote also discloses that the U.S. government has invoked  Cold War-era national-security powers to compel telecommunication companies, including AT&T Inc. and Verizon Communications Inc., to disclose confidential information about the components and composition of their networks in a hunt for evidence of Chinese electronic malfeasance.

Specifically, the U.S. Commerce Department this past spring requested a detailed accounting of foreign-made hardware and software on carrier networks, according to the Bloomberg article. It also asked the telcos and other companies about security-related incidents, such as the discovery of “unauthorized electronic hardware” or suspicious equipment capable of duplicating or redirecting data.

Brand Ambitions at Risk

The concerns aren’t necessarily exclusive to alleged Chinese cyber espionage, and Huawei is not the only company whose gear will come under scrutiny. Still, Huawei clearly is drawing a lot of unwanted attention in Washington.

While Huawei would like this matter to be resolved expeditiously in its favor, the investigations probably will continue for some time before definitive verdicts are rendered publicly. In the meantime, Huawei’s U.S. aspirations are stuck in arrested development.

To be sure, the damage might not be restricted entirely to the United States. As this ominous saga plays out, Huawei is trying to develop its brand in Europe, Asia, South America, Africa, and Australia. It’s making concerted advertising and marketing pushes for its smartphones in the U.K., among other jurisdictions, and it probably doesn’t want consumers there or elsewhere to be inundated with persistent reports about U.S. investigations into its alleged involvement with cyber espionage and spyware.

Indulge me for a moment as I channel my inner screenwriter.

Scenario: U.K. electronics retailer. Two blokes survey the mobile phones on offer. Bloke One picks up a Huawei smartphone. 

Bloke One: “I quite fancy this Android handset from Huawei. The price is right, too.”

Bloke Two: “Huawei? Isn’t that the dodgy Chinese company being investigated by the Yanks for spyware?

Bloke One puts down the handset and considers another option.

Serious Implications

Dark humor aside, there are serious implications for Huawei as it remains under this cloud of suspicion. Those implications conceivably stretch well beyond the shores of the United States.

Some have suggested that the U.S. government’s charges against Huawei are prompted more by protectionism than by legitimate concerns about national security. With the existing evidence against Huawei classified, there’s no way for the public, in the U.S. or elsewhere, to make an informed judgment.

Brocade Engages Qatalyst Again, Hopes for Different Result

The networking industry’s version of Groundhog Day resurfaced late last week when the Wall Street Journal published an article in which “people familiar with the matter” indicated that Brocade Communications Systems was up for sale — again.

Just like last time, investment-banking firm Qatalyst Partners, headed by the indefatigable Frank Quattrone, appears to have been retained as Brocade’s agent. Quattrone and company failed to find a buyer for Brocade last time, and many suspect the same fate will befall the principals this time around.

Changed Circumstances

A few things, however, are different from the last time Brocade was put on the block and Qatalyst beat Silicon Valley’s bushes seeking prospective buyers. For one thing, Brocade is worth less now than it was back then. The company’s shares are worth roughly half as much as they were worth during fevered speculation about its possible acquisition back in the early fall of 2009. With a current market capitalization of about $2.15 billion, Brocade would be easier for a buyer to digest these days.

That said, the business case for Brocade acquisition doesn’t seem as compelling now as it was then. The core of its commercial existence, still its Fibre Channel product portfolio, is well on its way to becoming a slow-growth legacy business. What’s worse, it has not become a major player in Ethernet switching subsequent to its $3 billion purchase of Foundry Networks in 2008. Running the numbers, prospective buyers would be disinclined to pay much of a premium for Brocade today unless they held considerable faith in the company’s cloud-networking vision and strategy, which isn’t at all bad but isn’t assured to succeed.

Unfortunately, another change is that fewer prospective buyers would seem to be in the market for Brocade these days. Back in 2009, Dell, HP, Oracle, IBM all were mentioned as possible acquirers of the company. One would be hard pressed to devise a plausible argument for any of those vendors to make a play for Brocade now.

Dell is busily and happily assimilating and integrating Force10 Networks; HP is still trying to get its networking house in order and doesn’t need the headaches and overlaps an acquisition of Brocade would entail; IBM is content to stand pat for now with its BLADE Network Technologies acquisition; and, as for Oracle, Larry Ellison was adamant that he wanted no part of Brocade. Admittedly, Ellison is known for his shrewdness and occasional reverses, but he sured seemed convincing regarding Oracle’s position on Brocade.

Sorting Out the Remaining Candidates

So, that leaves, well, who exactly? Some believe Cisco might buy up Brocade as a consolidation play, but that seems only a remote possibility. Others see Juniper Networks similarly making a consolidation play for Brocade. It could happen, I suppose, but I don’t think Juniper needs a distraction of that scale just as it is reaching several strategic crossroads (delivery of product roadmap, changing industry dynamics, technological shifts in its telco and service-provider markets). No, that just wouldn’t seem a prudent move, with the risks significantly outweighing the potential rewards.

Some say that private-equity players, some still flush with copious cash in their coffers, might buy Brocade. They have the means and the opportunity, but is the motive sufficient? It all comes back to believing that Brocade is on a strategic path that will make it more valuable in the future than it is today. In that regard, the company’s recent past performance, from a valuation standpoint, is not encouraging.

A far-out possibility, one that I would classify as remotely unlikely, envisions EMC buying Brocade. That would signal an abrupt end to the Cisco-EMC partnership, and I don’t see a divorce, were it to transpire, occurring quite so suddenly or irrevocably.

I do, however, see one dark-horse vendor that could make a play for Brocade, and might already have done so.

Could it Be . . . Hitachi?

That vendor? It’s Hitachi Data Systems. Yes, you’re probably wondering whether I’ve partaken of some pre-Halloween magic mushrooms, but I’ve made at least a half-way credible case for a Hitachi acquisition of Brocade previously. With its well-hidden Unified Compute Platform (UCP), Hitachi has aspirations to compete against Cisco, HP, Dell and others in converged data-center infrastructure. Hitachi owns 60 percent of a networking joint venture, with NEC as the junior partner, called Alaxala. If you go to the Alaxala website, you’ll see the joint venture’s current networking portfolio, which is bereft of Fibre Channel switches.

The question is, does Hitachi want them? Today, as indicated on the Hitachi website, the company partners with Brocade, Cisco, Emulex (adapters), and QLogic (adapters) for Fibre Channel networking and with Brocade and QLogic (adapters) for iSCSI networking.

The last time Brocade was said to the market, the anticlimactic outcome left figurative egg on the faces of Brocade directors and on those of the investment bankers at Qatalyst, which has achieved a relatively good batting average as a sales agent. Let’s assume — and, believe me, it’s a safe assumption — that media leaks about potential acquisitions typically are carefully contrived occurrences, done either to make a market or to expand a market in which there’s a single bidder that has declared intent and made an offer. In the latter case, the leak is made to solicit a competitive bid and drive up value.

Hold the Egg this Time

I’m not sure what transpired the first time Qatalyst was contracted to find a buyer for Brocade. The only sure inference is that the result (or lack thereof) was not part of the plan. Giving both parties the benefit of the doubt, one would think lessons were learned and they would not want to perform a reprise of the previous script. So, while perhaps last time there wasn’t a bidder or the bidder withdrew its offer after the media leak was made, I think there’s a prospective buyer firmly at the table this time. I also think Brocade wants to see whether a better offer can be had.

My educated guess, with the usual riders and qualifications in effect,* is that perhaps Hitachi or a private-equity concern (Silver Lake, maybe) is at the table. With the leak, Brocade and Qatalyst are playing for time and leverage.

We’ll see, perhaps sooner rather than later.

* I could, alas, be wrong.

With Latest Moves, HP Networking Responds to Customers, Partners, Competitors

Although media briefings took place yesterday in New York, HP officially announced new networking  products and services this morning based on its HP FlexNetwork Architecture.

Bethany Mayer, senior VP and general manager of HP Networking, launched proceedings yesterday, explaining that changing and growing requirements, including a shift toward server-to-server traffic (“east-west” traffic flows driven by inexorable virtualization) and the need for greater bandwidth, are overwhelming today’s networks. Datacenter networks aren’t keeping pace, bandwidth capacity in branch offices isn’t where it needs to be, there is limited support for third-party virtualized appliances, and networks are straining to accommodate the proliferation of mobile devices.

Quoting numbers from the Dell’Oro Group, Mayer said HP continues to take market share from Cisco in switching, with HP gaining share of about 3.8 percent and Cisco dropping about 6.5 percent. What’s more, Mayer cited data from analyst firm Robert W. Baird. indicating that 75 percent of enterprise-network purchase discussions involve HP. Apparently Baird also found that HP is influencing terms or winning deals about 33 percent of the time.

The Big Picture

Saar Gillai, vice president of HP’s Advanced Technology Group and CTO of HP Networking, followed with a presentation on HP Networking’s vision. Major trends he cited are virtualization, cloud computing, consumerization of IT, mobility, and unified communications. Challenges that accompany these trends include complexity, management, security, time to service, and cost.

In summary, Gillai said that the networks installed at customer sites today just weren’t designed to address the challenges they’re facing. To reinforce that point, Gillai provided a brief history of enterprise application delivery that took us from the 60s, when we had mainframes, through the client-server era and the Web-based applications of the 90s through to today’s burgeoning cloud environments.

He explained that enterprise networks have evolved along with their application delivery models.  Before, they were relatively static (serving employees onsite, for the most part), with well-defined perimeters and applications that were limited qualitatively and quantitatively. Today, though, enterprise networks must accommodate not only connected employees, but also connected customers, partners, contractors, and suppliers. The perimeter is fragmented, the network distributed, the applications mobile (even in the data center with virtualization), client devices (such as smartphones and tablets) proliferating, and wireless LANs, the public cloud and the Internet also prominently in the picture.

Connecting Users to Services

What’s the right approach for networks to take? Gillai says HP is advancing toward delivering networks that focus on connecting users to the services they need rather than on managing infrastructure. HP’s vision of enterprise-network architecture conceives of a pool of virtualized resources where managing and provisioning are done.  This network has a top layer of management/provisioning, a layer below inhabited by a control plane, and then a layer below that one comprising physical network infrastructure. In that regard, Gillai drew an analogy with server virtualization, with the control plane functioning as an abstraction layer.

With talk of a management layer sitting above a control plane that rides atop physical infrastructure, the HP vision seems strikingly similar to the defining principles of software-defined networking as realized through the OpenFlow protocol.

OpenFlow: It’s About the Applications

On OpenFlow, however, Gillai was guardedly optimistic, if not a little ambiguous. Although noting that HP has been an early proponent of OpenFlow and that the company sees promise in the technology, Gillai said the critical factor to OpenFlow’s success will be determined by the applications that run on it. HP is interested in those applications, but is less interested in the OpenFlow controller, which it does not see as a point of differentiation.

Gillai is of the opinion that the OpenFlow hype has moved considerably ahead of its current reality. He said OpenFlow, as a specific means of enabling software-defined networking, is evolutionary as opposed to revolutionary. He also said considerable work remains to be done before OpenFlow will be suitable for the enterprise market. Among the issues that need to be resolved, according to Gillai, is support for IPv6 and the “routing problem” of having a number of controllers communicate with each other.

On the Open Networking Foundation (ONF), the private non-profit organization whose first goal is to create a switching ecosystem to support the OpenFlow interface, Gillai suggested that the founding and board members — comprising Deutsche Telekom, Google, Microsoft, Facebook, Verizon, and Yahoo — have a clear vision of what they want OpenFlow to achieve.

“If the network could become programmable, their life will be great,” Gillai said of the ONF founders, all of whom are service providers with vast data centers.

Despite Gillai’s reservations about OpenFlow hype, he indicated that he believes “interesting applications” for it should begin emerging within the next 12 to 24 months. He also said that it “would not be big surprise” if HP were to leverage OpenFlow for forthcoming control-plane technology.

ToR Switch for the Data Center

As for the products and services announced, let’s begin in the data center, seen by all the major networking vendors as a lucrative growth market as well as venue for increasingly intense competition.

HP FlexFabric solutions for the data center include the new 10-GbE HP 5900 top-of-rack (ToR) switch and the updated HP 12500 switch series.

HP says the new HP 5900 series of 10-GbE ToR switches provides up to 300 percent greater network scalability while reducing the the number of logical devices in the server access layer by 50 percent, thereby decreasing total cost of ownership by 50 percent.

Lead Time and Changes to Product Naming

The switch is powered by the HP Intelligent Resilient Framework (IRF), which allows four HP 5900 switches to be virtualized so that they can operate as a single switch. The HP 5900 top-of-rack switch series is expected to be available in Q1 2012 in the United States with a starting list price of $38,000.

It bears noting that HP typically refrains from announcing switches this far ahead of release data. That it has announced the HP 5900 ToR switch six months before it will ship would appear to suggest both that customers are clamoring for a ToR switch and also that competitors have been exploiting the absence of such a switch in HP’s product portfolio. Although the 5900 isn’t ready to ship today, HP wants the world to know it’s coming soon.

HP says its HP 12500 switch series benefits from improved network resiliency and performance  as a result of  the addition of the updated HP IRF technology. The switch provides full IPv6 support, and HP says it doubles throughput and reduces network recovery time by more than 500 times. The HP 10500 campus core switch is available now worldwide starting at $38,000.

You might have noticed, incidentally, something different about the naming convention associated with new HP switches. HP has decided that, as of new, its networking products will just have numbers rather than alphabetical prefixes followed by numbers. This has been done to simplify matters, for HP and for its customers.

FlexCampus Moves 

On the campus front, new HP FlexCampus offerings include the HP 3800 stackable switches, which HP says provide up to 450 percent higher performance. HP also is offering a new reference architecture for campus environments that unifies wired and wireless networks to support mobility and high-bandwidth multimedia applications. The HP 3800 line of switches is available now worldwide starting at $4,969.

Although HP did not say it, at least one of its primary competitors has cited a lack of HP reference architectures for customers, particularly for campus environments. HP clearly is responding.

HP also unveiled virtualized services modules for the HP 5400zl and 8200zl switches, which it claims are the first in the industry to converge blade servers at the branch into a network infrastructure capable of hosting multiple applications and services. The company claims its HP Advanced Services zl Module with VMware vSphere 5 and HP Advanced Services zl Module with Citrix XenServer deliver a 57-percent cut in power consumption and a 43-percent reduction in space relative to competing products. Available now worldwide, the vSphere HP Advanced Series zl Module with VMware vSphere 5 (including support and subscription, 8GB of RAM) starts at $5,299. The HP Advanced Services zl Module with Citrix XenServer (including support and subscription, 4GB of RAM) starts at $4,499.

Emphasis on Simplicity and Evolution

HP also rolled out HP FlexManagement with integrated mobile network access control (NAC) in HP Intelligent Management Center (IMV) 5.1 to streamline enterprise access for mobile devices and to protect against mobile-application threats. HP Intelligent Management Center 5.1 is expected to be available in Q1 2012 with a list price of $6,995.

Also introduced are new services to facilitate migration to IPv6 and new financing to allow HP’s U.S-based channel partners to lease HP Networking products as demonstration equipment.

Key words associated with this slate of HP Networking announcements were “evolutionary” and “simplification.” As the substance and tone of the announcements suggest, HP Networking is responding to its customers and partners — and also to its competitors — closing gaps in its portfolio and looking to position itself to achieve further market-share gains.

Discouraged in US, Huawei Invests Heavily in European Enterprise Push

As we watch Huawei invest heavily and ramp up for a sustained enterprise-networking push in Europe, the Chinese network-equipment provider, which made its name and fortune in telecommunications gear before expanding to mobile devices and enterprise infrastructure, remains conspicuous by its relative absence in the USA.

That’s not how Huawei planned it, of course. The company has made successive bids to establish a meaningful beachhead in the US, and each time it was turned back on national-security grounds.

Thwarted at Every Turn

There was its joint $2.2-billion takeover bid, as a minority player, with Bain Capital for 3Com, its former joint-venture partner in H3C, an acronym for Huawei 3Com. That came to naught when the Committee on Foreign Investment in the United States (CFIUS) discouraged the prospective buyers from pursuing the deal because of concerns about Huawei’s potential access to Tipping Point and 3Com security technologies. Concerns about the US government’s disposition to Huawei also torpedoed the Chinese company’s efforts to acquire Motorola’s wireless-network business and software vendor 2Wire, even though Huawei reportedly bid at least $100 million more than the successful acquirer in each case.

Since then, Huawei was warned off an acquisition of assets belong to 3Leaf, a cloud-software provider. Last, but perhaps not least from Huawei’s perspective, it has been effectively prevented from making headway in its sale of wireless base stations and other telecommunications infrastructure to America’s leading wireless operators, including Sprint Nextel.

While Huawei has made sales to smaller US service providers, it seems effectively locked out of sales to top-tier wireless operators. Understandably, that limits its growth in the US market, making displacement of incumbent vendors impossible.

Aiming for Enterprise Revenue of $7 Billion Next Year

As such, it’s no wonder Huawei looks to other parts of the world as it rolls out an aggressive plan to grow its new enterprise business to sales of $7 billion next year, from just $2 billion last year and $4 billion this year. By 2015, Huawei sees its enterprise business generating revenue of $15 billion to $20 billion.

That’s a heady growth target, and Huawei clearly is focusing on its domestic market in China, as well as emerging economies in Asia and South America, as well as strong growth in Australia and Europe, the Middle East, and Africa (EMEA).

I wouldn’t want to say that Huawei has given up on the US market — I don’t think Huawei gives up on anything — but it clearly recognizes political reality and will focus elsewhere for the time being.

For Cisco, Good News and Bad News

For Cisco and other enterprise-networking vendors with significant market share in the United States, that’s good news. The news might not be as good in Europe, where Huawei clearly is girding for intensive engagement with customers and channel partners, including those now in other camps.

Cisco obviously benefits, though it is not alone, if Huawei remains constrained or otherwise discouraged from moving aggressively into the US domestic market. Conversely, however, there is a danger that China, which seems to be influenced at least in part by Huawei and ZTE’s strategic imperatives (see recent developments in Libya), might make life more difficult for Cisco in China if Huawei’s hardships in the US persist.

Although Cisco seems to have stayed on the good side of Chinese authorities hitherto, circumstances and situations are subject to change. These developments, like so many others in a networking market that is now surprisingly fluid, bear watching.

What Cisco and Huawei Have in Common

Cisco and Huawei have a lot in common. Not only has Huawei joined Cisco in the enterprise-networking market, but it also has put down R&D roots in Silicon Valley, where it and Cisco now compete for engineering talent.

The two companies have something else in common, too: Both claim their R&D strategies are being thwarted by the US government.

Cisco Hopes for Tax Holiday

It’s no secret that Cisco would like the Obama Administration to deliver a repatriation tax holiday on the mountain of cash the company has accumulated overseas. The vast majority of Cisco’s cash — more than $40 billion — is held overseas. Cisco is averse to bringing it back home because it would be taxed at the US corporate rate of 35 percent.

Cisco would prefer to see a repatriation tax rate, at least for the short term, of a 5.25-percent rate. That would allow Cisco, as well as a number of other major US technology firms, to bring back a whopping war chest to the domestic market, where the money could be used for a variety of purposes, including R&D and M&A.

Notwithstanding some intermittent activity, Cisco’s R&D pace has decelerated.  Including the announced acquisition of collaboration-software vendor Versly today, Cisco has announced just four acquisitions this year. It announced seven buys in 2010, and just five each in 2009 and 2008. In contrast, Cisco announced 12 acquisitions in 2007, preceded by nine in 2006 and 12 in 2005.

Solid Track Record

Doubtless the punishing and protracted macroeconomic downturn has factored into Cisco’s slowing pace of M&A activity. I also think Cisco has lost some leadership and bench strength on its M&A team. And, yes, Cisco’s push to keep money offshore, away from US corporate taxes, is a factor, too.

Although Cisco is capable of innovating organically, it historically has produced many of its breakthrough products through inorganic means, namely acquisitions. Its first acquisition, of Crescendo Communications in 1993, ranks as its best. That deal brought it the family of Catalyst switches, a stellar group of executive talent, and eventual dominance of the burgeoning enterprise-networking market.

Not all Cisco acquisitions have gone well, but the company’s overall track record, as John Chambers will tell you, has been pretty good. Cisco has a devised cookbook for identifying acquisition candidates, qualifying them through rigorous due diligence, negotiating deals on terms that ensure key assets don’t walk out the door, and finally ensuring that integration and assimilation are consummated effectively and quickly.  Maybe Cisco has gotten a bit rusty, but one has to think the institutional memory of how to succeed at the M&A game still lives on Tasman Drive.

Acute Need for M&A

That brings us to Cisco’s overseas cash and the dilemma it represents. Although developing markets are growing, Cisco apparently has struggled to find offshore acquisition candidates. Put another way, it has not been able to match offshore cash with offshore assets. Revenue growth might increasingly occur in China, India, Brazil, Russia, and other developing markets, but Cisco and other technology leaders seem to believe that the entrepreneurial innovation engine that drives that growth will still have a home in the USA.

So, Cisco sits in a holding pattern, waiting for the US government to give it a repatriation tax holiday. Presuming that holiday is granted, Cisco will be back on the acquisition trail with a vengeance. Probably more than ever, Cisco needs to make key acquisitions to ensure its market dominance and perhaps even its long-term relevance.

Huawei Discouraged Repeatedly

Huawei has a different sort of problem, but it is similarly constrained from making acquisitions in the USA.  On national-security grounds, the US government has discouraged and prevented Huawei from selling its telecommunications gear to major US carriers and from buying US-based technology companies. Bain Capital and Huawei were dissuaded from pursuing an acquisition of networking-vendor 3Com by the Committee on Foreign Investment in the United States (CFIUS) in 2008. Earlier this year, Huawei backtracked from a proposed acquisition of assets belonging to 3Leaf, a bankrupt cloud-computer software company, when it became evident the US government would oppose the transaction.

Responding to the impasse, Huawei has set up its own R&D in Silicon Valley and has established a joint venture with Symantec, called Huawei Symantec, that structurally looks a lot like H3C, the joint venture that Huawei established with 3Com before the two companies were forced to go their separate ways. (H3C, like the rest of 3Com, is now subsumed within HP Networking. Giving HP’s apparent affinity for buying companies whose names start with the number 3 — 3Com and 3Par spring to mind — one wonders how HP failed to plunder what was left of 3Leaf.)

Still, even though Huawei has been forced to go “organic” with its strategy in North America, the company clearly wants the opportunity to make acquisitions in the USA. It’s taken to lobbying the US government, and it has unleashed a charm offensive on market influencers, trying to mitigate, if not eliminate, concerns that it is owned or controlled by China’s government or that it maintains close ties with the China’s defense and intelligence establishments.

Waiting for Government’s Green Light

Huawei wants to acquire companies in North America for a few reasons.  For starters, it could use the R&D expertise and intellectual property, though  it has been building up an impressive trove of its own patents and intellectual property. There are assets in the US that could expedite Huawei’s product-development efforts in areas such as cloud computing, data-center networking, and mobile technologies. Furthermore, there is management expertise in many US companies that Huawei might prefer to buy wholesale rather than piecemeal.

Finally, of course, there’s the question of brand acceptance and legitimacy. If the US government were to allow Huawei to make acquisitions in America, the company would be on the path to being able to sell its products to US-based carriers. Enterprise sales — bear in mind that enterprise networking is considered a key source of future growth by Huawei — would be easier in the US, too, as would be consumer sales of mobile devices such as Android-based smartphones and tablets.

For different reasons, then, Cisco and Huawei are hoping the US government cuts them some slack so that each can close some deals.

HP’s Extreme Rumor

There’s a rumor making the rounds that HP might be interested in acquiring Extreme Networks.

It’s easy to understand why Extreme would be willing to sell, but it’s less obvious as to why HP would want to buy. Still, this rumor has intensified recently, and one would be remiss not to at least deal with it.

Unless something is wrong at HP Networking, I don’t see HP making this deal. While there are differing interpretations as to why HP acquired 3Com (H3C) back in 2009, the fact remains that HP now offers a relatively extensive array of networking gear from its 3Com acquisition and from its preexisting HP ProCurve product portfolio. The combined offerings now run the gamut, from branch-office and campus offerings to data-center switches.

At least nominally, HP has the networking bases covered, though some could contend (and have done so) that HP Networking might want to consider unifying its product portfolio under a single network operating system, most likely Comware.

Considering that HP arguably hasn’t finished integrating its networking operations, and also taking into account that HP already has an extensive networking portfolio, what could be the motivation, if any, for a rumored acquisition of Extreme Networks?

Maybe there’s nothing to this rumor, and HP has no motivation to acquire Extreme. If so, that puts the story to bed. If HP does make an Extreme move, though, questions will be asked, and rightly so.

Wondering About HP Networking’s Dualism

At Network Computing, Greg Ferro writes an intriguing piece about HP Networking’s split personality.

After HP acquired 3Com (H3C), the conventional wisdom, with which I concurred, was that the ProCurve product line was living on borrowed time. I didn’t expect ProCurve to disappear overnight — there was an installed base of customers to take into account, after all — but I did think the development pendulum would swing overwhelmingly to China and the 3Com/H3C team.

To a large extent, that has happened, but the ProCurve product portfolio is proving surprisingly tenacious. As Ferro notes, HP’s E Series switches continue to sport ProCurve’s in-house ASICs and ProCurve software. Meanwhile, HP  Networking’s A Series switches feature merchant silicon and 3Com/H3C’s Comware network OS. Finally, HP has the S Series, which also sports merchant silicon.

HP’s Rationale

So, what’s with the continuing split in HP Networking’s product portfolio? In his article at Network Computing, Ferro quotes Dan Montesanto, an HP switch product manager, who asserts that custom ASICs “make a lot of sense in the ‘middle of the market,’” but apparently not as much sense at the low end or the high end of the market. You can read the rationalization over at Network Computing, and you can decide whether you buy it.

I must admit, I’m skeptical of the official reasoning. I don’t want to go all “conspiracy theory” on you — in fact, I don’t have a conspiracy theory to proffer on this matter — but I just question whether HP is giving us the whole truth and nothing but the truth.

Something just doesn’t ring true about it. Yes, I note HP’s claims that it can make cheaper and better chips than merchant-silicon purveyors for certain product price points in the market. Perhaps those claims are true. I can’t disprove them.

Still, why continue to offer the different network operating systems? Wouldn’t it make sense to run the same software across all HP’s switches? Silicon issues notwithstanding, why wouldn’t HP unify its networking portfolio under Comware?

Market Expects Comware Migration

The market thinks that will happen eventually. Ferro writes:

 “One thing seems clear: HP Networking hasn’t convinced the wider market that both Comware and ProCurve operating systems are necessary, and most network architects expect HP to migrate its product line to Comware.”

Again, I’m not trying to sell you an extraterrestrial in the desert or persuade you that I saw Elvis outside a Burger King, but I wonder what’s happening behind the scenes at HP. It’s almost as if HP Networking is keeping the ProCurve ASICs and software going as an insurance policy.

But, if that’s true, why?

Huawei Tries Not to Get Fooled Again

The evolution of the joint venture between Huawei and Symantec — called, perhaps not surprisingly, Huawei Symantec — has taken an interesting turn recently. Originally established in China with a remit covering storage and security products, Huawei Symantec has been expanding geographically, beyond China to other markets globally, and technologically, into networking infrastructure and servers from its original offerings of storage and security boxes.

As a joint venture, Huawei Symantec has some familiar elements. It’s based on a “China-out” strategy, which we’ve all seen before, and it’s only now hitting American shores after revving up its engines overseas. In some ways, it’s deja vu all over again for Huawei. We’ve seen this show before, though perhaps the ending will be different this time.

Trip Down Memory Lane

Before returning to the present, let’s take a quick excursion down Memory Lane, shall we?

In March 2003, when Huawei and 3Com Corporation formed a joint venture company, called Huawei-3Com (H3C), Huawei owned the majority stake, 51 percent, with 3Com holding the other 49 percent. The joint venture focused on research and development, production, and sales of data-networking products, with Huawei retaining territorial sales rights for “greater” China and Japan, and 3Com, through its own brand, having sales jurisdiction for the rest of the world. The JV agreement also accorded 3Com the right to buy two percent of the joint entity’s stock from Huawei during a two-year period, thus giving 3Com the option to take a controlling interest.

3Com provided financial support for the joint venture, whereas Huawei provided technology, products, and the H3C workforce in China.

Eventually, Huawei sold two percent of its take in the joint venture to 3Com, which then assumed a controlling interest of 51 percent. Subsequently, in 2006, Huawei divested its remaining 49 percent in H3C to 3Com for $880 million.

Thwarted Ambitions

China-based H3C came to represent the most valuable asset in 3Com’s possession. When Bain Capital and Huawei later tried to buy 3Com for approximately $2.2 billion — the acquisition ultimately was thwarted on national-security grounds by the US government — the H3C component was valued at about $1.8 billion, the legacy 3Com business at just $400 million.

If the Bain-Huawei acquisition of had been consummated, Bain would have owned 83.5 percent of 3Com, Huawei 16.5 percent. As we all know, 100 percent of 3Com is now owned by HP, where it forms a growing proportion of HP Networking.

Anyway, having taken that contextual excursion, let’s amble back to Huawei and Symantec and their joint venture. The point is, I’m sure Huawei learned some extremely valuable lessons from its entanglement with 3Com and from H3C, the JV love child they had together.

Origins of Huawei Symantec

In May 2007, as reported by ZDNet, Huawei Technologies and Symantec announced plans to establish a joint venture to develop and distribute security and storage appliances to telecommunications carriers and enterprises worldwide.

Headquartered in Chengdu, China, the joint venture was 51-percent owned by Huawei, with Symantec holding the remaining 49 percent stake.

Huawei contributed its telecommunications storage and security businesses, including its integrated supply chain and product-development practices. Symantec contribute $150 million toward the joint venture’s growth and expansion, as well as some of its enterprise storage and security software licenses, working capital and management resources. In addition, the joint venture had access to Huawei’s intellectual property (IP) licenses, research and development capabilities, manufacturing expertise and engineering resources, including more than 750 China-based employees.

A Symantec filing with the SEC indicated that the he joint venture lost $63 million on revenue of $224 million in 2009.

Reviewing Options

Recently, Symantec CEO Enrique Salem said that his company is reviewing its options regarding its joint venture with Huawei. Just as 3Com had before, Symantec has the right to buy an additional two percent of the joint venture for about $28 million. Salem said that Symantec and Huawei are discussing whether Symantec will exercise that right, or whether the two companies will sell a stake in the venture through an initial public offering. According to Salem, a decision, one way or the other, will be reached by the end of the year.

As I said earlier, in some respects, it’s like deja vu all over again, a reprise of the Huawei-3Com saga.

What’s different, though, is that, through Huawei Symantec, China’s $28-billion telecommunications-equipment titan already has gained entry to the US market. With its 3Com joint venture, 3Com retained sales rights outside greater China and Japan. This time, Huawei retains, as of today, 51-percent ownership in a joint venture that has a worldwide marketing and sales mandate. That’s an important distinction.

Bigger Canvas, Cloud Ambitions 

Now, let’s consider what this joint venture is selling. Whereas H3C was all about data-networking boxes, Huawei Symantec is painting on a much bigger canvas. It’s got the networking gear, check, but it also has storage, servers, security appliances, and it has plans to provide data-center management software, too. Like so many others — Cisco, HP, Dell, Oracle, IBM — it’s heading for the cloud.

And, as Ovum suggested in May, Huawei has major cloud ambitions:

“Huawei’s cloud strategy, comprising hardware (compute, storage), software (virtualization, distributed file system, database management), and services (“cloud in a box”), was a well-kept secret. Huawei’s overwhelming barrage of claimed cloud capabilities included a platform, “SingleCloud,” integrated content distribution networking and caching, and policy and charging control. Huawei highlighted the use of cloud-based storage and computing for its 10,000-person Shanghai R&D operation as early proof of its capabilities, noting energy savings, better data security, and faster inclusion of new employees as benefits it has accrued.”

Some, if not most, of that technology will find its way into the Huawei Symantec data-center offerings. If you look at the Huawei Symantec website, some of the hardware is there now — storage, servers, some networking gear, security appliances.

Cue The Who

At the very least, Huawei, on its own and through this joint venture with Symantec, can add to Cisco’s problems by further contributing to the commoditization of switches and routers and by putting a margin squeeze on converged data-center solutions. As if Cisco doesn’t have enough problems, now this threat looms on the horizon.

In the past, I had dismissed the possibility of a Cisco acquisition of Symantec, but — given the fear, loathing, and increasing desperation on Tasman Drive these days — I’m wondering whether Cisco is looking at Symantec in a different light now, especially within the context of Big Yellow’s expanding relationship with Huawei.

If Symantec could buy that controlling two-percent share from Huawei, well . . . .

Then again, Huawei must  have learned from its trials and tribulations with H3C. It’s surely looking for a different outcome this time.

Cue The Who’s “Won’t Get Fooled Again.”

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.