Xsigo: Hardware Play for Oracle, Not SDN

When I wrote about Xsigo earlier this year, I noted that many saw Oracle as a potential acquirer of the I/O virtualization vendor. Yesterday morning, Oracle made those observers look prescient, pulling the trigger on a transaction of undisclosed value.

Chris Mellor at The Register calculates that Oracle might have paid about $800 million for Xsigo, but we don’t know. What we do know is that Xsigo’s financial backers were looking for an exit. We also know that Oracle was willing to accommodate it.

For the Love of InfiniBand, It’s Not SDN

Some think Oracle bought a software-defined networking (SDN) company. I was shocked at how many journalists and pundits repeated the mantra that Oracle had moved into SDN with its Xsigo acquisition. That is not right, folks, and knowledgeable observers have tried to rectify that misconception.

I’ve gotten over a killer flu, and I have a residual sinus headache that sours my usually sunny disposition, so I’m no mood to deliver a remedial primer on the fundamentals of SDN. Suffice it to say, readers of this forum and those familiar with the pronouncements of the ONF will understand that what Xsigo does, namely I/O virtualization, is not SDN.  That is not to say that what Xsigo does is not valuable, perhaps especially to Oracle. Nonetheless, it is not SDN.

Incidentally, I have seen a few commentators throwing stones at the Oracle marketing department for depicting Xsigo as an SDN player, comparing it to Nicira Networks, which VMware is in the process of acquiring for a princely sum of $1.26 billion. It’s probably true that Oracle’s marketing mavens are trying to gild their new lily by covering it with splashes of SDN gold, but, truth be told, the marketing team at Xsigo began dressing their company in SDN garb earlier this year, when it became increasingly clear that SDN was a lot more than an ephemeral science project involving OpenFlow and boffins in lab coats.

Why Confuse? It’ll be Obvious Soon Enough

At Network Computing, Howard Marks tries to get everybody onside. I encourage you to read his piece in its entirety, because it provides some helpful background and context, but his superbly understated money quote is this one: “I’ve long been intrigued by the concept of I/O virtualization, but I think calling it software-defined networking is a stretch.”

In this industry, words are stretched and twisted like origami until we can no longer recognize their meaning. The result, more often than not, is befuddlement and confusion, as we witnessed yesterday, an outcome that really doesn’t help anybody. In fact, I would argue that Oracle and Xsigo have done themselves a disservice by playing the SDN card.

As Marks points out, “Xsigo’s use of InfiniBand is a good fit with Oracle’s Exadata and other clustered solutions.” What’s more, Matt Palmer, who notes that Xsigo is “not really an SDN acquisition,” also writes that “Oracle is the perfect home for Xsigo.” Palmer makes the salient point that Xsigo is essentially a hardware play for Oracle, one that aligns with Oracle’s hardware-centric approaches to compute and storage.

Oracle: More Like Cisco Than Like VMWare

Oracle could have explained its strategy and detailed the synergies between Xsigo and its family of hardware-engineered “Exasystems” (Exadata and Exalogic) —  and, to be fair, it provided some elucidation (see slide 11 for a concise summary) — but it muddied the waters with SDN misdirection, confusing some and antagonizing others.

Perhaps my analysis is too crude, but I see a sharp divergence between the strategic direction VMware is heading with its acquisition of Nicira and the path Oracle is taking with its Exasystems and Xsigo. Remember, Oracle, after the Sun acquisition, became a proprietary hardware vendor. Its focus is on embedding proprietary hooks and competitive differentiation into its hardware, much like Cisco Systems and the other converged-infrastructure players.

VMware’s conception of a software-defined data center is a completely different proposition. Both offer virtualization, both offer programmability, but VMware treats the underlying abstracted hardware as an undifferentiated resource pool. Conversely, Oracle and Cisco want their engineered hardware to play integral roles in data-center virtualization. Engineered hardware is what they do and who they are.

Taking the Malocchio in New Directions

In that vein, I expect Oracle to look increasingly like Cisco, at least on the infrastructure side of the house. Does that mean Oracle soon will acquire a storage player, such as NetApp, or perhaps another networking company to fill out its data-center portfolio? Maybe the latter first, because Xsigo, whatever its merits, is an I/O virtualization vendor, not a switching or routing vendor. Oracle still has a networking gap.

For reasons already belabored, Oracle is an improbable SDN player. I don’t see it as the likeliest buyer of, say, Big Switch Networks. IBM is more likely to take that path, and I might even get around to explaining why in a subsequent post. Instead, I could foresee Oracle taking out somebody like Brocade, presuming the price is right, or perhaps Extreme Networks. Both vendors have been on and off the auction block, and though Oracle’s Larry Ellison once disavowed acquisitive interest in Brocade, circumstances and Oracle’s disposition have changed markedly since then.

Oracle, which has entertained so many bitter adversaries over the years — IBM, SAP, Microsoft, SalesForce, and HP among them — now appears ready to cast its “evil eye” toward Cisco.

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Xsigo’s Virtualized Infrastructure Draws Cisco’s Fire

Long involved in the discussion about and the market for converged I/O, Xsigo wants to be part of a larger debate and a potentially much bigger market opportunity.

Xsigo said last summer that its goal was to virtualize components of data-center networking, just as servers and storage have been virtualized previously. Wait, some of you might say, isn’t that the purview of software-defined networking (SDN) vendors? Well, yes, that’s true, and while there are obvious differences between what Xsigo delivers and what’s being put on the table by SDN purveyors, Xsigo thinks it has a compelling story to tell.

Xsigo’s I/O Director started off addressing virtualization and data transfer between servers and storage. Last summer, though, its I/O Director stepped up to the server-to-server challenge, simultaneously extending its incursion onto server turf while making a claim on networking territory.

Cisco Takes Notice

That got the attention of Cisco Systems, which offers networking and servers, and a relatively vehement vendetta ensued between the two companies. Xsigo probably got more benefit than Cisco did from the mutual antagonism, if only because Cisco’s public reaction to Xsigo indicated that the smaller player had done enough damage to be considered a threat by the networking giant. In aiming its competitive marketing guns at Xsigo and blasting away, Cisco explicitly acknowledged Xsigo and implicitly conferred added legitimacy in the process.

At any rate, with the addition of the Xsigo Server Fabric, which began shipping in earnest toward the end of last year, the Xsigo I/O Director now allows servers and devices to connect to each other directly without going over the network. As a result, adding a virtual machine (VM) doesn’t involve using an IP address or setting up a virtual LAN (VLAN).  That’s addressed by I/O director and its virtual server interfaces.

Market analyst Zeus Kerravla has said that the Xsigo Server Fabric creates a new infrastructure atop the physical network, which is true enough. The Xsigo Server Fabric obviates the access-layer network, allowing servers and their VMs to communicate directly.

Bumping Layers

Xsigo contends its Server Fabric also effectively eliminates the aggregation layer. Xsigo says its infrastructure extends as for as the core network, where it is compatible with switches from any of the major players, including Cisco and Juniper. As such, Xsigo says its technology transforms a hierarchical network into a pool of bandwidth that can be used to connect virtualized resources in a data center.

By reducing the numbers of switch ports and infrastructure layers — the company says there’s just one layer of connectivity management between the OS or hypervisor and the core network with its approach as compared to as many as four layers in the Cisco model — Xsigo says its business model is the exact opposite of Cisco’s. Further to that point, Xsigo says that it is open, acting as a transparent conduit moving data between servers and the network core, whereas it alleges Cisco is not. Finally, Xsigo says it has no server agenda, whereas Cisco pushes its own servers as part of its Unified Computing System (UCS) for data-center virtualization.

Playing Its Part

Having no server agenda and taking a cut of the networking pie seem to have resulted in a go-it-alone strategy for Xsigo. It’s conceivable that market dynamics  and shifting vendor alliances could change that picture, but for now Xsigo doesn’t have a powerful technology-partner ecosystem to leverage.  As The Register noted, Xsigo has no OEM deals and is not thought to be an acquisition target of a major player, though Dell is responsible for about 20 percent of Xsigo’s sales and Oracle is cited as a potential acquirer in some quarters.

Xsigo customers, including some big names, have derived some significant cost savings from cutting down on cabling and getting much greater utilization from servers, virtual machines, and their network resources.

While not a member of the SDN fraternity, Xsigo wants us to know that it is playing its part in virtualized infrastructure for the data center.

BMC Still Likelier to Buy than to be Bought

After reading a recent Network Computing piece on BMC Software, it struck me that the management-software purveyor finds itself in a Darwinian dilemma: acquire or be acquired.

If it chooses to acquire, something to which it has not been averse previously, BMC might wish to make a play in enterprise mobility management (EMM) or mobile device management (MDM). As the article at Network Computing explains, that is a current area of need for BMC.  There’s no shortage of fish in that pond, and BMC is likely to find one at the right price.

Conversely, BMC might decide that it can’t compete in the long run with much bigger systems-management rivals such as IBM, HP, Microsoft, and Oracle. Even as BMC continues its transition toward defining itself as a multiplatform, hardware-neutral cloud-management vendor, it might conclude that the odds and resources stacked against are too great to overcome.

Dell Could Come Knocking

That, though, is by no means inevitable. The company has been independent for a long time — about 31 years, if we’re counting — and it has been subject to almost as many takeover rumors in the last few years as has F5 Networks. Still, like F5, it remains an independent company, and it might continue to do so indefinitely.

Nonetheless, if BMC finally chose to entertain a buyer, Dell might be at the front of the queue. Yes, we know that Dell is shopping for other goods — Dario Zamarian, Dell’s networking GM and SVP, has suggested that a purchase in L4-L7 network services might be forthcoming — and BMC’s price tag might be a bit steep (its market capitalization is about $6 billion).

Then again, Dell sees itself as an up-and-coming player in converged data-center infrastructure, and BMC offers management-software capabilities that Dell might need if it is to weave a compelling cloud-management narrative.

Intangibles and Existing Partnership

As for intangibles, Dell and BMC are very familiar with one another. The companies have partnered since 2002, working to accelerate IT deployment and configuration in a growing number of data centers. Dell has been a BMC customer for many years, too. Last and least, they’re both Texas-based companies.

The current arrangement between the two companies involves integration of Dell’s Advanced Infrastructure Manager (AIM) with BMC’s Atrium Orchestrator. It also encompasses BMC Asset Management as well as integration between BMC Server Automation (part of the BMC BladeLogic Automation Suite) and the Dell Lifecycle Controller.

If Dell were to acquire BMC, it obviously would want to squeeze more from the marriage. One possible scenario would involve Dell recreating and expanding upon the sort of engagement BMC has with Cisco pertaining to the latter’s Unified Computing System (UCS).

Congruent Messages

In this case, though, BMC’s software would be wedded to Dell’s evolving Virtual Integrated System (VIS). A lot of the marketing language Dell uses on its website is uncannily similar to the sort of pitch BMC makes for its cloud-management software. Both companies talk about automating and simplifying data-center environments, they both emphasize management of physical and virtual infrastructure, and they both stress the openness of their respective architectures, especially the ability to manage multiplatform (and multivendor) hardware and software.

In selling itself to Dell, though, BMC would be walking away from its relationship with Cisco, and its partnerships with some others, too. What’s more, Dell would assume ownership of some parts of the BMC business, such as mainframe-management software, that might not seem a great fit, at least at first glance.  Still, a Dell-BMC combination seems more plausible than fanciful.

If I were to wager on whether BMC will buy or be bought, though, it’s probably easier to imagine it buying an EMM or MDM vendor than to envision it getting scooped up at a potentially considerable premium by Dell (or another vendor). Even so, either outcome is within the realm of rational deduction.

Like OpenFlow, Open Compute Signals Shift in Industry Power

I’ve written quite a bit recently about OpenFlow and the Open Networking Foundation (ONF). For a change of pace, I will focus today on the Open Compute Project.

In many ways, even though OpenFlow deals with networking infrastructure and Open Compute deals with computing infrastructure, they are analogous movements, springing from the same fundamental set of industry dynamics.

Open Compute was introduced formally to the world in April. Its ostensible goal was “to develop servers and data centers following the model traditionally associated with open-source software projects.”  That’s true insofar as it goes, but it’s only part of the story. The stated goal actually is a means to an end, which is to devise an operational template that allows cloud behemoths such as Facebook to save lots of money on computing infrastructure. It’s all about commoditizing and optimizing the operational efficiency of the hardware encompassed within many of the largest cloud data centers that don’t belong to Google.

Speaking of Google, it is not involved with Open Compute. That’s primarily because Google has been taking a DIY approach to its data center long before Facebook began working on the blueprint for the Open Compute Project.

Google as DIY Trailblazer

For Google, its ability to develop and deliver its own data-center technologies — spanning computing, networking and storage infrastructure — became a source of competitive advantage. By using off-the-shelf hardware components, Google was able to provide itself with cost- and energy-efficient data-center infrastructure that did exactly what it needed to do — and no more. Moreover, Google no longer had to pay a premium to technology vendors that offered products that weren’t ideally suited to its requirements and that offered extraneous “higher-value” (pricier) features and functionality.

Observing how Google had used its scale and its ample resources to fashion its cost-saving infrastructure, Facebook  considered how it might follow suit. The goal at Facebook was to save money, of course, but also to mitigate or perhaps eliminate the infrastructure-based competitive advantage Google had developed. Facebook realized that it could never compete with Google at scale in the infrastructure cost-saving game, so it sought to enlist others in the cause.

And so the Open Computer project was born. The aim is to have a community of shared interest deliver cost-saving open-hardware innovations that can help Facebook scale its infrastructure at an operational efficiency approximating Google’s. If others besides Facebook benefit, so be it. That’s not a concern.

Collateral Damage

As Facebook seeks to boost its advertising revenue, it is effectively competing with Google. The search giant still derives nearly 97 percent of its revenue from advertising, and its Google+ is intended to distract it not derail Facebook’s core business, just as Google Apps is meant to keep Microsoft focused on protecting one of its crown jewels rather than on allocating more corporate resources to search and search advertising.

There’s nothing particularly striking about that. Cloud service providers are expected to compete against other by developing new revenue-generating services and by achieving new cost-saving operational efficiencies.  In that context, the Open Compute Project can be seen, at least in one respect, as Facebook’s open-source bid to level the infrastructure playing field and undercut, as previously noted, what has been a Google competitive advantage.

But there’s another dynamic at play. As the leading cloud providers with their vast data centers increasingly seek to develop their own hardware infrastructure — or to create an open-source model that facilitates its delivery — we will witness some significant collateral damage. Those taking the hit, as is becoming apparent, will be the hardware systems vendors, including HP, IBM, Oracle (Sun), Dell, and even Cisco. That’s only on the computing side of the house, of course. In networking, as software-defined networking (SDN) and OpenFlow find ready embrace among the large cloud shops, Cisco and others will be subject to the loss of revenue and profit margin, though how much and how soon remain to be seen.

Who’s Steering the OCP Ship?

So, who, aside from Facebook, will set the strategic agenda of Open Compute? To answer to that question, we need only consult the identities of those named to the Open Compute Project Foundation’s board of directors:

• Chairman/President – Frank Frankovsky, Director, Technical Operations at Facebook
• Jason Waxman, General Manager, High Density Computing, Data Center Group, Intel
• Mark Roenigk, Chief Operating Officer, Rackspace Hosting
• Andy Bechtolshiem, Industry Guru
• Don Duet, Managing Director, Goldman-Sachs

It’s no shocker that Facebook retains the chairman’s role. Facebook didn’t launch this initiative to have somebody else steer the ship.

Similarly, it’s not a surprise that Intel is involved. Intel benefits regardless of whether cloud shops build their own systems, buy them from HP or Dell, or even get them from a Taiwanese or Chinese ODM.

As for the Rackspace representation, that makes sense, too. Rackspace already has OpenStack, open-source software for private and public clouds, and the Open Compute approach provides a logical hardware complement to that effort.

After that, though, the board membership of the Open Compute Project Foundation gets rather interesting.

Examining Bechtolsheim’s Involvement

First, there’s the intriguing presence of Andy Bechtolsheim. Those who follow the networking industry will know that Andy Bechtolsheim is more than an “industry guru,” whatever that means. Among his many roles, Bechtolsheim serves as the chief development officer and co-founder of Arista Networks, a growing rival to Cisco in low-latency data-center switching, especially at cloud-scale web shops and financial-services companies. It bears repeating that Open Compute’s mandate does not extend to network infrastructure, which is the preserve of the analogous OpenFlow.

Bechtolsheim’s history is replete with successes, as a technologist and as an investor. He was one of the earliest investors in Google, which makes his involvement in Open Compute deliciously ironic.

More recently, he disclosed a seed-stage investment in Nebula, which, as Derrick Harris at GigaOM wrote this summer, has “developed a hardware appliance pre-loaded with customized OpenStack software and Arista networking tools, designed to manage racks of commodity servers as a private cloud.” The reference architectures for the commodity servers comprise Dell’s PowerEdge C Micro Servers and servers that adhere to Open Compute specifications.

We know, then, why Bechtolsheim is on the board. He’s a high-profile presence that I’m sure Open Compute was only too happy to welcome with open arms (pardon the pun), and he also has business interests that would benefit from a furtherance of Open Compute’s agenda. Not to put too fine a point on it, but there’s an Arista and a Nebula dimension to Bechtolsheim’s board role at the Open Compute Project Foundation.

OpenStack Angle for Rackspace, Dell

Interestingly, the presence of Bechtolsheim and Rackspace’s Mark Roenigk on the board both emphasize OpenStack considerations, as does Dell’s involvement with Open Compute. Dell doesn’t have a board seat — at least not according to the Open Compute website — but it seems to think it can build a business for solutions based on Open Compute and OpenStack among second-tier purveyors of public-cloud services and among those pursuing large private or hybrid clouds. Both will become key strategic markets for Dell as its SMB installed base migrates applications and spending to the cloud.

Dell notably lost a chunk of server business when Facebook chose to go the DIY route, in conjunction with Taiwanese ODM Quanta Computer, for servers in its data center in Pineville, Oregon. Through its involvement in Open Compute, Dell might be trying to regain lost ground at Facebook, but I suspect that ship has sailed. Instead, Dell probably is attempting to ensure that it prevents or mitigates potential market erosion among smaller service providers and enterprise customers.

What Goldman Sachs Wants

The other intriguing presence on the Open Compute Project Foundation board is Don Duet from Goldman Sachs. Here’s what Duet had to say about his firm’s involvement with Open Compute:

“We build a lot of our own technology, but we are not at the hyperscale of Google or Facebook. We are a mid-scale company with a large global footprint. The work done by the OCP has the potential to lower the TCO [total cost of ownership] and we are extremely interested in that.”

Indeed, that perspective probably worries major server vendors more than anything else about Open Compute. Once Goldman Sachs goes this route, other financial-services firms will be inclined to follow, and nobody knows where the market attrition will end, presuming it ends at all.

Like Facebook, Goldman Sachs saw what Google was doing with its home-brewed, scale-out data-center infrastructure, and wondered how it might achieve similar business benefits. That has to be disconcerting news for major server vendors.

Welcome to the Future

The big takeaway for me, as I absorb these developments, is how the power axis of the industry is shifting. The big systems vendors used to set the agenda, promoting and pushing their products and influencing the influencers so that enterprise buyers kept their growth rates on the uptick. Now, though, a combination of factors — widespread data-center virtualization, the rise of cloud computing, a persistent and protected global economic downturn (which has placed unprecedented emphasis on IT cost containment) — is reshaping the IT universe.

Welcome to the future. Some might like it more than others, but there’s no going back.

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.

Talk of CEO Succession at Cisco

As Cisco has struggled to adapt to the protracted global market downturn and the “recoveryless” recovery — it’s been going on so long, perhaps we should just call it the Information-Age Depression — the company’s CEO, John Chambers, has been subject to unfamiliar criticism from investors and industry observers alike.

Then again, Cisco’s shares have stagnated for much of the last decade, leading some to contend that Chambers and his thinning bench of executive talent were long overdue for reproach.  Indeed, it’s a measure of Cisco’s great success under Chambers, especially during the hypergrowth 90s, that he was spared the scrutiny that other executives would have received under similar circumstances. Cisco’s blazing growth and industry dominance in its earlier incarnation gave Chambers and crew protective cover from criticism — until now.

Glory Days Fade

One can only feast on the glory deals for so long. Cisco still dominates enterprise networking, but its market share is receding gradually. The company hasn’t been able to find the growth it expected from Chambers’ “market adjacencies,” and it was forced to abort an ill-considered foray into the consumer space, shutting down Pure Digital Technologies and its Flip video camcorders earlier this year.

What’s more, the company’s inorganic growth-by-acquisition model, which served it so well in the 1990s and into the last decade, seems to be sputtering, with Cisco making fewer acquisitions and not batting its formerly exalted average on the ones it does make. Cisco executives who directed and executed some of its most successful acquisitions — Charlie Giancarlo and Mike Volpe among them — no longer are with the company, which might partly explain Cisco’s faltering M&A pace.

Hoisted on Its Own Petard

However, Cisco also has put itself into a box of its own devising, having parked most of cash overseas to avoid US taxation. Until that money is repatriated, whether through a “tax holiday” or otherwise, Cisco will be forced to evaluate acquisitions partly on where its money resides rather than exclusively on the basis of strategic requirements. It’s a perverse dilemma, but ultimately Cisco was the author of its own misfortune.

That’s been doubly unfortunate because Cisco had become dependent on acquisitions to provide its innovation. Years ago, competitors alleged that Cisco couldn’t innovate organically, and I also felt that accusation was harsh and unfair. Now, though, it’s difficult to contend that Cisco is providing enough value-bestowing innovation to drive top-line growth or to support its traditionally robust profit margins.

Finally, Cisco has seen scores of talented executives, and their intellectual capital, leave the company in recent years. This summer thousands of employees were shown the door. Others, some with reserves of institutional memory and hard-won experience, took early retirement.

Chambers Reportedly Leaving

Cisco has seen better days, and it’s no wonder that shareholders are demanding a change of leadership. A Reuters news item reports that John Chambers might be about to relinquish the big chair, with discussion inside and outside the company intensifying about Cisco’s CEO succession plans.

Some sources say Chambers might announce his departure imminently while others say he’ll want to leave on a high note, perhaps after an expectation-smashing quarter. Timing aside, it seems all but certain that Chambers will be gone before long.

Reviewing the Field of Candidates

That has occasioned rampant speculation about who will succeed him. Candidates have been proposed from inside and outside Cisco, and some apparently are campaigning for the job, lobbying shareholders and board members for support.

The current consensus is that Cisco will look externally for its next CEO rather than promote from within.  That view implicitly questions the depth of the executive bench strength currently at Cisco.

Potential external candidates mentioned by Reuters include former Hewlett-Packard CEO Mark Hurd and former Cisco executives Charles Giancarlo, Mike Volpi, Gary Daichendt, and James Richardson. Other industry executives cited as possible contenders include Juniper Networks Inc CEO Kevin Johnson, former McAfee CEO Dave DeWalt, and HP executive David Donatelli.

Hurd Worst Fit

Some dark-horse candidates undoubtedly will surface, too, but of those mooted by Reuters, I think Mark Hurd perhaps is the worst fit. Hurd’s specialty is operational efficiency and relentless cost-cutting. As Cisco’s latest layoffs and austerity attest, operational discipline isn’t necessarily the company’s most urgent requirement.

What Cisco really needs is somebody who knows how to identify, nurture, and lead the next wave of growth. I respectfully submit that Mark Hurd is not that candidate. It’s probably a moot point, because Hurd has a pretty cushy sinecure as co-president at Oracle.

Of the others, one or more of the former Cisco executives might be good candidates, including Daichendt and Richardson. Presuming Cisco can repatriate its mountain of overseas cash, Volpi or Giancarlo might be able to resuscitate Cisco’s growth-by-acquisition model.

Casting an eye at those who’ve never been at Cisco,  I question whether Donatelli is the right fit, and I suspect that Kevin Johnson will remain at Juniper. Former McAfee CEO Dave DeWalt is an interesting possibility. He has a mix of operational, sales, and M&A aptitude that Cisco’s board might find compelling.

Perhaps the good folks at Betfair should establish a “market” on the next Cisco CEO.

Dell: Brocade and CommVault Rumors Redux

 
Dell is sitting on more than $15 billion in cash and investments, and we should expect that the diversifying computer mainstay will tap that money in pursuit of further acquisitions in 2011.

Brocade: A Reasonable Target for Dell

I have heard repeatedly that Dell wants to make a networking acquisition. The most logical target, given Dell’s increased storage profile in recent years, is Brocade Communications. Dell already resells Brocade’s Fiber Channel SAN switches, and Brocade’s technology plays well with Dell’s earlier acquisition of Compellent Technologies. An acquisition of Brocade would boost Dell’s margins, allowing it to become a vendor, rather than a reseller, of SAN switches.

There’s considerable logic supporting a Dell acquisition of Brocade, but there are some reasons to think it won’t happen, too. Brocade has a current market capitalization of about $3.15 billion, and it’s not unthinkable Dell would have to offer at least $4 billion to seal a deal.

Big Deal, Big Risks

The larger the deal, the bigger the risk that integration and assimilation won’t go smoothly. Dell would prefer smaller, digestible deals, and Brocade could result in acquisitive indigestion. Additionally, even though there’s technological logic underlying a potential Dell bid for Brocade, the market and channel profiles of the two companies are not perfectly aligned and could result in post-merger complications.

Furthermore, recent indications within Brocade suggest a sale of the company isn’t necessarily imminent. Its now-former CFO, Richard Deranleau, left the company recently to “pursue other interests.”  Seemingly knowledgeable observers believe Deranleau would have stuck around if a deal for the company had been in the works.

Let’s also remember that Brocade isn’t exactly a new focus of takeout rumors. Every few months, if not more frequently, Brocade is said to be on the block or on the cusp of an impending acquisition. Those deals did not develop, and it’s possible the latest flurry of Dell rumors will fall into the same uneventful bucket.

OEM Entanglements

One reason Brocade might have remained on the shelf, to speak, might involve the nature of its OEM agreements with vendors that include not only Dell but also IBM, HP, EMC, Oracle, Hitachi, Fujitsu, among others. It’s top three OEM resellers — HP, IBM, and EMC — account for about half the company’s revenue.

It’s reasonable to assume that those companies might have included language in their OEM contracts with Brocade that protect themselves and their customers from potentially injurious consequences resulting from Brocade being merged with or acquired by another vendor. Citi analyst John Slack is among those who have contended that Brocade’s existing OEM agreements might cause difficulties for a buyer of the company.

That said, as mentioned above, Brocade would be a reasonable addition to Dell’s storage-centric strategic buildout. It makes sense technologically, and could happen, but that doesn’t mean it will.

CommVault Rumors Return

Meanwhile, CommVault has been perennially rumored to be a Dell acquisition target. Again, it’s a plausible scenario. Dell is a major reseller of CommVault’s Simpana data-management software, accounting for 23 percent of the company’s revenue. Just as in the case of Brocade, Dell could improve its margins significantly by directly selling those products to its channel partners and customers rather than functioning as a reseller.

But the rumor about Dell acquiring CommVault has circulated, quite literally, for years. If Dell wanted to lock up CommVault, it could have done so before now, at a price more favorable than CommVault’s current market capitalization of more than $2 billion. (And, in any deal that might transpire, CommVault would negotiate a significant premium over its current market cap.)

Unless, of course, CommVault wasn’t open to acquisition proposals. Some contend CommVault will be even less amenable to acquisition now that it has struck a potentially lucrative OEM deal with NetApp. If Dell finally wishes to consummate a deal with CommVault, it might be forced to pay a relatively hefty price.

No Ruse: Hurd Joins Ellison at Oracle

A changing of the guard has occurred in the Oracle executive suite, with Charles Phillips on the way out and Mark Hurd, former chairman and CEO of Hewlett-Packard, taking his place as co-president alongside Safra Catz.

The move is both unsurprising and surprising at the same time. For example, it’s not surprising that Phillips is leaving Oracle. Reports had persisted for some time that he might depart. His departure needn’t have coincided with Hurd’s arrival, but that’s the way it worked out.

Comfortable Arrangement

Speaking of which, Hurd’s move to Oracle makes perfect sense considered within the context of his friendship with Larry Ellison. The two apparently are close, and they share considerable mutual admiration and respect. There’s every reason to think they’ll be able to co-exist at Oracle’s executive heights.

That said, I’m still not sure that Oracle needs Mark Hurd. It’s already a lean, mean ship, and Hurd’s modus operandi is to identify and rectify operational inefficiencies in pursuit of cost reductions. Oracle does that well today, and probably could have continued to do so without Hurd joining the company, no doubt at great expense to shareholders.

From Tennis Court to Boardroom

I have to wonder whether Ellison is making this move purely on the basis of business considerations or whether he made the decision more for personal reasons. It certainly feels like executive fiat. I don’t think Hurd will do any lasting damage at Oracle — he’ll be reporting to Ellison and will not be given the latitude he had, up until near the end, at HP — but nor am I convinced that he offers a lot of upside value.

I had thought Ellison and Oracle might have been engaging in a ploy in leaking discussions of Hurd taking a job there. I thought Ellison might have been trying to help his friend’s negotiating position in relation to a CEO position elsewhere. There had been talk to that effect in recent days.

In the end, though, the tennis tandem have become boardroom buddies. What will be interesting to watch now is not so much how Hurd coexists with Ellison, but how well he gets along with co-president Safra Catz. You know the old saying: Two’s company, three’s a crowd.

Pondering Hurd-to-Oracle Reports

Everybody knows by now that Oracle CEO Larry Ellison and former HP CEO Mark Hurd are good friends, on and off the tennis court.

Ellison, you might recall, sent the New York Times an impassioned email missive decrying the HP board’s decision to show Hurd the door, ostensibly over dubious expense reports. That futile intervention by the Oracle chieftain was testament to his loyalty to his friend and it might actually have reflected Ellison’s true estimation of Hurd as an executive.

We’ll know soon enough, because reports have surfaced in the Wall Street Journal and the aforementioned New York Times suggesting that Oracle might offer a top executive position to Hurd. Other reports also suggest that Hurd could snag a seat on Oracle’s board of directors.

These reports all are fueled by “a person briefed on the talks” between Hurd and Ellison. The person in question has chosen to remain anonymous, apparently due to the confidentiality of the matters under discussion. We don’t know whether the talks are being leaked by somebody inside Oracle, someone close to Hurd, or by other parties with knowledge of the situation.

Like Dropping Anvil on Subdued Prisoner

If Hurd were to join Oracle, it would be in a senior executive capacity, especially if he also were to claim a position on the board. This suggests that one of Oracle’s current co-presidents, Charles Phillips or Safra Catz, could be displaced as a result of Hurd’s ascension. Of the two, Phillips is thought by many to be more likely to suffer if Hurd were to join the Oracle executive team.

Still, if Hurd were to join Oracle, I’d attribute the move to Ellison’s friendship with Hurd rather than to any burning need for Hurd’s talents at Oracle. Hurd would not come cheaply, and — on the basis of a rigorous cost-benefit analysis, surely an approach Hurd would appreciate — it’s not obvious that he’d bring a return on the considerable investment he’d entail.

After all, Oracle doesn’t have difficulty running a tight ship. Why would it have need for the services of an executive who is the technology industry’s answer to Al Dunlap, a man variously honored with affectionate sobriquets such as “Chainsaw Al” and “Rambo in Pinstripes.” Adding Hurd to the mix would be overdoing it, like dropping an anvil on a prisoner who’s already been subdued.

Potential Negotiating Leverage

The fact is, Oracle doesn’t need Hurd’s operational help with the integration of Sun Microsystems, and Larry Ellison doesn’t require or want assistance plotting the strategic course and vision for his company. Besides, Hurd’s strength is not and never was vision. His calling card, his speciality, is finding and then mitigating or eliminating operational inefficiencies. Oracle doesn’t have many of those.

All of which causes me to wonder whether this story has been leaked for other reasons. We know Ellison and Hurd are friendly. We know Ellison is inclined to come to his friend’s assistance. Allow me to hypothesize for a moment. Let’s assume Hurd is in negotiations for a CEO job with another technology company in Silicon Valley, one whose operations might benefit from some vigorous austerity measures. Let’s further suppose that Hurd is trying to negotiate the sort of boffo compensation to which he has become accustomed. Finally, let’s assume that the company in question is reluctant to acquiesce to his demands. In those circumstances, a putative offer of a plum job at Oracle could provide Hurd with convenient negotiating leverage.

No matter what transpires, I would not be surprised to see Hurd take a board seat at Oracle, effectively substituting for the one he lost at News Corporation in the wake of the scandal (or whatever it was) at HP. Ellison and Hurd are friends, after all.

Virtualization Still Calls Data-Center Tune

As the latest VMworld begins its transformation from current event to memory, now probably is as good a time as any to reflect on what it all means, if anything, for the future of data centers, the IT industry, and various big-name vendors.

There has been a lot of talk about public, private, and hybrid clouds at VMworld, but I think that’s something of a side issue. Yes, certain enterprises and organizations will partake of cloud services, and, yes, many enterprises will adopt a philosophy of IT as service within their data centers. They’ll make data-center management and automation decisions accordingly.

Even so, at a practical level, it is virtualization that continues to drive meaningful change. The  robust growth of virtualization has introduced problems (optimists would call them opportunities), too. How do you automate it, how do you manage it, how do you control it so that it remains a business asset rather than a potential liability?

Reciprocal Choking

At a fundamental level, that’s the big problem that data centers, whether within enterprises or service providers, must solve. The ultimate solution might involve data- center convergence — the integration and logical unification of servers, storage, networking, and orchestration — but it’s not clear whether that is the only option, or whether the price of vendor lock-in is worth the presumed benefit. Most enterprise customers, for the time being, will resist the urge to have one throat to choke, if only because they fear the choking might be reciprocal.

Indeed, as the vendor community has reacted to the popular appeal of data-center virtualization, the spectacle has been fascinating to watch. Who will gain control?

It’s not a simple question to answer, because the vendors themselves won’t have the final say; nor will the industry’s intelligentsia and punditry, formidable as they may be. No, the final arbiters are those who own, run, and manage the data centers that are being increasingly virtualized. Will network managers, or at least those with a strong networking sensibility, reign supreme? Will the leadership emerge from the server, application, or storage side of the house? What sorts of relationships will  these customers have with the vendor community, and which companies will serve as trusted counsel?

Ownership of Key Customer Relationships

As virtualization, by necessity, breaks down walls and silos, entirely new customer relationships will develop and new conversations will occur. Which vendors will be best positioned to cultivate or further develop those relationships and lead those conversations?

Meanwhile, vendors are placing their bets on technologies, and on corporate structures and strategic priorities. HP is an interesting case. Its Enterprise Servers Storage and Networks (ESSN) seems increasingly titled toward storage and servers, with networking — though not an insignificant consideration — relegated increasingly to a commoditized, supporting role. Just look at the executive management at the top of ESSN, both at HP headquarters and worldwide. You’ll notice an increasingly pronounced storage orientation, from Dave Donatelli on down.

Cisco, meanwhile, remains a networking company. It will try to imbue as much intelligence (and account control) as possible into the network infrastructure, even though it might be packaged under the Unified Computing Systems (UCS) moniker. That might not be a bad bet, but Cisco really doesn’t have a choice. It doesn’t own storage, is a relative neophyte in servers, and doesn’t have Oracle’s database or application pedigree.

Dell’s Move

IBM and Dell will be interesting to watch. Dell clearly places a lot of emphasis on owning its own storage technology. It has its own storage offerings right up through the midrange of the market, and it tried hard to buy 3PAR before being denied by a determined HP, which had its own reasons for winning that duel.

Questions remain over the importance Dell attaches to networking. We should learn soon enough whether Dell will continue to partner, with Juniper and Brocade, or whether it will buy its way into the market. To the extent that Dell continues to maintain its networking partnerships, the company effectively will be saying that it deems networking a secondary priority in its data-center strategy. IBM already seems to have made that determination, though there’s always a possibility it will revisit its earlier decision.

This puts Juniper in an interesting position. It needs to continue to push toward its Project Stratus intelligent flat network, thereby enhancing its value to customers and its importance to Dell and IBM as a partner. Brocade faces a similar challenge in storage networking, though it still seems to have a lot of work ahead of it in repositioning the Ethernet-switching portfolio it obtained through its acquisition of Foundry Networks.

Microsoft Pays for Inattentiveness

I have not mentioned Microsoft. VMware threw down a gauntlet of sorts earlier this week when it suggested that the importance of Windows as an operating system had been undercut severely by the rise of virtualization. For the most part, I agree with that assessment. Microsoft has some big challenges ahead of it, and it has been attempting to distract us from its shortcomings by talking a lot about its cloud vision. But a vision, no matter how compelling, is thin gruel if it is not supported by follow through and execution. In virtualization, Microsoft was caught flat-footed, its gaze averted by commotion outside the data center and the enterprise, and it is paying a steep price for that inattentiveness now.

Even though marketing hype has pivoted and tilted toward the cloud, virtualization continues to recast the data center.

Market Wants a Bidding War, but Should Dell Raise Stakes?

As 3PAR’s stock price ascended for much of today, it became obvious that the market, in its abstract and aggregate wisdom, had determined that Dell would not shrink from a showdown with HP over ownership of the virtualized-storage vendor.

HP and Dell both have their reasons for wanting to take 3PAR off the market.

Dell is thought to be desperate to have its own high-end storage offerings rather than have to sustain an increasingly strained reseller relationship with EMC. In addition, Dell wants to burnish its bonafides as a legitimate big-money datacenter player, moving beyond its traditional business market among the SMB set. The margins that could be derived from 3PAR’s storage business are attractive to Dell, which believes it could significantly expand 3PAR’s market presence.

Meanwhile, HP is considering its own options — it sells Hitachi storage gear at the high end of the market — and it has strategic reasons for cutting Dell off at the pass.

EMC Disapproves

None of the other major players, including Oracle and IBM, is thought to have interest in entering a bidding war. For its part, EMC is tut-tutting censoriously from the sidelines, publicly deriding Dell and HP for their showy extravagance.

So, it’s up to Dell to raise the stakes or fold. After hours tonight, the market is unsure which way Dell will go.

Whatever Dell chooses to do, it must not lose its head. Business decisions are supposed to make business sense. As a Computerworld article today noted, 3Par reported $194.3 million in revenue for the fiscal year that ended March 31.  The HP bid that topped Dell’s original proposal represents a valuation more than eight times greater than 3PAR’s fiscal year revenues. (3PAR has had trouble making money, so let’s dispense with a discussion of earnings.)

Reason over Passion

Dell, even though it has nearly as much cash on hand as does — $10.88 billion to HP’s  has $14.17 billion — can’t afford to get crazy. It must spend its cash wisely if it its to fill enterprise gaps and compete across the data center. Spending madly for 3PAR would come back to haunt Dell at a later date.

If Dell truly believes 3PAR is a rocket ship destined for supercharged revenue liftoff, then it can justify an escalation in its bidding war against HP. But can it do that? Or would it just be a case of Dell trying to save face, attempting to win a pissing match against its bigger rival? It sure feels like testosterone might be getting the better of reason at the moment down in Round Rock.

Meanwhile, there’s some debate as to whether Dell and HP have other options. Some say they do, and point to Isilon and Compellent as purveyors of highly virtualized storage systems. Others argue that 3PAR is the best of the bunch, deserving the special attention it has received.

Either way, Dell should weight its next move carefully. It it ups the ante, it just might have to pay the price.

IBM Reorganization Prompts Questions

IBM announced its latest quarterly results yesterday, but it did something else, too: It reorganized itself, shuffling some executives upward and changing the reporting structure for others.

On the surface, it’s not a big deal. It goes on all the time, especially at large companies besieged by changing markets, technological advances, bureaucratic inertia, and intracompany politics. Reorganizations help to shake things up, to keep the generals and the troops focused externally, on customers and markets rather than on solipsistic careerism (not that there’s anything wrong with that) and departmental intrigue.

But I’m wondering whether the IBM move portends more than that. In disclosing the changes to IBM staff in an email, the company’s president, CEO, and chairman Sam Palmisano wrote the following about the most significant aspect of the change, the integration of IBM’s formerly independent Systems and Technology Group (STG) into the company’s Software Group:

“We know that IT infrastructure performance is greatly enhanced when every element – from microprocessors and storage through operating systems and middleware – is designed and brought to market as tightly integrated, optimized systems.”

It’s a straightforward observation, as well as a decent rationale for the change, but it might hint at something more. In recombining its hardware and software under the same executive management — and in acknowledging the enhanced infrastructure performance of “tightly integrated, optimized systems” — IBM’s move causes  one to wonder whether the company might consider becoming a purveyor of other presumably valuable pieces of optimized infrastructure.

Until now, for example, IBM has been willing to stay out of the network-infrastructure business. First, it had a partnership with Cisco, which it still invokes occasionally for mutual benefit, and more recently it has partnered with Brocade and Juniper Networks. Through those partnerships, IBM covers the networking gamut, able to offer its customers extensive solutions that reach from the network edge to the core.

It doesn’t own the gear it sells, though. And it might not feel the need to offer its own gear, even now. But circumstances have changed since it first partnered with Cisco. Back then, Cisco wasn’t trying to sell servers, and it wasn’t aggressively pushing storage from EMC, an IBM “coopetitor.” Moreover, during the same intervening period, HP has gotten more serious about network infrastructure, buying 3Com to complement its HP ProCurve business and to form HP Networking.

Even Oracle is making sounds about getting into the networking game via an acquisition. That would make IBM think twice, if not three times, about whether it needed to change tack. In fact, it’s probably giving ample thought to the matter now.

I don’t presume to know what Palmisano and his inner sanctum are saying after they pad into the boardroom on IBM’s mahogany row. But I do know that this reorganization, entirely logical and justified in its own right, makes me wonder whether the stage has been set for a different sort of move.