HP Sticks Another Thorn in Cisco's Side

Cisco Systems (Nasdaq: CSCO  ) opened an unpleasant can of worms when it decided to start selling server systems.

The latest round of backlash from that decision involves Hewlett-Packard's (NYSE: HPQ  ) hunting down longtime Cisco customers with flaming torches and sharpened pitchforks, chanting the mantra "a catalyst for change." By HP's reckoning, some $9 billion in existing Cisco networking hardware is just about due for replacement, and what better time than a forced upgrade to switch horses to HP's networking gear?

Under the "Catalyst" program, HP offers generous 20% discounts on its high-end A-series and E-series Ethernet switches if you trade in an old Cisco Catalyst or Nexus switch. If that's not enough to make you switch, HP also points out that its networking equipment is proven to work well with other brands, and the company can also sell you installation services and administration training to boot. Nice way to double-dip there, HP.

IBM (NYSE: IBM  ) and Oracle (Nasdaq: ORCL  ) have also done some nasty things to Cisco over the past year and a half, like getting closer to Cisco rivals Brocade Communications Systems (Nasdaq: BRCD  ) and Juniper Networks (NYSE: JNPR  ) , but HP is the Cisco partner acting most like a jilted lover.

This is obviously an effort to squeeze value out of HP's $2.7 billion 3Com buyout. That in turn was always an attempt to fire back at longtime HP partner Cisco for suddenly becoming a direct competitor in the server space. HP has fired many a shot across Cisco's bow since the networking giant announced its Unified Computing servers, but the venom doesn't seem to have disappeared at all.

HP won't snag anything near all $9 billion of incremental upgrade sales from Cisco with this program, but every little contract stolen will be a thorn in Cisco's side courtesy of a former ally. I still think Cisco was stupid to get into the server market, and will lose more than it gains from that silly move.

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Fool contributor Anders Bylund holds no position in any of the companies discussed here. Juniper Networks is a Motley Fool Big Short short-sale choice. The Fool has written calls (bull call spread) on Cisco Systems. Motley Fool Alpha has opened a short position on Juniper Networks. The Fool owns shares of International Business Machines and Oracle. Motley Fool Alpha owns shares of Cisco Systems. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. You can check out Anders' holdings and a concise bio if you like, and The Motley Fool is investors writing for investors.


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  • Report this Comment On December 20, 2010, at 2:31 PM, neteng99 wrote:

    The notion that HP networking gear will replace existing Cisco gear is far-fetched, and not even plausible. Putting aside the USA national security concerns associated with networking equipment tied to the People's Republic of China's military, where are HP's advanced features such as MPLS, BGP, and VPLS?

    Actually a plausible and fair report would mention Cisco's highly successful and disruptive Unified Computing System (UCS) server technology. Cisco's UCS base is now over 2000 customers and counting, every one representing an HP or IBM server account.

  • Report this Comment On December 20, 2010, at 3:14 PM, BradReeseCom wrote:

    Hi neteng99,

    Tolly Group competitive lab test report:

    HP E5400 zl and HP 8200 zl switches vs. Cisco Catalyst 3750-X and 4500 switches

    http://www.bradreese.com/blog/12-8-2010.htm

    Network research dynamo Gartner reports:

    Debunking the Myth of the Single-Vendor Network

    http://www.gartner.com/technology/media-products/reprints/hp...

    Regarding Cisco and China:

    Quite a lot of Cisco's products are manufactured in China, so Cisco CEO John Chambers bragged in a story featured in The Economist:

    "Cisco also has a record of being willing to reorganise itself. It was an early outsourcer of manufacturing, for instance. Many of its products are never touched by a Cisco employee, but built by a contract manufacturer, tested remotely and then shipped directly to the customer."

    http://www.economist.com/node/14303574?story_id=14303574

    So it appears Cisco's Chinese manufactured products are never touched by a Cisco employee before being shipped to U.S. customers by Cisco's manufacturing contractors located in China (the unanswered question is who owns Cisco's Chinese manufacturing contractors, perhaps it's the People's Liberation Army - PLA?).

    And exactly what are the national security standpoints of using Cisco's Chinese manufactured equipment which is never touched by Cisco itself after being manufactured in China and then installed into the U.S. internet infrastructure?

    Cisco will double its manufacturing in China, Chambers said, a move worth approximately $14 billion, based on the $7 billion Cisco said it purchased from China over the past five years.

    The company has great influence over where its suppliers manufacture, and many would be directed to do so in China, Chambers said.

    While Cisco CEO John Chambers is a registered Republican and was a supporter of Senator John McCain's presidential candidacy, he states:

    "One thing a technology company should never do is fall in love with one political party or one form of government."

    http://pcworld.about.com/od/networkin1/Cisco-to-spend-US-16B...

    In a Washington Times story, Cisco CEO John Chambers proudly bragged:

    "What we're trying to do is outline an entire strategy of becoming a Chinese company."

    http://www.washingtontimes.com/news/2004/dec/25/20041225-114...

    Sincerely,

    Brad Reese

  • Report this Comment On December 20, 2010, at 7:52 PM, Metzer75 wrote:

    Wow. If you "still think Cisco was stupid to get into the server market," you obviously don't understand the dynamics of the data center market at all, and probably shouldn't be writing about tech business. The economics of cloud computing are undeniable, and if you're a vendor that's not offering a converged infrastructure with a roadmap for cloud capabilities, you will find yourself a commoditized, niche player in a matter of a few years. HP was already pushing and becoming successful with Procurve and Virtual Connect prior to the introduciton of UCS. Unchallenged, they would have driven Cisco (or at least Cisco's value prop) entirely out of the data center. Cisco had no choice. Had they done nothing, the risk of losing margin and market share was an even bigger certainty than by going after the server business themselves. Moreover, they're already at a $500 million run rate with UCS. Not too shabby.

  • Report this Comment On December 20, 2010, at 8:17 PM, srivatsan123 wrote:

    First up market for both servers and networking is too big (there simply cannot be a single vendor, even Big Blue has struggled to monopolize let alone HP). For every service provider/Enterprise I've seen so far no one is dumb enough to run into this problem. In other words for every customer you will see a mix of HP, Cisco and Juniper switches. For every server vendor it would be the same (Ping me for a list of unsatisfied HP server customers!, I can show you atleast 100 of them). So there simply cannot be a monopoly in any market whatsoever.

    Put yourself in customer's shoes and you will be able to better visualize this.

  • Report this Comment On December 20, 2010, at 9:56 PM, ajentsch wrote:

    I agree completely with neteng99, who I assume is a network engineer like myself. HP networking gear is complete crap. Cisco customers that are persuaded into switching to HP will soon switch back. Hp doesn't belong in networking. From there gear to there support and documentation they suck. Just my 2 cents.

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