Cisco Steps on Server Giants' Toes

Cisco Systems (Nasdaq: CSCO  ) is never boring. Just when you think you have the networking giant all figured out, it does something completely unexpected. This time, I'm not so sure that's a good thing.

The latest twist on Cisco's story is a "unified computing system" (UCS) that basically puts serious server hardware inside a high-end network switch, with everything tuned to slice virtual machines out of the whole package. Marrying network gear to the computing resources that need it sounds like it makes sense, but Cisco is playing a risky game here.

The product comes with glowing endorsements from industry leaders in almost every corner of the data center: VMware (NYSE: VMW  ) is helping with virtualization, EMC (NYSE: EMC  ) with storage solutions, and both Red Hat and Microsoft (Nasdaq: MSFT  ) are eager to provide platform support. Meanwhile, Accenture (NYSE: ACN  ) is standing by with consulting and tech-support services.

Sounds like a complete package, right? Broad-line industry support across traditional rivalry lines, and everyone is happy?

Well, no. The UCS will compete directly with offerings from other server makers such as Hewlett-Packard (NYSE: HPQ  ) and IBM (NYSE: IBM  ) . That class of companies is entirely absent from Cisco's press releases, and I'd imagine that Big Blue and HP are feeling a bit miffed at Cisco for making a land grab in their stronghold markets.

That wouldn't be so bad if the likes of HP and IBM weren't also big resellers of Cisco equipment. It's common practice to buy a gaggle of IBM servers already bundled with the Cisco switches and routers you need to fit the new hardware into your IT infrastructure. Cisco might be poking itself in the eye here. Only time will tell whether the goodwill lost between Cisco and some of its reselling partners outweighs the revenue from the new product lines.

Watching Cisco jump into consumer electronics and home networking was fine. Those were low-risk plays where Cisco didn't butt heads with any of its major partners. This time, the stakes are much higher, and I'm getting nervous. This stock is off my watch list until I see how the server guys react.

More risky business:

Accenture and Microsoft are Motley Fool Inside Value recommendations. VMware is a Motley Fool Rule Breakers recommendation. Try any of our Foolish newsletter services free for 30 days.

Fool contributor Anders Bylund holds no position in any of the companies discussed here. You can check out Anders' holdings or a concise bio if you like, and The Motley Fool is investors writing for investors.


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  • Report this Comment On March 17, 2009, at 7:41 PM, enik99 wrote:

    Cisco’s server is not smart. The smarts are in the software which comes from BMC. BMC software is proprietary and works best in homogenous environments. Most large data centers hate proprietary lock in solutions and are far from homogeneous. For the first time ever Cisco will be competing in a hyper competitive (razor thin margin) market. A market very different from the fat margin network market they’ve grown accustomed to. Their success is by no means assured. Now if they break lose some of the $30B+ and buy BMC and (EMC to get full control of VMWare) that would be a game changer.

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