Cisco’s jump into the server market has certainly put the spotlight on the battle for the data center and HP was the first competitor to respond by cutting prices 30 to 50 percent on its network equipment -- a shot across Cisco’s bow. This is war, and IT departments will benefit from more options and/or better prices. However, as I take a closer look, I’m not even sure that Cisco and the traditional vendors in the data center space (HP, IBM, EMC and Juniper Networks) are fighting on the same battlefield. But one thing is certain: with $30 billion in the bank, Cisco is a force to be reckoned with and the other companies will have to get busy to refine their own go-to-market strategies.
How, exactly, will the new Cisco server be differentiated? We’ll know soon enough. Probably the most astounding aspect of this is how well Cisco has kept its real strategy and many of the important details out of the mainstream.
The New York Times coverage last month only touches the surface: “A Cisco-branded server with virtualization.” Trust me, there’s got to be much more to it than that because several questions immediately leap to mind: Will their servers be sufficiently differentiated to command a premium in the cutthroat server market? Will these systems be cheap enough to manufacture to be priced competitively against the incumbent vendors, who know all too well about the need for massive scalability and squeezing costs out at every opportunity?
Except for its consumer-oriented acquisitions like Linksys, Cisco has never been known for its low cost of goods or optimized manufacturing. After all, with the 65 percent margins it’s been able to maintain in its core networking business, it really hasn’t had to think about that stuff.
So, while I don’t see this as a profitable move for Cisco in the short term, it’s most certainly looking for a long-term payoff. After all, if there’s one place Cisco should be able to succeed in the server market, it’s with central IT, and the data center is a good place to start. This is where Cisco is strongest and expanding from a position of strength certainly makes sense.
Now suppose Cisco succeeds in the server market. What will that mean? Its gross sales should increase but most likely its profit margin will go down. Maybe this is Cisco’s tax shelter strategy for the next few years … make less money (which is probably not a bad idea based on the current administration’s apparent plans for redistributing the wealth). If Cisco can remain strong in their core, this is probably the best time for it to expand into the server market. But grabbing a chunk of this market will not be quick and it will not be easy; it will be a long slog.
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