Cisco and Brocade - Great Technology vs. Proprietary Technology

By David Gross

Was just reading through an article over at Investopedia on Brocade, and it was so off-base, I thought I would give a counterpoint here.    The writer claimed that Brocade had great technology but poor ability to sell, that there was something wrong with posting non-GAAP earnings, that there was good reason to believe Brocade would take share, and that it would benefit from the market shift to Fibre Channel over Ethernet. 

All four of these claims are either wrong or based on random speculation.   But the strangest one is his point about great technology but poor ability to sell.   If Brocade was so bad at selling, it wouldn't have OEM deals with IBM, HP, Hitachi, Oracle, Dell, and others.   The company is fairly strong at sales.   And its technology might be "great", but on the Ethernet side, it has to deal with proprietary Cisco technologies like VTP, ISL, and CDP which have long held Foundry/Brocade's Ethernet revenue in the $100-$150 million range per quarter, while Cisco's has soared past $3.5 billion.   

As I've written here before, Wall Street simply doesn't seem to know about Cisco's proprietary routing and VLAN technologies, and has no idea how important they are to the business.   It's understandable considering that Cisco IR and its executives rarely talk about them, and instead focus investor presentations on flashy marketing themes about e-learning, conferencing, "human" networks, and so forth, and I can't fault them if so many Wall Streeters are going to center their analysis on investor relations spin.   Nonetheless, EIGRP, VTP, ISL, and other proprietary VLAN and routing protocols are to Cisco what Windows is to Microsoft.

While Cisco is setting up itself for mediocre returns by wasting capital on silly overdiversifications into conferencing and video, Brocade still hasn't been able to grow its Ethernet business as fast as Cisco has grown its Ethernet business, in spite of Cisco's being over 20 times larger.   Cisco posted a 25% y/y revenue increase for its switch business in its most recent quarter, while Brocade posted just a 9% increase, and has been selling its Ethernet products at gross margins 30 points lower than Cisco's.

Now, at the end of the Investopedia article the writer says that perhaps Wall Street thinks Brocade's SAN switches could become irrelevant.   But for the last three years, Brocade has acted like it thinks its SAN switches could become irrelevant, and has told a fancy tale about "convergence" and Fibre Channel-over-Ethernet that has made it seem like the company has no faith in the SAN market it dominates.   And for that, you can't blame Wall Street.

Juniper Close to Surpassing Brocade's Ethernet Revenue

By David Gross

There was speculation for years that Juniper would acquire someone like Extreme or Foundry to get into the Ethernet business.  But rather than hastily run into a deal, the router manufacturer took its time building its own products, releasing its EX series of switches in 2008.   At the same time, Brocade diversified into Ethernet by acquiring Foundry for $3 billion.  

When Brocade acquired Foundry, the Ethernet supplier was doing $165 million in revenue a quarter.   In the 3rd quarter of 2008, Foundry's last as an independent company, its rival Juniper sold just $18 million worth of Ethernet switches.   But during the 3rd quarter of 2010, Juniper sold over $100 million of its EX Series Ethernet switches, more than a five-fold increase in two years, while Brocade sold $122 million worth of Foundry-developed products in its quarter ended July 2010, a 25% decrease over the same period.

BRCD's 3rd Quarter Ends in July

Both Brocade and Juniper have strong relationships with IBM, which resells both company's products.   And Brocade has long had a dominant share of the Fibre Channel switch market.   But this is what has been interesting.   Selling Fibre Channel and Ethernet together under one company has resutled in stagnant Fibre Channel revenue, and declining Ethernet revenue.   Meanwhile, in an article at NetworksAsia, a Juniper exec reported in 2009 that over half of its EX switches were being sold with routers.   Essentially, just as Cisco has long been able to sell its routers and switches to the same customers, Juniper has been able to do the same, albeit in much lower volumes.   Yet, Cisco never needed Fibre Channel switches to sell Ethernet products, and Brocade never needed Ethernet switches to sell Fibre Channel switches.   In spite of all the "convergence" hype, SANs and LANs simply do not mix well.   The LAN/SAN integration we're supposed to get with Fibre Channel over Ethernet reminds me a lot of the LAN/WAN integration we were supposed to get with IP over ATM.

While Cisco probably scared Brocade a bit when it started developing SAN-OS, now NX-OS, companies like Juniper, F5, and Riverbed have had success against the networking giant by focusing on one product category at a time, not by trying to replicate much of its product line, as Brocade is now trying to do.   

Brocade really just needs to cut its losses in the Ethernet business.   The $122 million it booked last quarter in "Ethernet" actually includes the ServerIron load balancer.   More importantly, its gross margins for the acquired Foundry products have fallen into the mid-20s.   They were in the 60s when it bought the company two years ago.   Now I wouldn't count Brocade out as a company, it's been dominant for over a decade in storage networking, but while it thought it could take on Cisco, it has wound up losing to Juniper. 

Brocade, QLogic and Emulex Endorse 16G Fibre Channel

By David Gross

QLogic (QLGC), Emulex (ELX) and Brocade (BRCD) recently endorsed the forthcoming 16G, or FC-PI-5, standard under development by ANSI. While not unexpected, it was refreshing to see Emulex and Brocade in particular support stand-alone Fibre Channel's upgrade path, without the Fibre Channel-over-Ethernet nonsense both have been pushing the last two years.

SANs and LANs are not merging anywhere outside of PowerPoint presentations, and SAN managers continue to need vendors who have expertise in Fibre Channel and storage networks. While 8G Fibre Channel products are just starting to be deployed now, it seems SAN vendors are at least listening to customers who want to know how they will upgrade their networks in the future, not how they will “converge” them.

Brocade plans to have 16G Fibre Channel switches available next year. Still, I have to wonder how they'll maintain their market share in Fibre Channel as they continue on their misguided over-diversification into all things data networking. The press release they put out on 16G was filled with enough marketing gibberish to discourage any investor who thinks they might have turned a corner.

Some of the odd statements from the Brocade PR include :

“Brocade’s heritage is data center networking”

What??? Brocade's heritage is storage networking. No reason to run away from a segment they've dominated the last ten years to catch onto the flavor-of-the-month.

Then there was this...

“delivering unmatched simplicity in managing data-intensive applications, investment protection for existing SAN infrastructure and non-stop networking”

Non-stop networking, are they borrowing bad catch phrases now from HP? Also, if the products are so simple, why can't they described in plain English?

Is Data Center Structured Cabling Becoming Obsolete?

by Lisa Huff

Today if you walk into a “typical” data center you’ll see tons of copper Category cabling in racks, under the raised floor and above cabinets. Of course, it can be argued that there is no such thing as a “typical” data center. But, regardless, most of them still have a majority of copper cabling – but that’s starting to change. Over the last year, we’ve seen the percentage of copper cabling decrease from about 90-percent to approximately 80-percent and according to several data center managers I’ve spoken to lately, they would go entirely fiber if they could afford to.

Well, at 10G, they may just get their wish. Not on direct cost, but perhaps on operating or indirect costs. While copper transceivers at Gigabit data rates cost less than $5 per port (for the switch manufacturer), short wavelength optical ones still hover around $20/port (for the switch manufacturer) and about $120/port for the end user – a massive markup we’ll explore later. But 10GBASE-T ports are nearly non-existent – for many reasons, but the overwhelming one is power consumption. 10GBASE-SR ports with SFP+ modules are now available that consume less than 1W of power, while 10G copper chips are struggling to meet a less than 4W requirement. Considering the fact that power and cooling densitie4s are increasingly issues for data center managers, this alone may steer them to fiber.

This has also led to interconnect companies like Amphenol (APH), Molex (MOLX) and Tyco Electronics (TEL) to take advantage of their short-reach copper twinax technology in the form of the SFP+ direct attach cable assemblies and a change in network topology – away from structured cabling. So while structured cabling may be a cleaner and more flexible architecture, many have turned to top-of-rack switching and direct-connect cabling just so they can actually implement 10-Gigabit Ethernet. Of course, Brocade (BRCD), Cisco (CSCO), Force10 and others support this change because they sell more equipment. But is it the best possible network architecture for the data center? 

Will 100 Gigabit Create New Data Center Networking Startups?

When MPLS (Multi-Protocol Label Switching) was released in the late 90s, Juniper (JNPR) entered the market with a proprietary packet forwarding ASIC, i.e. Application-Specific Integrated Circuit. When Gigabit Ethernet arrived around the same time, Extreme (EXTR) and Foundry (BRCD) introduced their proprietary packet forwarding ASICs. As 10 Gigabit Ethernet was being ratified in 2002, Force10 hit the scene with its proprietary packet forwarding ASIC. So who will develop a proprietary packet forwarding ASIC for 100 Gigabit? No one.

As process geometries in the semiconductor industry get smaller, the fixed design costs for each chip increase. Ten years ago, when 130 nanometer was still a state of the art technology, it cost around $10 million in R&D to develop an ASIC for forwarding packets. Today, at 40 nanometers, it costs well over $100 million.

Regardless of what happens with the economy, VCs fondness for the industry, or the development of the data center market, it is no longer financially possible for a startup equipment vendor to build a carrier-class forwarding architecture with its own ASIC, in addition to having to write an NMS, and sell a box. This is why startups like BLADE and Arista are focused on boxes that have LESS functionality than competing platforms from large vendors, but can also shoot frames across a network with less latency, as long as there aren't too many different places that traffic can go. In some respects, they're like the Model Ts of data networking, simple and inexpensive platforms with fewer configuration options but very strong price/performance.

In a follow up post, I'll look at what this means for programmable logic vendors like Xilinx (XLNX) and Altera (ALTR).