Should Cisco worry? In the same week that it pares its workforce by 16%, Cisco was also presented with two major events that could likely impact its switching business.
The first is Dell acquiring Force10. In acquiring a maker of data center core and top-of-rack switches, with high-density 10G offerings, Dell fills out its data center arsenal considerably.
Dell is already a leading x86 server vendor, claiming leadership here and a No. 2 ranking worldwide. Cisco, meanwhile, claims No. 2 here and No. 3 worldwide, based on Q1 figures.
Acquiring Force10 gives another leading server vendor another switch offering. HP had its own and then acquired 3Com, and IBM acquired BLADE Network Technologies. Cisco, of course, is the king of data center networks and got into the server business two years ago.
But with the three (or four) leading server vendors now owning and able to offer Ethernet switching (and storage) to their base, what's that mean for profit margins in switching - the same margins Cisco's looking to recover through job cuts and operational restructuring? Barron's, citing a report from RBC Capital, has the same take.
You can see switching following the server model of becoming highly commoditized, low margin and dependent on large volumes. Cisco will have to look well beyond the data center to regain that lost switching margin. We believe that was part of the impetus for last week's unveiling of the Sup 2T engine for the high-margin Catalyst 6500 base, a development that is largely aimed at that base in the enterprise campus core.
The second impactual development is Intel's acquisition of switch chip maker Fulcrum. Fulcrum is in 10G switches made by Arista Networks and IBM's BLADE acquisition, two vendors who have made a good dent in 10G data center switching but who lack the volume or critical mass to drive it to commodity levels.
Now Intel owns Fulcrum - the same Intel that supplies X86 server motherboards and NICs to HP, Dell, IBM... and yes, Cisco. The same Intel that's in most of the PCs shipping and that have shipped.
Intel has that critical mass, that ability to drive volumes. Now with a 10G switching design in its position, Intel could conceivably drive the same volumes that it does in PCs and server motherboards (just by selling to its server base of HP, IBM, Dell), thereby accelerating 10G switching's eventual commoditization, and that of follow on 40/100G Ethernet.
These two events indicate that, not only will switching likely follow the commoditization and margin erosion model of servers, it will likely accelerate. That can't be good news for Cisco, as noted by Rob Enderle in this post on ITBusinessEdge. Especially coming the same week that margin erosion in switching is costing the company 16% of its workforce.
