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Optical/IP

Force10 Deal Could Sting Brocade, Juniper

If the Dell Technologies (Nasdaq: DELL) acquisition of Force10 Networks Inc. closes, the Ethernet growth prospects at Brocade Communications Systems Inc. (Nasdaq: BRCD) and Juniper Networks Inc. (NYSE: JNPR) could be collateral damage.

Both had OEM deals with Dell, to help them join the rush to outfit next-generation data centers. Now, Dell is planning to supply some of its own high-end networking gear. It's similar to the way Cisco Systems Inc. (Nasdaq: CSCO) began supplying its own servers, annoying IBM Corp. (NYSE: IBM) and especially HP Inc. (NYSE: HPQ). (See Dell to Acquire Force10 and HP Picks a Fight With Cisco.)

Brocade's case is getting more attention, because Brocade was supposedly the company Dell wanted to buy. But it was also planning to resell Ethernet switches through Dell on an OEM basis, a relationship that Force10's presence would weaken. (See Why Dell (Maybe) Likes Brocade and Brocade, Dell Team Up.)

"Dell was a small part of Brocade's Ethernet business but represented a large growth opportunity," analyst Mark Sue of RBC Capital Markets wrote in a research note Wednesday morning. "Brocade's Ethernet segment is on run rate of [about] $500M/year and represented a disproportionate amount of next year's growth relative to FibreChannel."

Same thing goes for Juniper.

"This purchase by Dell almost ensures that Juniper's business with Dell will never ramp," analyst George Notter of Jefferies & Co. Inc. wrote in a note published Wednesday. Dell had only begun selling Juniper's EX line of switches on an OEM basis. (The companies expect that to happen by October.)

For Juniper, Ethernet switches have been a growth vehicle, analyst Simon Leopold of Morgan Keegan & Company Inc. wrote Wednesday. Switch sales grew by 95 percent in 2010, although they still make up less than 10 percent of Juniper's revenues.

So, neither Brocade nor Juniper should see much effect in their revenues. What's gone is the potential for growth from the Dell OEM deals.

There might be a more broad problem lurking, though. Sue is thinking Ethernet switching revenues could shrink this year as competition intensifies.

Big picture
It's a thesis he'd been pursuing already. As the number of switch ports sold grows 9 to 12 percent during this year and next, Sue expects prices to fall as Arista Networks Inc. , Brocade, HP and Juniper all try to grab from Cisco's dominant market share. (Cisco held 64.9 percent share during the past four quarters, according to calculations from Infonetics Research Inc. and Morgan Keegan.)

"We project that 10Gbit/s ports, which are now selling for less than one-fifth the price 10 years ago, may see the most accelerated price decline," he wrote in a note issued Monday morning. "Regular 1Gbit/s ports in modular and fixed configurations may decline in price by 10 percent or more."

That's particularly bad news for Cisco. "Most data networking switching vendors on average have gross margins of 45-55 percent, which implies that Cisco, at 63.9 percent corporate gross margins, has the most to lose as pricing competition intensifies," Sue wrote on Monday.

In the time since he wrote that, there's been not only the Dell/Force10 deal, but the Intel Corp. (Nasdaq: INTC) agreement to acquire Fulcrum Microsystems Inc. . (See Intel Seeks Ethernet Leverage With Fulcrum.)

Using Intel's distribution power, "Fulcrum may have the opportunity to become more prevalent and capture more value share, pushing margins lower for these large switch vendors," Sue wrote on Wednesday.

— Craig Matsumoto, West Coast Editor, Light Reading

Pete Baldwin 12/5/2012 | 4:58:23 PM
re: Force10 Deal Could Sting Brocade, Juniper

So, would Dell's entry have much effect on the price wars in switches? Or is HP basically taking care of tanking the price all by itself?

paolo.franzoi 12/5/2012 | 4:58:22 PM
re: Force10 Deal Could Sting Brocade, Juniper

Craig,


You know Dell is already in the switch business....


 


seven


 

chudak 12/5/2012 | 4:58:21 PM
re: Force10 Deal Could Sting Brocade, Juniper

Yes, but it was mainly complete solutions from chip vendors

Pete Baldwin 12/5/2012 | 4:58:20 PM
re: Force10 Deal Could Sting Brocade, Juniper

I know. All right, to clarify: A price war seems to be brewing in Force10's part of the business.  What's Dell's entry going to do to that?

^Eagle^ 12/5/2012 | 4:58:19 PM
re: Force10 Deal Could Sting Brocade, Juniper

Craig,


Dell's entry will definitely drive a price ware.


and Brookseven is right in the statement about switching becoming more and more of a commodity.  Even if the product managers are unhappy with that.  there is a bit of nuance in that statement however.  There are different products classes powered by different chip sets targeting diffent parts of the applicatin landscape.  However, given that most players use merchant silicon to power their systems, within any one segment, there is less and less real hardware differentiation.  


Some players still will work to make a business out of building platforms out of custom code in FPGA's, custom ASICS and semi - custom DSP's with embedded processors.  But then those approaches often have difficulty competing on price.  


So, despite the fight to keep the "high ground" in terms of value, the ethernet swithing market is certainly becoming more and more a commondity.  After all that is one of the fundamental reasons why ethernet won the topology wars long ago and why it continues to win.  From a protocol perspective, there are a lot of other approaches, that can be argued might be more efficient, faster, more robust, etc. etc.  At the root of it all with Ethernet is that it scales, and due to the vast prolifieration of ethernet, large investments in chip set developement can be made since volumes are high, and this drives the entire ecosystem in certain ways.


Dell will certainly drive a price war in the low to middle end of enterprise switching.  And Dell rarely looses when they enter these kinds of price wars.  Seven is correct: Cisco should be the company most concerned.  


sailboat

Pete Baldwin 12/5/2012 | 4:58:19 PM
re: Force10 Deal Could Sting Brocade, Juniper

Just trying to open up a topic for discussion, seven. Looks like your answer to the question, then, would be "no."  :)  Thanks.

paolo.franzoi 12/5/2012 | 4:58:19 PM
re: Force10 Deal Could Sting Brocade, Juniper

Craig,


Can I rephrase for you again:


"All Ethernet Switches of all classes will be commoditized shortly if not already.  Who will stay in this business at basically no margin and why?"


Basically it is not Dell that makes this happen.  It falls to the semiconductor people.  There is virtually no differentiation of Ethernet switches (I can not wait to be screamed at by different product managers over that statement).  But basically, from what I see they try to upsell based on "managed" or whatever.  Over time, Ethernet Switches have become and are more becoming popcorn items that you toss in the garbage when they break.  It has happened at the 1G level and will happen at the 10G level.


I think a company like Dell entering this business just shows that this segment of the business has commoditized and is headed to a company that outsources its real product development to the semiconductor guys.  


The company that needs to worry about this (of course) is not HP but Cisco.  Of course, this only really matters in the Enterprise space and only when people are talking about new switches and only when they are talking about switches in the F10 class of product (which does not include desktops).


Of course, I think you need to line this all up with the Cloud trend.  Remember the guy talking about commodity hardware?  


seven

^Eagle^ 12/5/2012 | 4:58:18 PM
re: Force10 Deal Could Sting Brocade, Juniper

oops, "war" not "ware".


 


Sorry

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