Tuesday, December 14, 2010

HP vs. Cisco?

Hewlett-Packard and Cisco Systems are close marketing partners, but the relationship could face new strains as HP beefs up its line of low priced corporate network switches to capitalize on recent sales gains.

HP’s ProCurve networking group has quietly sold switching gear for years, garnering a tiny 3 percent share of the enterprise market. But now it’s beginning to make some noise with new products and features aimed squarely at Cisco, the market leader responsible for more than two-thirds of all Ethernet switch sales.

Among other things, HP on June 8 agreed to spend $28 million to acquire high-speed Ethernet switching technology from Riverstone Networks, in an effort to build a more complete line of networking gear to match Cisco’s portfolio.

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Though HP won’t threaten Cisco’s dominance in the enterprise switching market anytime soon, heightened rivalries between the two companies could fray their long-standing alliance at a time when Cisco is aggressively courting new partners to fuel growth.

“HP is one of Cisco’s biggest distributors,” said Zeus Kerravala, an analyst from The Yankee Group. “HP’s sales guys are being compensated for selling Cisco gear. It may not be a problem right now, but over the long term, I see this becoming a much bigger issue for them.”

Cisco is increasingly basing its future on big alliances, and managing relationships with partners such as HP will be crucial to its plans. Cisco CEO John Chambers has repeatedly underlined the importance of partnerships for the company. The strategy was manifest in a deal announced in April to expand Cisco’s sales partnership with wireless phone giant Ericsson, as well as in recent comments signaling Cisco’s openness to a possible tie with rival Nortel Networks.

Cisco’s outreach efforts come amid growing competition among makers of corporate network switches and routers–an arena Cisco dominates with more than 90 percent market share. Earlier this month, Juniper Networks announced the J-Series to compete directly against Cisco’s 1700, 2600 and 3700 enterprise routers. Juniper has been stealing market share from Cisco in the high-end router space, providing hardware to Internet service providers and telephone companies.

Unlike the case with Juniper, which has always been a straight competitor to Cisco, HP and Cisco are also strategic partners. In fact, until last year, HP CEO Carly Fiorina served on Cisco’s board of directors. With $56 billion in sales last year, HP offers Cisco a major sales channel into corporations. The two companies often sell into the same accounts. HP often provides network integration services in addition to certain products, such as servers, storage hardware, network management software and computing gear, while Cisco contributes networking gear.
ProCurve an upward one
Over the last couple years, sales of HP ProCurve networking products have grown more rapidly than those of competing products from companies such as 3Com, Cisco, Nortel Networks and Enterasys Networks, said Josh Johnson, an analyst with Synergy Research Group. In the first quarter of 2004, HP ProCurve moved to third in terms of revenue, from fifth place in the previous quarter. Cisco led the market both in terms of revenue and ports shipped.

During the first quarter of 2004, HP Procurve had about 3.1 percent of the total $3.367 billion Ethernet switch market. Cisco had about 69.1 percent of that market, according to Synergy Research.

Though HP may be coming from a smaller base than Cisco, the company has aggressively grown its revenue over the past year. In four of the last five quarters, HP has seen double-digit growth. Meanwhile, Cisco’s growth has fluctuated.

“We make no bones about the fact that we want to be the alternative to Cisco,” said Brice Clark, worldwide director of strategic planning for ProCurve Networking by HP. “And I think we are doing a good job. In the past three years we have been one of the fastest-growing networking companies. We doubled our port shipments between 2002 and 2003.”

HP primarily competes with Cisco on price. Clark said HP can undercut Cisco’s pricing by at least 30 percent to 50 percent on most product offerings.

Because of its focus on price, HP has been very successful in penetrating certain niche markets, such as education and government. But it has been less successful breaking into Fortune 500 companies, said Joel Conover, an analyst with Current Analysis.

“HP is a big company and a formidable competitor for Cisco,” he said. “But the biggest problem for HP is that they sell entirely through the channel. They don’t have direct contact with the customer, which is critical in dealing with large enterprises.”

Cisco downplayed HP’s increasingly aggressive stance in the enterprise networking market.

“HP is a valued partner working with us in a broad range of technology areas,” said a Cisco representative. “Together we are providing solutions for our many joint customers. However, like many of our other partners, there are spaces where we may compete. Cisco continues to strengthen the market transition to Gigabit Ethernet, and its switching portfolio provides the optimal solution for security, availability and reliability.”

HP has also tried to downplay the conflict of interest.

“The market doesn’t need another Cisco,” said John McHugh, vice president and worldwide general manager of the ProCurve business unit. “We offer a different value proposition for customers. If you’ve got a simple network and you’re looking for a cost effective solution, HP’s a good choice. But if you’ve got a complex need for an end-to-end solution, then HP wouldn’t be the right vendor. That’s Cisco’s forte.”

Still, HP’s recent steps signal that competition between the two companies will likely increase in the coming months.

For example, HP is using the Riverstone technology to develop more in-house Ethernet switch expertise. Traditionally, the company has made work-group and wiring-closet switches. At the high end of the market, it has resold switches from Foundry Networks. Clark said the Foundry relationship will continue, and the new switches based on Riverstone’s technology will augment these products.

In addition to broadening its portfolio with new products, HP has also enhanced older ones. For example, it has introduced higher density Gigabit-Ethernet and power-over-Ethernet modules for its 5300 series switches. It has also added new software to its 700wl wireless gateway product to improve usability, and it’s improved aerials for the its 420 and 520 wireless access points.

“Cisco has carried the lion’s share of the routing and switching market for several years,” Kerravala said. “They have to be careful about protecting their dominance in these markets.”

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