The Tangled Web Of Cisco, EMC And VMware

| About: Cisco Systems, (CSCO)

Today Cisco (NASDAQ:CSCO) announced it plans to acquire privately held WHIPTAIL, an innovator in the high performance, scalable, solid-state storage market. While Cisco has stated that WHIPTAIL is being purchased with the intent of its technology being integrated into its UCS server based fabric computing architecture, and that it does not plan to enter the stand alone solid state drive ((NYSE:SSD)) market where EMC (EMC) plays, most analysts and press reports point out that this is just another competitive pressure point between traditional partners Cisco and EMC/VMware (NYSE:VMW).

The planned acquisition of WHIPTAIL by Cisco, and VMware's acquisition of SDN specialist Nicira last year, which played a critical role in the launch of VMware's network virtualization platform NSX at VMworld last month, does suggest that competitive friction is increasingly becoming part of the relationship between Cisco and EMC/VMware. On the other hand, the VCE partnership formed by Cisco and EMC/VMware in 2009 that sells the integrated storage, compute (Cisco), network (Cisco) and virtualization (VMware) kit called Vblock is now generating approximately $1.2-$1.3 billion in annual revenues, is growing about 30% annually and most recently had a very strong order growth rate of 50% according to Cisco's 4Q13 earnings call. The dichotomy of the successful VCE partnership between Cisco and EMC/VMware and acquisitions of private companies by each entity that encroach on respective partner core markets makes the ultimate competitive/partnership outcome difficult to predict in my view. I believe further private company acquisitions and internal product releases (e.g. NSX from VMware and Insieme from Cisco) will be the main course of action rather than a large acquisition that would further encroach on each other's markets.

When Cisco entered the server market through the acquisition of the spin-in private company Nuova in 2008, traditional server companies HP (NYSE:HPQ) and Dell (NASDAQ:DELL) were trying to encroach on Cisco's enterprise networking business. So while this was an offensive move on Cisco's part given Cisco's desire to integrate compute and network in offering next generation data center solutions, it also was a way to counter the competitive actions of Dell and HP in the networking market. While VMware did not formally enter the physical networking market through its introduction of its vSwitch and the acquisition of Nicira, these and other product offerings brought VMware into the virtual world of networking (e.g. networking of virtual machines within servers), one in which it wants to integrate into its vSphere virtualization platform and ultimately result in it being the de-facto virtualization platform for the software defined data center. While one might argue this does not compete with Cisco's dominance of the physical networking market of the data center, Cisco does not want to concede the emerging virtualization realm of networking and remain purely in the physical domain. Cisco has its own initiatives to compete for the virtual and physical domains as well as the overriding virtualization and orchestration platform (e.g. Open Network Environment, onePK, OpenDaylight etc.).

At this point, I think both Cisco and EMC realize that a bolder move into each other's market in the form of a larger, higher profile acquisition would be fraught with financial and integration risk. Thus, I think at this time it is unlikely Cisco will make a larger acquisition in the storage market (e.g. acquiring a company like NetApp (NASDAQ:NTAP)) or EMC acquiring a company in the data center switch market (e.g. acquiring privately held Arista or publicly traded Juniper (NYSE:JNPR) or Brocade (NASDAQ:BRCD)) Such moves would jeopardize the VCE relationship and challenge the acquirer to disrupt the large incumbency in the storage or data center switch market. And finally, the potential for a mega merger between Cisco and EMC also seems highly unlikely given the high risk of integration and cultural clash etc.

The next likely public "salvo" in the dichotomous relationship between Cisco and EMC/VMware is likely to take place at Interop NY in the beginning of October. John Chambers, CEO of Cisco, will be providing a keynote at this trade show. If my memory serves me right, I do not think Mr. Chambers has keynoted an Interop trade show since 2005, so clearly he probably wants to use this platform for some important news. It is likely that Cisco will formally announce its new data center product offering being developed by spin-in Insieme at the show. If Insieme is formally announced at Interop NY, we will likely see how Cisco plans to integrate physical networking, network virtualization control, overlay and orchestration compute and solid state storage. It will be interesting to see if EMC/VMware will be part of or absent from the Insieme product launch given Cisco was basically absent from the VMware NSX launch at VMworld.

Disclosure: I am long CSCO, DELL, EMC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: NT Advisors LLC is a consulting firm that may have in the past, present or future solicited and/or generated consulting services from any company mentioned in this article.