Cisco-HP split may not be too painful for customers

The rivals won't force users to choose and may offer good deals to switch over, analysts said

Cisco Systems and Hewlett-Packard probably won't force their mutual customers to take sides after the end of their partnership, though the vendors are deadly serious about competing against one another, analysts said on Friday.

Cisco said Thursday it would not renew its system integrator contract with HP after it expires April 30, which means HP will no longer be a Cisco Certified Channel Partner or Global Service Alliance partner. The company said its relationship with HP had evolved from partnership to competition. As a result, it isn't appropriate for Cisco to continue sharing road map information with HP, among other things, the head of Cisco's channel program said on a webcast.

As a hint of the break to come, HP earlier on Thursday had said it would expand its own reseller contract with QLogic for storage switches, a category of product that HP has resold from Cisco. In addition, there were reports earlier this week that Cisco had halted work on a future product called the Nexus 4001d blade switch, designed to fit into the Dell M1000e blade chassis. (Cisco declined to comment on unannounced products and said Dell remains a reseller of several Cisco products.)

The coming change announced Thursday only formalized a break that had been forming over the past few years, analysts said. In the past, HP has resold many of Cisco's high-end enterprise networking products while Cisco has used HP computing platforms, some as the basis for network appliances. Each focused on its own areas of expertise, and though HP did sell networking gear through its ProCurve division, that business was focused mostly on small and medium-sized businesses.

However, as data centers become larger and more complex, especially with virtualization, the largest IT vendors are trying to circle the wagons around complete sets of products for those facilities. Cisco and HP are among the most active in this trend, along with IBM, Oracle and Dell, according to industry analysts. Cisco shook up the industry nearly a year ago when it introduced the UCS (Unified Computing System) blade server platform, entering a business where it had never competed. That may have set off the conflict.

"When Cisco started selling servers, it was pretty clear HP had started to de-emphasize Cisco's networking equipment," said analyst Steve Schuchart of Current Analysis. "This is the tombstone on the corpse of the relationship."

In fact, HP is shaping up to be not just a competitor, but Cisco's biggest rival, Schuchart said. With its acquisition of 3Com, expected to close by midyear, the company will have a fairly complete lineup of both routing and switching products, though not quite the same breadth as Cisco, he said. While Cisco had more than two-thirds of the Ethernet switch market in the third quarter of last year, HP and 3Com were the second- and third-place vendors in that business, with a combined 10.3 percent of the market, according to figures from Dell'Oro Group.

Both companies are likely to continue building their forces through acquisitions, UBS Warburg analyst Nikos Theodosopoulos wrote in a research note. "We expect the competition between Cisco and HP to be intense over the next few years," he wrote. They are likely to use aggressive financing deals to win customers, he wrote.

As HP bulks up to take ground from Cisco, the latest development hurts it more, according to a research note by Ovum. "It appears that HP needs Cisco more than Cisco needs HP, with the 3Com acquisition expected to still take some time to be completely integrated," the analyst company said.

However, both Cisco and HP are smart enough not to let their rivalry hurt customers who bought into the two vendors in happier times, analysts said.

"Customers will not be forced to choose between one and the other," Schuchart said. However, "They might be asked," he added.

Both companies are likely to "strongly encourage" their customers to standardize on their gear, said analyst Gordon Haff of Illuminata. The good news is that encouragement will probably come in the form of financial incentives in many cases, he said.

For its part, Cisco said it will honor Cisco customer service contracts with HP customers and has contacted HP about crafting a new agreement that better reflects the companies' new relationship. "We will continue to work with HP wherever our customers expect it and where it makes sense for our business," said Keith Goodwin, senior vice president of Cisco's Worldwide Partner Organization, on the webcast.

Agreements under which Cisco resells HP products on an OEM basis will not be affected, a Cisco spokeswoman said.

The consolidation of enterprise IT companies that helped drive Cisco and HP apart is likely to affect customers of all major vendors but may not be all bad, the analysts said. The "re-verticalization" of IT is the latest stage of the cycle that saw computing move from totally proprietary systems such as mainframes and minicomputers to the decentralized, open architectures of PCs and Ethernet LANs, Haff said. IT departments have benefited from the high volume and falling prices of standard components over the past several years, but those parts are increasingly hard to piece together into working systems, he said.

As vendors including Cisco, HP, IBM, Oracle and Dell try to supply all parts of a data center, on their own or through tight partnerships, they will probably help to ease some of the pain of that complexity, Haff said. This could be bad news for some third-party system integrators that have done some of the heavy lifting, he said. And all is not lost from the era of "best-of-breed" IT, he added. Anyone who wants to build their own systems in-house can still do so.

"We're not moving back to the old days, really," Haff said.

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