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IBM challenges partner Cisco

IBM is partnering with a smaller Cisco rival to take on the networking giant in its core market.

IBM is adding a new chapter to the high-tech industry's long history of "coopetition."

Big Blue is expected to announce on Tuesday that it plans to resell Ethernet switching equipment from Brocade, a much smaller rival to Cisco Systems. Under the agreement, IBM will rebrand and sell Brocade's enterprise IP networking equipment as its own through IBM's global sales force and authorized IBM Business Partners.

IBM's move is interesting for two reasons. One, it clearly pits IBM against one of its biggest partners, Cisco. And two, it puts IBM back in a market it exited 10 years ago. In a somewhat ironic twist, IBM will now be competing against the company it sold its networking business to in 1999. Cisco paid $2 billion for all of IBMs networking patents, products and customers. As part of the agreement, the two companies formed a strategic alliance that allowed IBM Global Services to resell Cisco's products.

No one knows for sure how much business Cisco has gotten from the deal. But IBM is the world's largest systems integrator, and analysts say that Cisco could get about $400 million to $500 million from IBM's sales each year.

When IBM sold its networking business to Cisco, it said it did so because the investment that was necessary to compete effectively in the changing networking market was too high. But now it looks like IBM sees opportunity in networking, or perhaps the company is feeling threatened as it sees its close partner edge into its market.

For years, Cisco has been expanding into adjacent businesses, which sometimes overlap with markets its partners are already in. For example, Cisco competes directly with Microsoft in unified communications.

But Cisco's most recent move to build and sell its own data center servers along with an entire solution for the data center that includes networking equipment has likely stirred the coopetition pot even further for partners, IBM and Hewlett-Packard, which also sell products designed for the data center.

"The relationship between Cisco and its partners IBM and HP has changed significantly," said Zeus Kerravala, a senior vice president at the analyst firm Yankee Group."Now when you hear Cisco talking about their big partners they are talking about Oracle and SAP, but not so much about IBM, HP and Microsoft."

Cisco's strategy in the data center, which it unveiled about a month ago, is to provide a total solution from soup to nuts that includes high-performance networking equipment as well as servers and virtual server solutions. Kerravala said that Cisco's new strategy has likely set a fire under its close partners to come up with a total solution of their own.

"I don't think the Brocade/IBM deal is a total reaction to Cisco's Unified Computing strategy," he said. "But I'm sure it contributed to it."

Brocade's CEO Michael Klayko admitted Cisco's aggressive moves in the data center market have opened some doors for the company from customers and other technology partners looking for options other than Cisco.

But he said the deal with IBM had been in the works long before Cisco announced the Unified Computing strategy.

"We started talking with IBM well over a year ago about this," Klayko said. "So I think part of IBM's willingness to work with us was part offensive. This is a $20 billion to $30 billion market we are talking about here. As for the timing of everything, we can't control when our competitors are going to bring new ideas to the market, but I can say that it has facilitated some good things for us."

IBM's choice of Brocade as a partner shouldn't come as much of a surprise either. The companies already have a similar agreement in which IBM rebrands and resells Brocade's storage area networking equipment. While rebranding and reselling products in the storage market is common place, it isn't in the networking market. And until now, Cisco has largely gone unchallenged in its core business.

For most of the past decade, Cisco has primarily competed against much smaller rivals in the networking and switching business. While these smaller competitors have been able to win some business, none have made a big dent in Cisco's market share. Even large competitors, such as Nortel Networks, have failed at taking on Cisco, which currently wields 90 percent market share in networking equipment.

But over the past few years, another partner-turned-competitor has also challenged Cisco's dominance. And for the past four or five years, HP has been building up its Ethernet switching business. And now the company's ProCurve products account for 10 percent of the Ethernet switching market and the company is No. 2 in terms of market share, Kerravala said.

He explained that the deal with Brocade finally brings a formidable competitor to Cisco in the high-end switching market. HP's ProCurve products can address the low-end of the market. And IBM will address the high end of the market with products Brocade bought from a longtime Cisco competitor Foundry Networks.

Even though companies, such as Foundry have been competing with Cisco for more than 10 years, they have lacked the sales force and marketing power to provide a real threat to the company.

But Cisco's new competitors, who also happen to be partners, could take a significant chunk of Cisco's business.

"Fighting against HP, Microsoft, and IBM is totally different from competing against small startups and smaller companies that have been around forever," Kerravala said. "The bigger companies can spend just as much as Cisco can on marketing and they also have the sales force to outrun Cisco."