Consolidation picks up speed

There are five stages in the life of a technology start up. Who the hell is SAN IT? Should we work with SAN IT? Why did Cisco buy SAN IT? If only we’d bought into SAN IT. And finally, who the hell were SAN IT?

Success in this industry is all about positioning, as survivors of Cisco sales conferences will testify. At these events, John Chambers tends to stalk among the audience barking out questions. Eighteen months ago, he fixed his eyes on one poor sap .“You!” he snapped to a man who resembled a rabbit trapped in a juggernaut’s headlights. “What do you think we should do about EMC? Partner with it? Or take it on?”

The unlucky salesman blew his chance to please the boss by choosing the wrong answer. Chambers put him straight in front of the rest of the sales team. “We partner with it! It owns the storage market!” he shouted at the trembling sales guy, who scuttled back into the woods and has never been seen again.

And he deserves oblivion too, because anyone familiar with Cisco cannot fail to have noticed the pattern that has emerged in all its business dealings. Cisco started by making routers for internet working. As this market grew, so did Cisco. Everything Cisco does revolves around generating more sales of routing and switching equipment.

To keep the momentum going, the company has bought into all manner of technology areas – everything from SANs to security and from intelligent homes to dumb terminals.

“The great thing about all these technologies is that they need a fast networking infrastructure to support them,” said David Willis, Gartner Group’s senior vice president.

“For every dollar Cisco makes selling other services, it makes two dollars on selling its core networking products.”

Cisco is a $32bn company, which generates 56 per cent of its revenue through the sale of switches and routers. According to Willis, though, Cisco is reaching the limit of its traditional markets and business models.

“To achieve its target of 20 per cent growth by the end of 2007, it needs to move into new markets because organic growth of its business can only really guarantee 10 per cent,” he said.

That is why we have seen Cisco gobble up so many companies recently. Expect more massive acquisitions this year too, said Willis. Not just small ones, but massive, ground-shaking mergers too, along similar lines as the purchases of Scientific-Atlanta and Linksys.

“With $18bn in cash, and a newfound acceptance of debt financing, Cisco has the ability to make big bold moves quickly,” Willis added.

The same is true for other players in this market, of course. Other major mergers include the Siemens/Nokia network divisions following the Alcatel-Lucent deal and Ericsson’s purchase of Redback Networks. An alliance between Nortel and Microsoft has also been announced.

“Even eBay’s multibillion-dollar purchase of Skype at the end of last year is ominous,” said Rajesh Sinha, senior technical director for communications integrator Bailey Teswaine.

“It is an acknowledgement of the power of voice over IP [VoIP]. We have seen significant growth in the take-up of VoIP solutions and this trend is going to continue.”

This could create a dilemma for both manufacturers and the channel. Cisco’s acquisition of security vendor IronPort, for example, takes it into competition with vendors it used to count on as strategic partners.

“Cisco has really broadened the scope of vendors it wants to attack,” said Clive Longbottom, service director at analyst Quocirca. “It used to provide network security in its software, but only on the client side. Now that it provides secure socket layer [SSL] VPNs, it is going head to head with companies such as Citrix.”

The Citrix partnership with Microsoft could draw Cisco into another conflict. Microsoft in turn partners with Nortel for voice communications systems and with Citrix for the branch office box.

These collaborations and convergences were heavily promoted as part of the marketing of Windows Vista. The new networking software in Vista and Windows Server Longhorn includes features to manage VPNs, security, high availability and policy networking.

Microsoft’s unified communications manager, Mark Deakin, diplomatically played down the conflict, despite the fact that it could erupt at every level, as convergence takes place among vendors, the channel and even technology purchasers.

“The Cisco- Microsoft relationship is certainly interesting. With Nortel, we have a definite integration story. With Cisco, it’s going to be more about interoperability,” he said.

As students of drama will know, you need conflict to create a story and, according to the experts, a compelling story will emerge this year.

“Cisco’s relationship with Microsoft will get even rockier during 2007 and 2008,” said Willis.

This market consolidation will then put pressure on the resellers.

On top of that it poses a number of seemingly unanswerable questions. Should VARs work with Cisco, Microsoft or Alcatel-Lucent and compete with all the millions of other communications, voice, data and storage resellers who all seem to be converging into one channel? Or should they strike out and find new suppliers who are in a position to offer a specialist alternative?

Niche start-ups tend to do the job better and offer better margins because it is easier to differentiate. On the other hand, selling a brand like Cisco is less challenging.

Longbottom recommends that resellers find new niche players in technologies such as WAN acceleration, SSL VPNs and other areas of security. VARS that sign up with some of the keen young start-ups in these areas have a good chance of standing out from the rest of the herd, according to Longbottom.

Not only that, but resellers might just be able to get someone to answer technical questions within a day and get immediate responses on those co-op marketing agreements they have been trying to negotiate, he added.

Sales staff at Cisco are pressed for time and they have to spread themselves rather more thinly. One account manager has to know about everything in Cisco’s vast smorgasbord of products.

It cannot be easy to become an expert on NAS and SANs in one meeting, and then speak convincingly about internet protocol TV in the next. In theory, resellers can always find help, but most major vendors are so vast that it is not easy to find all the right people, especially if you are not aware that they exist. Bringing them together for your sales meeting is another challenge altogether.

Meanwhile Alcatel-Lucent is settling down after the merger. The companies have made the first round of redundancies, announcing plans to lay off 1,500 staff across Europe.

This was always inevitable in a merger of two large international organisations that occupy a lot of the same territories, according to Graeme Allan, Alcatel-Lucent’s vice president of enterprise business.

As reported by CRN, the annual Alcatel Forum in Paris, held every February, gave the new company the chance to outline the opportunities it offers the channel and explain why the consortium is a better option than Cisco.

“The good thing about our organisation is that neither Alcatel nor Lucent is even close to being over-distributed,” said Allan.

In contrast, the perennial grumble among Cisco partners is about disappearing margins. The cost of being a Cisco partner is pretty steep too, Allen added, a mistake that Alcatel-Lucent will be trying to avoid.

In the areas of the market where Cisco competes with the likes of Alcatel-Lucent, however, the pressures are not the same.

Alcatel and Lucent were driven together partly because Lucent did not have an enterprise business. It did once, but that was spun off as Avaya. In the sector in which Lucent was operating, the number of potential buyers was decreasing.

“The acquisition and consolidation previously were different in the enterprise and carrier markets,” said Mark Sheery, vice president of switching and routing at research organisation Ovum.

The telecoms carriers are consolidating, which means suppliers are being forced to consolidate to enable them to meet the needs of these new large carriers and to claw back some of their pricing power through economies of scale, he said.

On the other hand, firms such as Atrica, a relatively new entrant to the market with carrier-class Ethernet, are able to offer complete alternatives, without the legacy of having to support their traditional products.

“The Ethernet space has really mushroomed in the six years we have been in this market,” said Umesh Kukreja, marketing director at Atrica.

As an ex-Alcatel executive, Kukreja admits that he has Cisco and Alcatel in his sights when planning which markets he intends to plunder when convergence creates demand for faster and more reliable delivery of services.

Atrica would be a great start-up to link up with. The problem is that at the moment Atrica tends to sell direct.

But if VARs cannot find a start-up with which to partner, as Longbottom suggested, it is worth looking at companies that are making a new start.

Alcatel-Lucent is certainly shaking things up. On the channel side, it feels like a new company. The appointment of Sphinx as a new distributor has helped.

“Sphinx will give us a better presence among the broader voice community,” Allan added.

Last month Sphinx was also appointed to distribute the vendor’s data products. And earlier this year the vendor recruited Westcon to carry its data products.

However, Longbottom believes that linking arms with a start-up in the networking arena is still the best option for the channel, although he admitted VARs had better be quick, because there is only a short window of opportunity.

“In 12 to 24 months’ time they will all get swallowed up,” he said.

“While VARs are lining up a replacement for their current supplier, they should also be lining up another replacement for them for when they get swallowed up too.”

Consolidators poised for multiple mergers