Tension in the storage area network (SAN) switch marketplace could
be cut with a knife these days. There are only two real players
left, Brocade Communications Systems Inc. and Cisco Systems Inc.,
battling for every point of share. Interestingly, there's only one
company left that's paying any attention, the Dell'Oro Group, which
has been following the market since 2002.
According to the latest report from Dell'Oro, released March 19,
Cisco is gaining share on Brocade for the second quarter in a row.
"Three quarters in a row, and you've got a trend," said Tam
Dell'Oro, founder and president of the Dell'Oro Group.
The report states Cisco earned $128 million in worldwide revenue
for SAN switches, which includes directors and fabric switches, in
the fourth calendar quarter of 2006, picking up six percentage
points in director market share and four percentage points in the
overall SAN switch market, from the previous quarter. Meanwhile,
McData Corp. went from $96.9 million to $90 million losing six
points of share from the third quarter to the fourth quarter. If
Dell'Oro is correct, this means that Brocade, which acquired McData
in the summer of 2006, lost those six points of share to Cisco
instead of picking them up for itself. [Ed note: Ouch!]
Brocade is spitting blood over these numbers, which it says are
inaccurate. "We absolutely believe we maintained our market share
despite what Dell'Oro says," said Tom Buiocchi, vice president of
marketing at Brocade. "Our numbers in that report are not accurate,
and we told Dell'Oro that."
At the center of the confusion is how both companies report
their results, in fiscal quarters, versus the Dell'Oro numbers,
which are in calendar quarters. For this reason, Dell'Oro noted
that the market should not draw conclusions from one quarter. She
points out that since 2004, Brocade has in fact gained five
percentage points of overall share while Cisco has picked up three
points.
"Cisco gives us detailed guidance on their performance ending in
December, but Brocade and McData do not give us that much detail
into whether they had a linear quarter or not." She said it's
possible that Brocade/McData did not have a linear quarter, but
Dell'Oro is assuming in its report that it did. "We've used the
same process for 20 quarters in a row, and it has been accurate,"
she said. "But technically, we are not comparing a precise Brocade
number to a Cisco number."
Buiocchi at Brocade argues that he can't disclose more guidance
because this market segment is "100% of Brocade's business … it
would be material to our business to give guidance." Cisco, on the
other hand, does not break out its SAN storage numbers in its
earnings reports, which account for less than 1% of its total
business, suggesting it is arriving at a number without explaining
or standing by it. Buiocchi said he believes Cisco actually earned
approximately $105 million for the calendar fourth quarter 2006,
not $128 million. "We just want the right information in the
market," he said.
A source close to Cisco said that it would lose all credibility
if the numbers it gave to Dell'Oro were not correct. Apparently,
Cisco is looking at trying to break out these numbers in future
earnings reports. [Ed note: Transparency! What a good
idea!].
The fire storm over these numbers is happening for a couple of
reasons. Perception counts for a lot in the market among users, and
Brocade's sales people will have to answer questions about this
report. And secondly, this is the first quarter of market share
data since the merger closed. "It's a very heated quarter -- the
situation will not be lost on shareholders," Dell'Oro said.
If Cisco is gaining share ...
According to Dell'Oro, Cisco is benefiting from two full
quarters shipping its 4 Gbps Fibre Channel director and
traditionally it has a strong end of year. "Government is typically
strong and larger enterprises come in quite strong at this time of
year. They are likely benefiting from their overall enterprise
business," Dell'Oro said, adding that there are also some McData
customers who are shifting over to Cisco in the wake of the
merger.
Cisco has been conducting aggressive advertising and marketing
campaigns since the merger, winning over users who have felt
vulnerable and confused in the face of the two companies coming
together. "We spent aggressively to capture that," a source close
to Cisco said.
This heightened competition is bringing about an important
advantage for users: lower pricing. Per port price erosion is twice
the usual quarterly rate, according to Dell'Oro. The analyst firm
said that Cisco's prices dropped eight percentage points to $570
per port from the third quarter to the fourth quarter of 2006,
while Brocade's dropped nine percentage points to $520 per
port.