News

Cisco Systems is getting into the computer server business, after decades of providing the connective equipment for data centres, in a move that places the technology company in direct competition with the its long-time partners IBM and Hewlett-Packard Co.

The new strategy uses software that allows computers to function as multiple machines. This lets companies reduce costs by conserving energy and cutting the number of staff and servers needed to run IT centres.

“What we're really talking about here is catching the next market evolution,” Cisco chief executive John Chambers said during a morning press conference.

The strategy will allow Cisco to move beyond the switch and router technology that connects servers to building servers themselves. These computers will include chips from Intel as well as software from VMWare and Microsoft.

Some analysts have already expressed concern about Cisco's new server push, since the server market tends to have smaller margins than the company's existing businesses.

Nevertheless, Cisco has been diversifying into new products as growth slows in its traditional router and storage business.

“The key take-away is it gives us a chance to perhaps become the leading company not just in communications but also in IT along with our partners. And that's kind of what the Internet is about,” Mr. Chambers said.

The Unified Computing System is designed to incorporate computing, storage and virtualization technologies, including those developed by EMC Corp. and VMware Inc.

By incorporating these technologies into a single system, Cisco said it will help customers expand their data centre capacity more efficiently, and lower power and cooling costs. Owners of the new system can cut capital expenditures by 20 per cent and operational expenses by 30 per cent, the company said.

The move underscores the technology industry's focus on data centres as a key growth area, as companies look for ways to deal with rapidly increasing Internet traffic, rising energy bills and strained budgets.

Cisco's new blade server – a multifunctioning computer designed to save space and power corporate data centres – incorporates VMware's virtualization technology, which enables customers to do more with less equipment, improving energy efficiency and lowering costs.

Other Cisco partners include Intel Corp., Microsoft Corp., BMC Software Inc. and Accenture Ltd .

But the move risks antagonizing Cisco's vendor partners HP and IBM, which are the world's two largest maker of servers. Both have helped to sell Cisco's network equipment to mutual customers, with analysts estimating the two vendors accounting for $2-billion to $3-billion (U.S.) of Cisco's annual sales.

“This is not without risk – as this move will mean Cisco will have to compete against some of its largest resellers,” said Ronald Gruia, analyst at consulting firm Frost & Sullivan.

While Cisco's annual revenue has grown from $1.2-billion to around $40-billion since Mr. Chambers took over as CEO in January, 1995, analysts said the company is taking a necessary step to become a larger player in the data centre space.

HP already sells a switching product that competes with Cisco's products and IBM has recently said it was partnering with Cisco's smaller rival Juniper Networks. Switches are networking products that connect multiple computers.

Microsoft, while a partner with Cisco for its Unified Computing System, competes with Cisco in “unified communications,” a range of software and equipment that tie together e-mail, phones and other communications tools.

Many analysts expect more “co-opetition” as companies strive to offer a more comprehensive set of products and software while simultaneously trying to edge out competitors in certain fields.

That means Cisco will have to be both dependent and vigilant of its vendor partners.

“If Cisco's customers have to buy their blade servers from HP or Dell, then the door is open for either of those two to offer their management tools to customers, or to tailor their blades to work better with those tools,” said Tim Stammers, senior analyst at advisory and consulting firm Ovum.

Cisco shares were unchanged at $15.51 in afternoon trading, while the Nasdaq, of which Cisco is a component, was down 1 per cent.