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Comments on the passing IT scene

Read Rich Ptak's view on the recent alliance between Cisco and IBM, as well as HP's new strategy.

Richard Ptak

IBM-Cisco Alliance: A major move forward for on-demand computing
The recently announced IBM-Cisco alliance apparently stirred only a little excitement among IT commentators and in the industry press. The announcement bears further analysis to understand the full impact, but we believe even the currently announced solutions merit considerably more attention and focus. Let's examine the announcement.

The alliance began in response to customer demand and a shared vision articulated through Cisco's Intelligent Information Network and IBM's OnDemand computing. IBM and Cisco have brought together the OnDemand Operating Environment architecture and the Business Ready Data Center Network architecture in their labs. IBM has installed Cisco's Business Ready Data Center Network in its OnDemand Design Center while Cisco installed IBM's Virtualization Engine with automation components of the OnDemand Operating Environment in its Business Ready Data Center architecture test lab. The companies are testing the unified OnDemand infrastructure and using the labs as a basis to conduct deeper technology integration as well as develop professional services capabilities to meet customer needs.

Most press attention has focused on the effort to plug Cisco's Intelligent Gigabit Ethernet Switch Module (IGESM) into IBM's eServer BladeCenter server chassis. We believe much more significant is the Cisco Business Ready Data Center optimized with IBM for the OnDemand operating environment. This architecture looks to us to be the immediate delivery of direct automated, intelligent orchestrated management and provisioning of storage, network and server based on actual transaction behavior. The resulting significant management enhancements make operation of the combined network and IT infrastructure much more cost effective and seamless.

As we said earlier, we will examine the announcement and deliverables more closely in a future report. The roadmap details future plans, but IBM and Cisco have made real progress in providing a meaningful solution to the business problem of automating the application and allocation of IT infrastructure resources to real-time business operational needs. The real advantage comes from the combination of IBM's Virtual Engine tightly integrated with the Cisco network vision. No other vendor today offers anything similar to the tight technology integration with Cisco's network solutions. Kudos go to the folks at IBM Technology and Server Group and Tivoli, as well as those at Cisco for this accomplishment. There are several competitors (and commentators) that will suffer some loss of sleep as a result of this alliance.

HP picking a fight with Dell
Very interesting to us is the new HP strategy, which appears to be "lose a bit on each sale, but make it up on volume." Actually, that was the inside line used in the ancient '80s to describe Digital Equipment's strategy to penetrate the software application market, but somehow it seems an appropriate description. As reported in the May 11 Wall Street Journal, HP will slice margins even more finely in the desktop space in order to gain market share (and customer creditability) as it competes with rivals Dell and IBM. We understand the theory here, but wonder at the size of the HP financial reserves.

Just six weeks ago, HP's OpenView group told us they were operating in a "grace period" with no pressure to turn a profit while they focused on gaining market share. The WSJ article points to a "no holds barred" strategy to use everything in the admittedly impressive HP solutions portfolio to close server sales. HP pricing concessions would (and apparently do) bundle everything from consumer electronics to consulting services into a package to close a sale.

These actions raise questions in two areas:

  1. What will be the fate of the IT infrastructure/services market? Is it really HP's expectation that the market for IT infrastructure will rapidly transform from a proprietary systems market to one for commoditized IT services? Does HP have deep enough pockets to drive and successfully ride down a prolonged and bloody market consolidation? HP appears to be betting a fair amount of its future to accelerate this drive to a fully commoditized market.
  2. How and where will the resource trade-offs to subsidize HP's server and software market growth be felt? As any competent economist can tell you, every business decision involves trade-off in the allocation of scarce resources. Loss in one sector has to be covered by profit or reduced costs in another if the business is to survive. HP's success in overwhelming customers (and driving off rivals) with large-sized, low-priced packages of goods and services regardless of underlying cost carries its own internal price. This price must eventually be paid, whether in the shape of reduced quality of services or scaled-back solutions. HP has sufficient economic expertise at high enough levels to recognize the challenge; it will be interesting to see how they resolve it.

HP has done a remarkable job pulling together a coherent, convincing market message wrapped around its technology, services and product solutions. HP management has clearly decided that they have sufficient margins to engage in a prolonged and bloody battle of attrition. We aren't so sure. We think some of their competition may, like Brer Rabbit, be encouraging HP to "please don't toss them into that briar patch!"

Richard L. Ptak is Founder and Partner of Ptak, Noel & Associates. He has over 30 years experience in systems product management. He was VP at Hurwitz Group and D.H. Brown Associates and worked at Western Electric's Electronic Switch Manufacturing Division and Digital Equipment Corporation. He is frequently quoted in trade press and is author of the Manager's Guide to Distributed Environments.
This was last published in May 2004

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