Brocade's Business Booms

Business is booming for the 900-pound gorilla of the storage-area network (SAN) market, and its longtime reign doesn't look to be ending anytime soon. That is, unless a few tiny cracks around the edges start to widen.

Brocade Communications Systems Inc. (Nasdaq: BRCD), which owns approximately 80 to 90 percent of the market for Fibre Channel SAN switches, yesterday announced quarterly net revenues of $92.1 million, a 360 percent increase from the same quarter of 1999, and a 48 percent increase over last quarter. Brocade also announced net income of $20.1 million, a 1,146 percent increase over the $1.6 million reported for the same time last year, and 51 percent more than net income last quarter.

Wall Street loved the news: Brocade's stock price jumped more than 12 points and was up to 210 1/2 in the final hour of trading.

The action is helping to boost Brocade's value relative to its leading public competitors: With a total market capitalization of about $23 billion, Brocade is easily ahead of Gadzoox Networks Inc. (Nasdaq: ZOOX) and Vixel Corp. (Nasdaq: VIXL), with market caps of $230.7 million and $121.2 million respectively; McData Corp. (Nasdaq: MCDT), which went public last week, was trading at 91.25 late today with a market cap of about $9.474 billion; and Qlogic Corp. (Nasdaq: QLGC) was trading at 86.25, with a market cap of $6.7 billion.

Why does Brocade have so little competition? And can its love affair with Wall Street continue indefinitely?The first question is easily answered: Brocade was early to market with its Fibre Channel switch and managed to establish key OEM and reseller agreements, including ones in the optical networking area. Its partners include Cisco Systems Inc. (Nasdaq: CSCO), which plans to integrate Brocade's switches with its DWDM gear; and ONI Systems Corp. (Nasdaq: ONIS), which has put Brocade SAN modules into its metro platform.

There are questions, however, about Brocade's ability to continue riding quite so high. For one thing, Brocade is invested entirely in one product, its Silkworm Fibre Channel switch. And neither Silkworm nor Fibre Channel are guaranteed any market immortality. Companies such as Nishan Systems Inc. already are looking to create alternatives, particularly for carriers with IP-intensive networks. (See SAN Surprise Jolts Market).

Another threat to Brocade's dominance could come from standards. This fall, the American National Standards Institute is expected to ratify Fabric Shortest Path First (FSPF), an interoperability protocol that routes storage traffic across multivendor Fibre Channel switches. If the protocol passes, it could give other switch vendors a chance to compete with Brocade on price.

Brocade originally tried to stymie its competitors' efforts to establish an interoperability spec. It refused, for instance, to participate in demonstrations of a competing protocol called Open Systems Routing Protocol (OSRP) conducted at leading trade shows by Ancor (now Qlogic), Gadzoox, McData, and Vixel. (See Fibre Channel Vendors Split On Standards).

Then, this spring, Brocade bowed to the inevitable, but with a catch: It played its hand at a leading Fibre Channel industry group, the National Committee for Information Technology Standards, which has input to ANSI. Brocade representatives there urged a vote for FSPF, based on Brocade's market position and the fact that FSPF is already installed in its switches. And the gorilla won.But competitors and industry sources see the pending establishment of interoperability standards as significant progress. "[Brocade] slowed the competitive process for a very long time. The outcome isn't the way we would have wanted it to work out entirely, but it's going to give us a chance to go into Brocade shops and offer a better-priced alternative," said one competitor, who asked for anonymity.

"Competition will definitely increase," agrees Dan Tanner, senior analyst at the Aberdeen Group consultancy. But he doesn't see Brocade being undercut easily on price. "The SAN market may not be all that cost sensitive," he says. If a carrier is ready to install SANs at all, they're usually ready to spend big. Instead, he thinks the rumbling for putting SANs onto native IP networks is more threatening. "Fibre Channel won't disappear anytime soon. But IP storage transfer is definitely in the works."

-- Mary Jander, senior editor, Light Reading http://www.lightreading.com