Brocade's Virtual Bet

Brocade Communications Systems Inc. (Nasdaq: BRCD) has placed its long-term prospects ahead of short-term concerns about its stock by acquiring Rhapsody Networks and that's the right decision (see Brocade Scoops Up Rhapsody).

Brocade's stock is getting whipped like a sick mule because of this deal. Several Wall Street firms downgraded the stock after the acquisition was announced. They don't like it because it's going to dilute the stock (Brocade is trading 10 percent of its outstanding shares for Rhapsody) and Brocade says it won't see any revenue from it until the back half of 2004 (see Brocade Stock Not Rhapsodic).

Yes, it's a risky and defensive maneuver, and time will tell how it all pans out. But all things considered, Brocade's purchase of Rhapsody was swift and smart.

First of all, the news shouldn't have come as a surprise to readers of Byte and Switch: We reported that Brocade was planning to buy Rhapsody three weeks before the deal was announced (see Sources: Brocade to Buy Rhapsody).

Really, Brocade actually didn't have much choice but to acquire Rhapsody or one of its ilk, because it was staring down the barrel of Cisco Systems Inc. (Nasdaq: CSCO). And according to many in the industry, Rhapsody was the best of the lot. "Of all the intelligent switch guys, I think Rhapsody was the crown jewel," says Steve Duplessie, senior analyst at The Enterprise Storage Group Inc.A year ago, the situation was very different. Brocade was sitting on its huge market lead in Fibre Channel fabric switches, while also trying to extend up into the FC director space. That was Plan A.

Then came Cisco. With its Andiamo Systems Inc. spin-in, Cisco was promising to deliver an intelligent, FC-based switch platform that would incorporate features like volume management traditionally deployed on the host.

Time for Plan B. Brocade announced its intentions, in March 2002, to deliver a "V-switch" that would virtualize the connections among multiple vendors' servers and storage. But by all appearances, no actual product development had occurred: It was a virtual product in the literal sense of the word. When CEO Greg Reyes was asked on a conference call with investors about the V-switch technology Brocade had already supposedly developed, he said this: "We continued to refine and develop a better understanding of this requirement [for virtualization]... As we worked more closely in understanding the needs of the marketplace, we came to learn of Rhapsody, and this is a very, very logical combination."

It sounds as if there was nothin' there but slideware, a placeholder until Brocade figured out what the hell it was going to do to counter the Cisco/Andiamo threat. Fast forward to this week: Problem solved, at least as far as giving Brocade the right weapons to take on Cisco.

In relation to Cisco, Brocade has a strong story. Reyes, in outlining the strategy behind the deal, repeatedly hammered home the point that Brocade, unlike Cisco, has always had an OEM model. Brocade says it will work with OEMs – which include EMC Corp. (NYSE: EMC), Hewlett-Packard Co. (NYSE: HPQ), Hitachi Data Systems (HDS), and IBM Corp. (NYSE: IBM) – to let them embed their own software onto the Rhapsody platform."We believe that the addition of this capability represents a new major software revenue opportunity for Brocade's OEMs and application partners, who have identified their intent to migrate certain applications that will run more efficiently in the fabric," Reyes said. That is definitely language EMC and IBM understand.

Rhapsody's system was built from the ground up as an open platform – able to run software from Veritas Software Corp. (Nasdaq: VRTS) and any other vendor that writes to its APIs. Cisco, on the other hand, has been working most closely with Veritas, and from what we can tell it hasn't had a very easy time of integrating software into the Andiamo switch. (Cisco, however, claims the Andiamo platform will be open to third-party applications as well. See Andiamo Loses Ground.)

Another point in Brocade's favor is that Cisco doesn't have any kind of track record in delivering SAN infrastructure. It's starting from square one. As one industry analyst told me, "Cisco doesn't even know how to spell storage." Hmmm... maybe storridge?

Nick Allen, research director at Gartner Inc., believes Rhapsody could actually get Brocade to market with an intelligent FC switch ahead of Cisco. His expectation is that Brocade will eventually incorporate Rhapsody's technology as a blade in the SilkWorm 12000, and that the company is being conservative when it says it won't see meaningful revenue from Rhapsody for two years.

Meanwhile, "Cisco has to prove the product works," he says. "Let's assume that it behaves like most other products and takes a while to qualify... It will be the middle of 2003 before it's proven it can interoperate and not have a gazillion problems." By contrast, Allen notes, Rhapsody says it has been in advanced testing with several storage vendors. Brocade claims it will announce OEMs for the Rhapsody platform sometime before the end of this year.So who are you going to bet on? Cisco, a huge company with a strong brand name that has a relatively small focus on storage networking? Or Brocade, a smaller player that is entirely focused on storage networking and is trying to reassure OEM partners that it won't steal their customers?

We'll see if Big & Broad beats Small & Focused, or vice versa. But in any event, Brocade with Rhapsody definitely makes the game more interesting.

— Todd Spangler, US Editor, Byte and Switch
http://www.byteandswitch.com