SAN Valley Does the Cisco Two-Step

LAS VEGAS -- Networld+Interop -- SAN Valley Systems Inc., one of a slew of startups now entering the IP storage networking market, is walking a fine line between working with Cisco Systems Inc. (Nasdaq: CSCO) and competing against it.

Cisco has invested in SAN Valley, while, at the same time, launching its own IP-based SAN (storage area network) products; and SAN Valley is working with companies that compete with Cisco in other markets.

At the Networld+Interop trade show held here this week, SAN Valley demonstrated its storage product working with a Compaq Computer Corp. (NYSE: CPQ) DRM (disaster recovery management) package, as well as equipment from Brocade Communications Systems Inc. (Nasdaq: BRCD), ADIC Storage Solutions, and LuxN Inc..

SAN Valley is in talks with other hardware vendors about possible OEM agreements. "It's all about execution for us now," says Rick Walsworth, vice president of marketing. He was unable to comment further on possible deals.

It should be noted, however, that SAN Valley could also be an acquisition target for Cisco, which is eager to become a major force in the storage market. Walsworth admits there is "no telling what's around the corner." He points out that Cisco lacks a service provider offering, "a significant hole in its storage strategy." Coincidentally, that's where SAN Valley's technology fits.The company's eight-port SL1000 device, which connects Fibre Channel using Internet Protocol (FCIP) encapsulation, helps tie together remote storage networks over an IP backbone. Service providers, including Enron Corp. (NYSE: ENE), are trialing the device, with a mind to offering storage as a high-bandwidth service.

SAN Valley's close ties with Cisco began when Andreas Bechtolsheim, one of the founders of Sun Microsystems Inc. (Nasdaq: SUNW) and now VP of engineering for Cisco's enterprise group, encouraged Cisco to invest. Bechtolsheim also put some of his own money into SAN Valley.

After two rounds of funding the company has a total of $31 million from Moore Capital, Upstart Capital, Vertex Management, Innovacom Venture Capital, Cisco, and Agilent Technologies Inc. (NYSE: A). It is in the process of looking for a third round but is "in no rush," according to Walsworth.

In getting its technology accepted in the market, SAN Valley has plenty of competition to battle: SANcastle Technologies, Lucent Technologies Inc. (NYSE: LU), CNT Networks, Entrada Networks (Nasdaq: ESAN), Crossroads Systems Inc. (Nasdaq: CRDS), and Cisco (through its NuSpeed acquisition) are all competing in the IP storage connectivity market.

William Hurley, storage analyst with The Yankee Group is bullish on SAN Valley's chances, although he says demand is not yet there for IP-based devices. "These products will increase the adoption of SANs, but the robustness must be proven," he says. "Point-to-point wavelength services are still the most reliable way to connect remote storage networks together today. SAN Valley has its work cut out."As for SAN Valley's relationship with Cisco, in the past such type of "co-opetition" arrangements have generated mixed results -- sometimes favoring Cisco, but often resulting in a big win for the startup.

ONI Systems Inc. (Nasdaq: ONIS), for example, took Cisco's money and leveraged its reputation to the full while it was getting started -- but then reportedly gave its patron the bum's rush when Cisco tried to acquire it. ONI has since gone on to considerable success as a public company.

Then there's Procket Networks Inc.. Cisco was a lead investor in this startup, which started life as a developer of OC192 (10 Gbit/s) and OC768 (40 Gbit/s) components. Procket subsequently switched direction and is now working on a routing system that will go head to head with Cisco's core routers. In effect, Cisco ended up funding a potentially powerful new competitor (see New Kid on the Cisco/Juniper Block).

Brocade is another storage networking company that's partnered with Cisco. However, this relationship now looks as if it may be heading into stormy waters after Cisco set up a stealth-mode spin-in called Andiamo Systems Inc. that will compete with Brocade in the SAN market (see Ciscos Secret SAN Strategies Revealed). Brocade has had to change its product strategy to react to the threat from Andiamo/Cisco and others (see Brocade Unveils Big SAN Switch).

— Jo Maitland, Senior Editor, Byte and Switch http://www.lightreading.com