IBM Slashes Cisco MDS Pricing

IBM Corp. (NYSE: IBM) has lowered its list prices for the Cisco Systems Inc. (Nasdaq: CSCO) MDS 9000 SAN switches by as much as 31 percent -- a clear indication, some analysts say, that Cisco's initial progress in the market has been slower than it expected.

The move is an about-face from IBM's original plan to price the Cisco gear higher than switches from Brocade Communications Systems Inc. (Nasdaq: BRCD), CNT (Nasdaq: CMNT), and McData Corp. (Nasdaq: MCDTA).

Tarek Makansi, director of storage products for IBM, told Byte and Switch earlier this year that Cisco's switches would be "competitively priced, given their value." We interpreted this to mean (correctly, it turned out) that the switches would be priced higher per port than competing products (see IBM Tells Cisco: 'Let's Go!' and Cisco Gets Set).

IBM apparently assumed that certain proprietary features of the MDS switches -- such as Virtual SANs (VSANs), which allow multiple logical SAN fabrics to run over the same physical infrastructure -- as well as the "Cisco brand name" warranted a healthy markup over existing market prices (see Cisco's VSANs: Hype or Innovation?).

But now Big Blue has changed its tune. "After Cisco launched the switches, IBM went back to them and said, 'A premium-pricing strategy isn't going to work with customers,' " says IBM spokeswoman Whitney Basaman. "As a result, IBM is reducing the pricing of those switches to make them price-competitive in the market." She adds that IBM will announce more pricing details in July.What also surely prompted IBM to lower its pricing is that Hewlett-Packard Co. (NYSE: HPQ) last week started shipping the Cisco FC switches -- for well under IBM's original price points (see HP Moves Hard on Cisco).

SG Cowen Securities analyst Michael Jung, who published a research note yesterday detailing IBM's price cuts, says the evidence suggests Cisco's incursion into the SAN market will not be as rapid as it might have hoped.

"Four months after IBM initial pricing was announced... we believe IBM is still trying to find the right price customers are willing to pay to give Cisco a try," Jung writes in the note.

IBM made its biggest reduction on the Cisco MDS 9216 fabric switch. Originally $52,263, a 16-port 9216 is now down to about $36,000 list.

Table 1: IBM List Prices for Cisco MDS Switches

Jung notes that McData continues to be the low-cost leader in the FC fabric space, with IBM selling a 16-port Sphereon 4500 switch for $22,700 -- almost 40 percent less than Cisco's 9216 and 30 percent less than Brocade's 16-port SilkWorm 3800.

However, Cisco disputes SG Cowen's price comparison, complaining that the analyst firm didn't account for certain additional components. McData's switches require Product Manager software, which ranges in price from $3,150 to $9,590 per switch. Meanwhile, IBM's base pricing for Brocade's 3800 includes only eight optical interfaces.

But even accounting for these extras, Cisco comes out the most expensive option: The 16-port 9216 is still 8 percent more than the Brocade 3800 and 39 percent more than the McData 4500. "We think the premium is justified based on our advanced feature set and our performance," says Paul Dul, product line manager for Cisco's MDS 9000 family.

In another recent development on the Cisco front, Steve Querner, VP of worldwide storage networking sales, has left the company (see Cisco's VP of Storage Sales Quits).

— Todd Spangler, US Editor, Byte and Switch