IBM is expected to announce on Tuesday that it plans to resell Ethernet switching equipment from Brocade, a much smaller rival to Cisco.
Under the agreement, IBM will rebrand and sell Brocade's enterprise IP networking equipment as its own through IBM's global salesforce and authorised IBM business partners.
IBM's move pits it against one of its biggest partners, Cisco, while reinstating it in a market it left10 years ago.
It also means IBM will now be competing against the company it sold its networking business to in 1999. Cisco paid $2bn (£1.3bn) for all of IBM's networking patents, products and customers. As part of the agreement, the two companies formed a strategic alliance that allowed IBM Global Services to resell Cisco's products.
It is unclear how much business Cisco gained from the deal, but IBM is the world's largest systems integrator, and analysts say Cisco could be getting about $400m-$500m from IBM's sales each year.
When IBM sold its networking business to Cisco, it said it did so because the investment that was necessary to compete effectively in the changing networking market was too high. But now it seems IBM sees opportunity in networking, or perhaps the company is feeling threatened as it sees its close partner edge into its market.
For years, Cisco has been expanding into adjacent businesses, which sometimes overlap with markets its partners are already in. For example, Cisco competes directly with Microsoft in unified communications.
But Cisco's most recent move to build and sell its own datacentre servers along with an entire solution for the datacentre that includes networking equipment is likely to have stirred the 'coopetition' pot for partners IBM and HP, which also sell products designed for the datacentre.
"The relationship between Cisco and its partners IBM and HP has changed significantly," said Zeus Kerravala, a senior vice president at the analyst firm Yankee Group."Now when you hear Cisco talking about their big partners they are talking about Oracle and SAP, but not so much about IBM, HP and Microsoft."
Datacentre strategy
Cisco's strategy in the datacentre, which it unveiled about a month ago, is to provide a total solution that includes high-performance networking equipment as well as servers and virtual server solutions. Kerravala said that Cisco's new strategy is likely to have set a fire under its close partners to come up with a total solution of their own.
"I don't think the Brocade/IBM deal is a total reaction to Cisco's Unified Computing strategy," he said. "But I'm sure it contributed to it."
Brocade's chief executive Michael Klayko admitted Cisco's aggressive moves in the datacentre market have opened some doors for the company from customers and other technology partners looking for options other than Cisco.
But he said the deal with IBM had been in the works long before Cisco announced the Unified Computing strategy.
"We started talking with IBM well over a year ago about this," Klayko said. "So I think part of IBM's willingness to work with us was part offensive. This is a $20bn-$30bn market we are talking about here. As for the timing of everything, we can't control when our competitors are going to bring new ideas to the market, but I can say that it has facilitated some good things for us."
IBM's choice of Brocade as a partner should not come as a great surprise, either. The companies already have a similar agreement in which IBM rebrands and resells Brocade's storage-area networking equipment. While rebranding and reselling products in the storage market is common place, this is not the case in the networking market. And until now, Cisco has largely gone unchallenged in its core business.
Challenging Cisco's dominance
For much of the past decade, Cisco has primarily competed against much smaller rivals in the networking and switching business. While these smaller competitors have been able to win some business, none has made a big dent in Cisco's market share. Even large competitors, such as Nortel Networks, have failed at taking on Cisco, which currently wields 90 percent market share in networking equipment.
But over the past few years, another partner-turned-competitor has also challenged Cisco's dominance. And for the past four or five years, HP has been building up its Ethernet switching business. And now the company's ProCurve products account for 10 percent of the Ethernet switching market and the company is number-two in terms of market share, Kerravala said.
He explained that the deal with Brocade finally brings a formidable competitor to Cisco in the high-end switching market. HP's ProCurve products can address the low-end of the market. And IBM will address the high end of the market with products Brocade bought from a long-time Cisco competitor Foundry Networks.
Although companies such as Foundry have been competing with Cisco for more than 10 years, they have lacked the salesforce and marketing power to provide a real threat to the company.
But Cisco's new competitors, who also happen to be partners, could take a significant chunk of Cisco's business.
"Fighting against HP, Microsoft and IBM is totally different from competing against small startups and smaller companies that have been around forever," Kerravala said. "The bigger companies can spend just as much as Cisco can on marketing and they also have the sales force to outrun Cisco."
