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Cisco slashes prices in skirmishing SAN. (Storage News Review).

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Cisco Systems Inc is still hacking away at the high price of its recently-launched storage networking hardware apparently in an effort not only to find a level that attracts buyers but also keeps up with the price cuts from incumbent SAN suppliers.

Prices for Cisco's MDS 9000 Fibre Channel and IP SAN switches and directors listed by reselling partner IBM Corp were cut for the third time in as many months.

The largest cut saw 41% lopped off the price of a 16-port card, and the smallest saw 11% cut from the price of the base director hardware. Since IBM began shipping Cisco's hardware in March this year, its list price for the entry level MDS 9216 has fallen 44% from $52,000 to $29,000.

"We went back to Cisco and told them a premium pricing strategy was not going to work," a spokesperson for IBM said. IBM's price cuts come only a week after Hewlett Packard Co's announcement [Computergram International 9 July 2003] that it had begun reselling the MDS 9000, at prices it claimed were up to a third lower than those from other Cisco resellers.

The IBM-Cisco price cuts were highlighted in a note from investment bank SG Cowen. "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. Therefore we believe that this data point reinforces our thesis that Cisco's progress in storage networking will be slower than most people expect," the bank said.

Despite that, Cisco itself insists that the price cuts reflect what its competitors have been doing. "Our entry into the market has ratcheted up the competition. We're not surprised to see our competitors drop their prices. We don't operate in a vacuum, and we need to respond," said a Cisco spokesperson.

Full-on SAN price warfare hasn't yet started, but the knives are already glinting. In the last two months the IBM list price for McData's Intrepid 6140 director has been cut twice, reducing it by 27%, according to SG Cowen. In February the IBM list price for Brocade's Silkworm 12000 director was cut by 19%, and in April the maintenance charge for the 12000 was cut by 40%.

Last week Brocade CFO Tony Canova told a Bear Stearns conference that he could not rule out a low-end price war with McData Corp. Michael Jung, co-author of SG Cowen's note said that although the risk of a SAN price war has been present for some while, the healthy 50%-plus margins enjoyed by Brocade and McData--let alone Cisco's 70%-odd margin--prevent the current price cuts from qualifying as a war.

Cisco launched the MDS 9000 at the beginning of the year, and in the first quarter saw only $10m of revenue from the new kit. The hardware is intended to be sold only by Cisco's reselling partners, of whom only HP and IBM have formally announced availability of the product, which they did only well after the beginning of the year.

Comparisons of Cisco's pricing to that of Brocade Communications Systems Inc or McData Corp are complicated by the fact that Cisco charges an all-in price for hardware and a complete software suite, while Brocade and McData sell their management software on an a la carte basis and customers buy varying amounts of it. Also complicating comparisons, Cisco offers an option to use cheaper blocking ports in place of standard non-blocking ports for less heavily loaded links on the MDS 9000.

However SG Cowen has attempted to calculate IBM list prices for "base" configurations of Cisco, Brocade and McData hardware "without a lot of bells and whistles [software]." Acknowledging the complexity of the situation, the bank balks at describing its configurations as typical.

The figures listed in the note it issued this week show Cisco's low-end gear as between three percent and 13% more expensive than Brocade's, and between 49% to 59% more expensive than McData's. In contrast, at the high-end Cisco's gear is between nine percent to 21% cheaper than Brocade's, but is 13% to 44% more expensive than McData's, according to the note which is based on IBM list prices.

Cisco disputes SG Cowen's figures, claiming for example that the bank under-calculated the cost of optical connectors for Brocade's switches, and under-estimated the amount of software that McData customers buy.

The vendor says that if these issues were factored in, SG Cowen's figures would show Cisco's low-end gear as being up to one percent cheaper than Brocade's, and no more than 18% more expensive than McData's. At the high end, it says the figures would show its hardware being up to 33% cheaper than Brocade's, and up to 23% cheaper than McData's.

When IBM cut the prices of the MDS 9000 in March, SG Cowen issued a price comparison in which it said the new prices resulted in Cisco's gear being slightly more expensive than its rivals at the low-end, but slightly cheaper than the competition at the high-end.

Since then not only have Brocade and McData cut prices, but SG Cowen has reduced the amount of software that it assumes Brocade and McData customers buy.
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Publication:MarketWatch: Storage
Date:Jun 24, 2003
Words:866
Previous Article:Microsoft's enterprise storage play--a window on NAS, a head in the SAN.
Next Article:HP cool about 4Gbit Fibre Channel. (Storage News Review).


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