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Brocade Threatens McData with price war. (Storage News Review).

Brocade Communications Systems Inc may have no choice but to cut its prices in response to a midrange squeeze in the storage networking market, the company has said.

The company's focus on sophisticated software to complement its hardware is not paying off in the mid-range, where customers have instead turned to lower-cost switches made by McData, Brocade's CFO Tony Canova said yesterday at the Bear Stearns 14th Annual Technology Conference in New York.

Brocade's number one priority is to regain lost market share, according to Canova. "If price happens to be the way to get there, we'll do that. Nobody wants to start a price war, but it is a competitive market," he said. Canova's comments add to a statement made during the company's earnings call last month that it would be working to reduce the manufacturing cost of its midrange hardware.

The CFO did not mention McData by name, but was otherwise candid about where and how Brocade has lost market share. In October McData launched a new range of entry-level and midrange products that it claimed were substantially cheaper than Brocade's hardware.

Yesterday Canova said: "The area where we lost share was in the mid-range market where there was a pure demand for connectivity." By connectivity, Canova said he meant switch ports or hardware rather than management software. "The bottom line is that there's a segment of the market that only values connectivity," he said.

That's unfortunate for Brocade, because it claims to have a competitive edge in the optional management software it sells, and which it hopes will account for an increasing share of its revenue and so help boost its profit margin. The software interacts with other suppliers' hardware, but much of its benefits apply only to Brocade hardware, and so should also make that hardware easier to sell.

In Brocade's last fiscal quarter, software accounted for 19% of its revenue. Despite the mid-range cold-shoulder, Brocade still expects to increase that percentage. Describing a "couple of years" as an intermediate or long term period, he said: "I feel that in that period of time we'll be able to get into the mid-twenties." In its last earnings call Brocade forecast that over the next 18 months to 30 months it will raise its profit margin to between 55% and 58%, a forecast which Canova repeated yesterday.

Last year Brocade became the first SAN vendor to support the trunking of ISL connections, a feature that McData is still struggling to achieve EMC qualification for on its software. The latest version of Brocade's Fabric OS software, which is just beginning to ship from Brocade's OEM partner, includes features such as improved security, the ability to manage HBAs, and change control management. But Canova said that customers who only run small SANs do not want to buy this software. The battle to regain market will involve "educating that market about the value of the Brocade [software] services as their networks grow larger," he said.

Brocade has a huge advantage in its enormous installed base, which includes probably the majority of the global 500, Canova estimated. "We think that much of the gains that one of our competitors made was at greenfield sites." he said. Interoperability is still an issue in storage networking, and there are "very few" instances of mixed SANs, according to Canova who added that there is "very little rip and replace" by customers who very much prefer to leave working systems well alone. "This is going to work for us, and against us," he said.
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Publication:MarketWatch: Storage
Date:Jun 24, 2003
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