Editor’s note: John Byrne is an analyst with Technology Business Research.

HAMPTON, N.H. – While the announcement of Cisco’s Unified Computing System (UCS) on March 16 may not have sent major shockwaves throughout the networking industry, it certainly caused more than a few small tremors.

Through previous public statements and less glamorous product and partnership announcements (e.g., Nexus, VMware), the company had made it clear that the datacenter was to be the jumping off point for its unified communications and cloud computing strategies. With the , Cisco appears to be finally putting its money where its mouth is.

By combining its dominant network systems with virtualization software from VMware and Microsoft, management software from BMC and service and support integration with BMC, EMC, Microsoft and VMware, Cisco claims to now provide a complete datacenter solution that significantly reduces total cost of ownership. While integration of computing and network resources was Cisco’s most obvious opportunity, TBR feels that Cisco has attracted attention by emphasizing virtualization and virtualization management to increase the perceived value of its offering and differentiate itself from competitors.

UCS is clearly a long-term investment for Cisco, an “adjacent market” that the company hopes will provide a new source of revenue to fuel growth as IT departments transition to this new form of computing. With more than $30 billion in cash, Cisco is one of few vendors who can make such an aggressive play in the current economic climate.

Impact of the UCS announcement on:

Customers: TBR believes many existing IT organizations will be slow to adopt Cisco’s all-in-one solution for a number of reasons:

• Most datacenters have already standardized on hardware and software vendors, and are committed to a best-of-breed model for new acquisitions. It will therefore be a challenge for Cisco to get customers to consider bundled hardware and software.
• Many companies have frozen non-essential purchasing until the economy stabilizes, so new and comprehensive products are unlikely to be considered in the short term.
• Cisco claims UCS was developed using industry standards, however they admit the system cannot use blade servers from other vendors, and vice versa. As a result, customers who deploy UCS will essentially be locked into a single vendor, creating a difficult tradeoff decision as they weigh the benefits of the system versus the lack of choice (and buying leverage) and potential interoperability issues.

Among larger organizations, TBR believes Cisco’s best hope is to leverage its relationships with existing customers, where it can find early adopters of this new technology. Companies that perceive Cisco as a strong vendor are more likely to consider their datacenter products when they resume conventional purchasing, particularly as they may be forced to adapt to rapidly changing circumstances.

Smaller organizations are a different matter. Without a large installed base of other vendors’ products, Cisco’s package will have more appeal. This is especially the case where demand for IT services is growing quickly, as Cisco’s promise of faster set-up and lower cost of ownership will encourage small and rapidly-growing IT organizations to give UCS full consideration.

Competitors: Blade servers (the majority of which are x86 blades) are a rapidly growing category of computer hardware, mainly due to their low cost and interchangeability. HP is the largest vendor, followed by IBM, Dell, Sun Microsystems and a host of smaller vendors. TBR believes Cisco’s presence in the market will cause its larger competitors to lower prices in the short term, benefiting customers but impinging on vendors’ margins.

Cisco claims that it had discussions with both HP and IBM around a blade server partnership, but in house development was required to ensure that UCS could function as a single system. As a result, Cisco’s datacenter products will not accept blade servers from other vendors, meaning that IT organizations that deploy UCS will essentially be locked in to a single vendor – a strategy that worked very well for Cisco in the 1990s, when it convinced so many customers to buy switches that ran proprietary protocols.

Cisco’s introduction of UCS follows datacenter announcements made by the company’s competitors in recent months, including HP and Juniper Networks. However, in contrast to its competitors, Cisco’s solution is much more clearly defined and comprehensive. Juniper is developing a datacenter architecture, but no specific products; HP’s announcement was limited to the introduction of datacenter switches that can also handle application processing.

Partners: In order to position UCS, Cisco announced a range of alliances, incorporating a number of major IT companies but excluding IBM, HP, Dell and Sun Microsystems. Top management of Accenture, BMC, EMC, Intel, Microsoft and VMware participated in Cisco’s rollout presentation. While it is clear that UCS will effectively end Cisco’s server partnership with HP and IBM in the long term, it remains to be seen whether it negatively affects other areas, such as services. IBM, for one, appears to be putting its eggs in the Juniper basket, having recently joined forces with Cisco’s router nemesis on the development of a similar datacenter fabric architecture for cloud computing.

TBR believes many of Cisco’s channel partners will value the company’s integrated datacenter solution, which will be especially appealing to new companies establishing datacenters for the first time and to rapidly growing companies, including cloud computing providers. However, since UCS is a brand-new product architecture, Cisco will need to invest heavily in partner training and support.

Short-term and mid-term outlook:

TBR believes Cisco will establish a toehold in server hardware with its integrated solution. To introduce its new line of blade servers, the company has assembled hardware and software packages to create end-to-end datacenter solutions. TBR believes Cisco will face near-term challenges introducing a new product line to a conservative market in a deep recession, but the company has positioned itself for rapid growth in the recovery, especially in the SMB market. The company’s principal blade server competitors, HP and IBM, will not be greatly affected in 2009, but will face a new, increasingly strong competitor going forward.

TBR also believes that customer acceptance of UCS could have an impact on Cisco’s acquisition strategy. If things go well, the company may be inclined to buy one or more of the partners that provides technology for UCS. One such company is BMC, from which Cisco currently licenses the technology for the UCS Manager product. Currently valued at around $6 billion, BMC would not only provide Cisco with a more comprehensive management software solution, but would also put it in more direct competition with both HP and IBM. TBR believes it would also be logical for Cisco to acquire VMware, in which it already holds a small equity stake. As noted in TBR’s 4Q08 NBQ Cisco report, at $9 billion, VMware is a bit more expensive than BMC, and brings more complications in that network storage vendor EMC owns approximately 84% of the company.