Is Cisco on the Outs With EMC, VMware?

Updated. Wednesday, Cisco (s csco) and NetApp (s ntap) announced more than 150 customers have adopted their joint FlexPod converged infrastructure architecture, a sign that might point to a falling out between Cisco and EMC (s emc). Those two companies are part of a joint venture called the Virtual Computing Environment, which sells Vblock systems composed of Cisco servers and networking, EMC storage and VMware (s vmw) virtualization, and the Cisco-NetApp partnership is directly competitive. Why would Cisco two-time EMC like this?
Here’s one possibility: Cisco is tired of getting the short end of the Vblock stick. I noted in February that Vblock sales have been growing at a fairly rapid clip — roughly 40 percent per month at that time — with an average deal size of $2.5 million. However, I heard recently from a well-connected source that Cisco gets only a small fraction of those profits, and it isn’t happy about it.
Perhaps the NetApp partnership is a tactic to get a bigger piece of the VCE pie. Or perhaps it’s the prelude to an acquisition that wouldn’t leave Cisco beholden to storage partners at all. Suggestions that Cisco will buy its way into the storage business to complement its server business are nothing new, after all, and NetApp would make Cisco a storage big shot immediately.
Nor are rumors that Cisco is interested in buying VMware away from EMC anything new, but that’s simply not going to happen. This makes Cisco’s involvement in OpenStack all the more intriguing. Apart from Rackspace, (s rax) the three large companies leading the OpenStack charge are Dell, (s dell) Cisco and, curiously, Citrix (s ctx) — purveyor of the XenServer hypervisor. If OpenStack takes off, a tight technology alliance with Citrix around OpenStack makes Cisco less dependent on VMware, the other third of the VCE venture.
But OpenStack users won’t likely ever represent the lion’s share of Cisco’s server customers, which is why buying Citrix would make a lot more sense. Citrix’s server strategy is all about virtualization, and XenServer would give Cisco a built-in set of virtualization technologies. Also, Citrix’s application-acceleration and virtual-desktop products could help Cisco transition from selling just switches and routers to service providers to helping those service providers offers value-added network and cloud services.
The considerable market positions EMC and VMware hold mean Cisco won’t likely ever cut off ties with them completely — there’s just too much business to be done with customers that want VMware virtualization and/or EMC storage — but Cisco certainly has the money to free itself from their grasps if it’s not happy. With restructuring on the horizon for the networking giant, and with its server business now operating at a $900 million run rate less than two years into its existence, the time for Cisco to transform itself into a whole-hog systems vendor might be now.
Update: Regarding the allegedly disparate split of VCE revenues, Cisco PR Manager Pamela Ferris told me Cisco doesn’t comment on rumors. She added, however, that Cisco does maintain a broad partner ecosystem to give customers choice in the storage and virtualization layers, and that it rarely goes into an engagement alone because customers have bought into unified computing architecture. Ferris said Cisco is happy with the traction it’s seeing with all of its partnerships around its UCS servers, including VCE and NetApp FlexPod architecture.
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