Cisco System's introduction of its Unified Computing Center system consisting of an 8-blade server, data storage and network system designed to run virtualization software will likely ignite a price war as IT vendors battle for smaller IT budgets.
It is an aggressive move by Cisco to break into new IT markets and to take advantage of two key trends: blade servers and virtualization technology.
Blade servers and virtualization software are becoming commodities and Cisco's move will accelerate this trend and create pressure on pricing on blade servers from HP, Sun, IBM and Dell, and also on data storage blades, while maintaining premium pricing on its network technology.
The response from its rivals will be to try to undermine Cisco's network business by trying to commoditize network gear in IT contracts, in a bid to protect server margins. This could lead to a war of attrition as IT vendors try to accelerate the commoditization of their rivals' businesses.
IBM will likely be the least affected by such competition because the majority of its revenues come from IT services. IBM has a large hardware business but it also acts as the largest reseller of servers and network systems for the top IT vendors.
Cisco can has two ways it can survive a price war and resist commoditization of its network business. Cisco has about $30 billion in cash. And it's management software provides a data center user interface that helps customers save on labor costs through more efficient management of resources.
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At Cisco, 'Downturn' Screams Long-Term Opportunity - BusinessWeek
. . . I do believe very strongly that while this is the most challenging time in our careers, as business leaders, customers, and as countries, it also offers potentially the most opportunity. When you face challenges of this magnitude, with the tremendous disruption it creates for businesses, for jobs, for families, you get a willingness [from people] to change with speed you do not get in normal times. So out of this tremendous pain as a country and as a world, I believe we should focus on tremendous gain.
. . . We're going to be extremely aggressive during this downturn. As a company, we can come out of this with a stretch goal of being the leader not just in communications, but in IT on a global basis.