In the last 18 months, both Cisco Systems Inc. (Nasdaq: CSCO) and Brocade Communications Systems Inc. (Nasdaq: BRCD) have entered the high-end switch market to challenge McDatas dominance. The RBC report cites the heightened competition as a reason for EMCs pricing strategy.
EMC appears willing to risk damaging the McData relationship to achieve price and strategy goals, RBCs report says. Once EMC has crossed this bridge for the first time, it becomes very likely they will return to use their economic leverage again. We also must conclude that the risk of EMC moving additional share of the director business to Cisco and/or Brocade has increased. In addition, we have to assume McData will decide to shift strategy away from an indirect route to market and its dependence on EMC.
At EMC's analyst day this August, CEO Joe Tucci openly expressed his view that SAN switch prices should drop. "The margins in the Fibre Channel switching and director space are still pretty rich," he said. "We think those can come down... That's why you heard me applaud Cisco coming into the market." (See EMC Salivates Over Software.)
The release from McData today included a statement from Tucci, saiying, "We continue to see solid end-user demand for McDATA products, and we value and remain committed to our partnership with McDATA."
The pressure Tucci talked about in August would hit McData very close to home: In the second quarter, the company had director sales of $64.3 million, representing 60 percent of its product revenue in the second quarter.
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