Cisco Says Bye-Bye to HPCisco Says Bye-Bye to HP

HP actually threw the first punch in this fight.

Yesterday Keith Goodwin, SVP of Cisco's Worldwide Partner Organization posted a video blog where he stated: "We recently notified HP that we will not renew its System Integrator contract when it expires on April 30, 2010, resulting in HP no longer being a Cisco Certified Channel or Global Service Alliance partner" (http://blogs.cisco.com/channels/comments/ciscos_evolving_partner_landscape/)This is yet another sign of the increased tension between these two companies that were once great partners. In fact, the relationship was so strong that Carly Fiorina was on Cisco's board while she was HP's CEO. However, that was a long time ago and a lot has happened since then to cause this divorce to occur.

I find it interesting that much of the blame as to why this relationship fell apart is pointed at Cisco for rolling out its Unified Computing product which created a competitive product to HP's servers. I disagree with this though and contend that HP actually threw the first punch in this fight. The feud actually started years before when the then-rogue Procurve group launched and began taking share (primarily from Cisco competitors) with pricing levels that were then half of the industry norm coupled with a lifetime warranty plan. The value play from Procurve was so compelling that companies were almost forced to evaluate it and HP quickly jumped up the market share charts.

Procurve's early success though didn't initially bother Cisco. Much of the share gain was at the expense of Nortel and ironically, 3Com who HP recently acquired. Carly remained on Cisco's board, Cisco left HP alone and as long as no one from HP corporate uttered the word "Procurve", everyone was happy. Then we began the Mark Hurd era.

I'm speculating here, but I think there were two things that caused the new regime to take the networking market to Cisco. The first was that Procurve was incredibly profitable. Maybe not compared to the big fat margins of Cisco, but the Procurve margins (which were estimated back then to be half of the industry norms) were way better than many of the business that HP had. PCs, notebooks and other consumer electronics certainly drove top line but really didn't contribute significantly to bottom line. In fact, I'm not sure if this is true or not, but an HP spokesperson told me a few years ago that only the print cartridge group (not printers, but the ink) was more profitable (percentage wise) than Procurve. The second factor was share gain. Procurve had done a great job of sucking most of the remaining blood out of the carcasses that Cisco had left behind and if Procurve was going to continue its growth, it had to be at the expense of Cisco. So Procurve became an official part of the overall HP story and has been making moves ever since.

We'll fast forward a few years to where we are today. On one side we have Cisco. The 800 pound networking gorilla that's pushing its own sever product has a great relationship with EMC (an HP competitor) and is making the "network centric" data centers one of its key go to market initiatives for the next several years.

On the other side we have HP. One of the 800 pound compute gorillas whose networking group has thrived historically almost in spite of HP. Now it's been fully integrated into HP and has all of the HP and EDS resources behind it. Couple that with all of the products and low cost engineering from 3Com and HP's "compute centric" model and you've got a company who is set up to challenge Cisco in a big way.

When I talk to industry people about HP-3Com, I get the sense that much of the industry doesn't fully appreciate how disruptive a factor the combined HP-3Com could be. Much of Cisco's success was due to its own excellent execution but it was aided by a bunch of competitors that just couldn't hang with Cisco. I'll admit there were smaller companies like Brocade (Foundry), F5 and Riverbed that can consistently beat Cisco because of their ability to meet the demands of a certain niche, but there hasn't been a significant end to end threat to Cisco since Nortel of the mid 90s.

Clearly these two companies had to go their separate ways and just admit they're competitors now, and having HP be an SI for Cisco just isn't viable. I do want to say though that I think Cisco did want to keep the relationship between the two companies going. I recall a conversation with Cisco CEO John Chambers about two years ago (pre UCS) where he asked me whether I felt that HP and IBM could both be partners in five years (so three years from now). I said I didn't think HP would be a partner and he surprisingly said that they would be. I felt at the time that Mr. Chambers was almost naively optimistic about HP and didn't fully understand just how aggressive Procurve was with its Cisco competition.

In summary, I think this move was a long time coming but it won't be the last major move we see in the vendor landscape. The coming together of computing, communications and networking will continue to reshape the vendor landscape. Partnerships will fall apart and new ones will be created. It should be a fun year for us industry watchers!HP actually threw the first punch in this fight.