The End Of The Duopoly?

It had to happen sooner or later, but Brocade?  I would have lost the farm on that bet.  In retrospect I'm not sure why I was so surprised - the logic is sort of obvious - but I just never saw it coming.

I think that I, like most, stopped thinking about it.  Emulex and Q-Logic have shared a spectacular 50-50 share of a flat HBA market - each at about 70% gross margins, for a long, long time.  Both companies have printed cash by fighting over a point of market share here and there - but neither dumb enough to screw up a perfectly good thing by bombing price.  They both knew their component portion of the OEM sale was so insignificant, as long as they were good citizens they could ride along under the radar.

I can paint a picture where Brocade steals a big chunk of share - first by forcing price cuts (which the others will very begrudgingly have to match), then by leveraging the fact that they are higher in the value chain since they own a lot of the switch footprint.  In theory, they could give away the HBA's and make it up in switch margin, thus destroying a perfectly nice little market.  I doubt they would do that, they have a chance to be able to change the game by adding intelligence at multiple points - the way Emulex would also like too - but having the switch as a core engine gives Brocade a leg up.

I can also paint a picture where not much changes except for Emulex and Q's stock prices.  Q has a broader business base on the component side, and Emulex hedges with its InSpeed stuff, but HBA's and the fat, juicy margins that came with them have been both their bread and butter plays.  One can't help but think this will cause some concern.

You have to hand it to them, they don't back down from giants like Cisco, have withstood a huge distraction with a stock option fiasco, surprised everyone by acquiring their then biggest competitor, and now are going to try to screw up a long established market.  It would not surprise me to see CEO Mike Klayko wearing a Curt Schilling like "Why Not Us?" tee-shirt while mowing the lawn.

First power became an IT hot button - and now HBA's?  What's next - super model backup services? 

Comments

[Brian Garrett]

Over the next couple years it's hard for me to imagine Brocade stealing big chunks of market share from QLogic and Emulex. Interoperability, OEM quals and building the infrastructure to support drivers takes time. Over the longer term I agree that Brocade's entry into the HBA market could be used to better deliver intelligent services including data migration and replication. Over the short term, I see your second picture more clearly - not much changes except for Emulex and Q's stock price.