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HP -- Cisco's Worst Enemy?

SAN JOSE, Calif. ( TheStreet) -- Embattled Cisco, (CSCO - Get Report) which reports its third-quarter results after market close, is starting to feel the switching strain as one-time partner HP (HPQ - Get Report) continues its attack against Cisco's core networking business.

"It is very obvious that HP is gaining market share in the switch business," said Kaushik Roy, an analyst at Wedbush Morgan, in an email to TheStreet. Roy said that HP competes aggressively with Cisco on price of core gear. "Many customers are comfortable buying switches from HP because of the HP brand and support, even if these switches don't have all the bells and whistles of a Cisco switch."

Cisco's decision to enter the server market may be coming back to haunt the networking giant.

Cisco's networking gear is widely lauded, particularly when it comes to handling with high-volume enterprise traffic.

But rivals -- specifically HP -- are eroding Cisco's market share. HP estimates that it gained 2.3% of switch revenue share in 2009 and 2010, and the trend looks set to continue. Revenue from HP's enterprise servers, storage and networking division climbed 22% during the company's recent fiscal first-quarter results, with HP noting particular strength in its networking products.

At the same time, Cisco's struggles in the consumer market signal that strength in its core networking products is more important than ever. Switch sales accounted for about 40% of Cisco's revenue during its recent fiscal second quarter, but they dipped 7% year over year.

Tech Giant Frenemies

Relations between Cisco and HP soured rapidly after Cisco unveiled its UCS server technology more than two years ago, effectively stomping on its partner's toes. HP, like a spurned Silicon Valley lover, hooked up with switch maker 3Com in a $2.7 billion deal, and started to throw resources at its own ProCurve products, clearly a move to get back at Cisco.

HP's latest jab at Cisco occurred earlier this week, when it unveiled its FlexNetwork architecture. FlexNetwork is a way for customers to build highly flexible, open source networking infrastructures, part of HP's broader tech services push to move customers away from Cisco.

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