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may be planning a major move into the blade server market next year, potentially going head-to-head with IBM and Hewlett-Packard, two of its biggest partners.

The networking giant already offers switch technology for


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, and


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's blade offerings, although Cisco has not offered its own blade servers before. This, however, could soon change; the company has already started work on its own blade technology, according to Vikram Mehta, CEO of networking specialist and Cisco rival

Blade Network Technologies


"It's a blade server system that will compete head-on with offerings from H-P and IBM," he told

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. "I have seen the box -- I know a blade server when I see one."

Blade servers, which are thinner versions of traditional servers, have grown in popularity in recent years, as users attempt to overcome their data center space constraints.

The Cisco offering, code-named "California Server", is rumored to use


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processors, and Mehta says that the server will be "closely coupled" with the networking giant's Nexus switch.

"If you're the size of Cisco, you're looking at the server market that's $67 billion and saying, 'I want a piece of that,' " adds Mehta. "They are looking at what their next growth opportunity is."

Cisco declined to comment for this story.

With Cisco stock currently trading around $16.40, well below its 52-week high of $29, a blade server revenue boost would be welcome news for investors. The tech bellwether recently sent shockwaves through the industry when it forecast a

weak second quarter

amid tight enterprise and service provider budgets.

Mehta said Cisco is expected to launch its blade server in the first quarter of next year. The company is also rumored to be using virtualization technology from


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on its blade.

Virtualization, which aims to boost the amount of available server resources, is widely used on blades. A partnership between Cisco and VMware would not come as a complete surprise. The networking giant invested $150 million in VMware last year, a move designed to strengthen collaboration between the two firms..

"Folks will likely suggest that Cisco has no core competency in building, selling, or supporting 'servers,' but given the channel and partnership with VMware . ... I'm not sure this really matters," wrote security specialist Christofer Hoff in his

Rational Survivability

blog Sunday.

At this stage, however, it is still unclear whether Cisco is planning a general-purpose blade server running a range of applications, or one that will perform more specialized functions such as telephony. Margins also are typically low in the blade server business, where a handful of manufacturers are battling for volume and market share. Additionally, Cisco would face stiff competition from H-P and IBM, two of its biggest partners.

H-P, with its BladeSystem, and IBM, with its BladeCenter offerings, hold first and second position in the blade market, according to analyst firm


. Blades, however, were the only form of server to experience positive growth during the third quarter of 2008, with all major vendors enjoying a double-digit revenue hike.