Cisco's Foes Won't Die by the Blade

Cisco's new blade server may not cut H-P and other rivals too deeply, but it could help new partners, some say.
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Cisco Systems

(CSCO) - Get Report

may be expecting

great things

from its entry into the server market, but investors will also be weighing the impact on the networking giant's many partners and

rivals

.

Potentially the biggest impact could be on Cisco's long-time partner

Hewlett-Packard

(HPQ) - Get Report

, which now faces a

direct threat

to its server business.

The goal-posts are shifting in the tech sector, forcing Cisco to seek new business opportunities outside of its core networking niche. With almost $30 billion in cash and a vast installed base, Cisco has the muscle to force itself into a new market, prompting

Goldman Sachs

to add the company to its

conviction buy list

Tuesday.

H-P, which saw its overall storage and server revenue plunge 18% in its recent first-quarter results, is understandably nervous about protecting its blade business, which grew 4% year over year.

"Would you let a plumber build your house?" sniped an H-P spokesperson, in an email to

TheStreet.com

. "

H-P has been there, done that, have the customers to prove it."

Despite being an obvious slap in the face, however, Cisco's strategy may not prove as much of a challenge to H-P as it first appears.

"Over the intermediate term, we do not expect to see any adverse impact to the hardware stocks from this launch," wrote David Bailey, an analyst at Goldman Sachs, in a note, explaining that Cisco's server ramp-up could be slow. "Moreover, Cisco's servers seem only compatible with its own switches, which will likely dampen the rate of adoption."

H-P can also console itself by selling its own ProCurve switches into Cisco's "back yard," and it has ramped up this part of its product line in the last few years.

"We would expect H-P to transition away from Cisco toward in-house solutions over time," wrote Jayson Noland, an analyst at R.W.Baird, but warned that Cisco's The Unified Computing System (UCS) still poses challenges. "Cisco's well-telegraphed move into the blade server market will likely create a more competitive environment for all server vendors."

Cisco's stock enjoyed the tech sector's modest rally Tuesday, and the company's shares rose 48 cents, or 3.11%, to $15.93. With the Nasdaq rising 2.98%, H-P's shares also rallied, and rose 43 cents, or 1.98%, to $29.45.

The Unified Computing System, which will be available next month, also offers plenty of upside for Cisco's virtualization partner

VMware

(VMW) - Get Report

, according to Noland. The software giant, which already has a distribution deal with H-P, can now tap a completely new market.

"Cisco's UCS platform appears to leverage VMware technology significantly and essentially provides VMware with another route to market," wrote Noland, adding that this is good news for H-P's storage partners

EMC

(EMC)

and

NetApp

(NTAP) - Get Report

. "We continue to view server virtualization and blade server adoption as positive for networked storage."

Other Cisco competitors include its networking rivals

Brocade

(BRCD)

and

Juniper

(JNPR) - Get Report

, which have both issued bullish statements on the firm's UCS strategy.

"Cisco's approach to 'unified computing' is not revolutionary," wrote Brocade spokesman John Noh in an email to

TheStreet.com

. "

Their approach is likely to be very capital intensive upfront, which will be a major obstacle in light of today's global economy."

Brocade also basked in the warm glow of the tech rally Tuesday, and the company's shares rose 9 cents, or 3.35%, to $2.78.

Switch and router manufacturer Juniper also shrugged off the UCS announcement, explaining that Cisco will inevitably shift its focus from networking.

"In our opinion, it's a distraction for Cisco," David Yen, executive vice president and general manager of Juniper's data center business group, told

TheStreet.com

. "They will have to spend a great amount of resources, money, and attention on the server strategy."

Up to this point, Cisco has only 10 beta sites trialing the UCS technology. Just one of these sites, services specialist

Savvis

(SVVS)

has been made public.

"We're testing the system, we have one in our lab, and we're in the early stages of putting it through beta tests," said Bryan Doerr, Savvis' CTO. "One of the areas that this could eventually be useful for is in our managed services related to cloud computing."