SAN JOSE, Calif. Hewlett-Packard's $2.7 billion bid to acquire 3Com Corp. marks another step in the consolidation of data centers and the vendors who serve them. In this sector, bigger is often better and cost has replaced performance as the main market driver.
Twenty years ago, businesses cobbled together a wide variety of diverse servers and networks in strategic ways to clobber their competitors. The technology choices were many and no one had enough computing clout.
Today, networks are consolidating around Ethernet, servers on the x86 and data centers configured for peak demand typically run at utilization rates of less than 20 percent. In this environment, business are hammering vendors for lower costs and calculating how much of their computing needs they could farm out to emerging cloud services offered on the massive data centers being built by Amazon, Google, Microsoft and others.
Google has become the poster child of the cost sensitivity of the largest data centers. It's an open secret that the Internet search giant has designed its own servers based on stripped down PC motherboards, a move other big data centers are said to be following. Now Google is said to even be designing its own network switches.
To survive, big vendors are getting even bigger. They seek to add value by becoming the one-stop shop for all the servers, storage arrays, switches and software any data center needs.
Thus Cisco Systems in May got into the business of selling Intel servers wrapped in big bundles with its top-of-rack switches. Going a step further, Cisco struck a recent deal with EMC Corp. and VMware to add more storage capabilities to its offering.
Brocade Communications and Foundry Networks were responding to the same trend when they announced a $3 billion merger plan in July 2008. The deal combined Brocade's Fibre Channel storage with Foundry's Ethernet networking expertise.
Other combinations have been less successful to date. Broadcom failed in its bid in May to snap up Emulex to extend its Ethernet business into Fibre Channel. IBM Corp. considered buying struggling Sun Microsystems before Oracle made its bid for Sun, a deal still waiting approval from European regulators.
A number of shoes have to fall before it becomes clear if an HP/3Com combination is successful. Products, customer lists and engineering teams need to be rationalized.
China is one of the interesting wrinkles for HP/3Com. 3Com is said to have engineering and manufacturing bases in China that could help HP lower its costs and extend its reach into one of the still fast-growing markets.
3Com struck in 2007 a deal to resell networking gear from HuaWei, China's answer to Cisco. HuaWei later tried and failed to buy 3Com.
How the HP acquisition pans out remains to be seen. But it's safe to say the current dynamics will drive more combinations for companies that could include Dell, Juniper Networks and many others.