Different vendors have used various names including "intelligent switch", "application switch" and "fabric appliances", among others, to uniquely position themselves from their competition. In the case of the Cisco MDS9000 series there are special blades to support applications like Veritas Volume Manger and IBM SAN Volume Controller (SVC). These blades can coexist with other blades including Fibre Channel port and IP (iSCSI & FCIP)...
The Brocade 7420 Multi-Protocol Router is another example of a switch with some advanced intelligence that is initially being deployed to support protocol conversion (iSCSI to Fibre Channel), SAN segmentation and routing, and storage over IP for distance using FCIP. Some other switches that support application-specific blades include those from Maxxan and Marranti. CNT and McData have announced plans to support application specific blades as well.
When looking at deploying intelligent switches or fabric-based appliances, beware of potential performance and availability impacts. For example, will implementing an intelligent switch speed up or slow down I/Os moving between your servers and storage subsystems? Will performing more functions and running applications on your switch or appliances slow other I/O processing down? Do you need to have redundant pairs of intelligent switches to isolate against component or device failure?
As to your question of whether traditional storage systems will be replaced by intelligent switches, I would say that those storage systems are safe from extinction for the foreseeable future. However, you will see storage systems like those mentioned above attached to intelligent switches, as well as storage router appliances for aggregation and disk pooling purposes. It's happening already, in fact. Aggregation and disk pooling, along with functions like data mirroring and remote replication and data movement, are generically called storage services and storage virtualization. It is important to understand the potential benefits of implementing an intelligent switch, as well as what its impact will be on your organization in terms of management, support, performance and availability.
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