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McData: Strategic Vendor Series

Our latest Strategic Vendor Series looks at the strengths and weaknesses of McData and what the company needs to do to fight off Cisco.

With its Computer Network Technology Corp. (CNT) acquisition closing this quarter, McData Corp. doubles its sales force to roughly 1,000 people, and is singularly focused on driving its business through its OEM partners.

IBM and Hitachi Data Systems Inc. (HDS) have qualified the company's flagship product, the i10K director, with EMC Corp. still to come.

"We want our customers to say to their OEMs 'we want McData,'" said Wayne Morris, senior vice president of worldwide marketing. "And we want them to know that we are no longer just a product company … We have expertise in FICON and [disaster recovery] DR and distance replication to help our customers build solutions," he said.

Still missing from McData's portfolio is an intelligent switch. McData is last to market with fabric-based services but claims its approach will be technically superior to products already available from Cisco Systems Inc. and Brocade Communications Systems Inc.

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Instead of selling blades with different services on them like virtualization, which would plug into its Director vis-a-vis Cisco's approach, McData will sell a separate 1U high appliance that runs the fabric services. From a management perspective, McData said it looks like it's part of the Director, so users are not forced to manage multiple boxes. But from a scalability perspective, it goes "far beyond" what Cisco can do, according to Morris. "With their product, when you want another blade and have run out of slots you have to buy an entirely new Director, whereas ours scales infinitely."

McData has an equity stake in startup Aarohi Networks, using its AV150 processor to enable the virtualization service module in its fabric services appliance.

We asked two industry analysts, Stephanie Balaouras, senior analyst with the Yankee Group, and Greg Schulz, senior analyst with the Evaluator Group, who follow the company closely, to give their perspective on McData's strengths and weaknesses.

Where is McData strongest?

Stephanie Balaouras: Historically, McData has been the market leader in the Fibre Channel director segment. The company lost market share in 2004 in the director segment -- particularly to Cisco, but it gained market share in the switch segment with the introduction of its multi-protocol router. According to the Yankee Group's Global Storage Networking Forecast, McData grew its share in the switch segment from approximately 15% in the first quarter of 2004 to a little more than 17.5% by the end of 2004, and 18.5% in the first quarter of 2005. This year, with the launch of the i10K, the company should be able to maintain its current market share in the director segment (31.7% in first quarter 2005 without CNT). So overall, the core business of the company is in good shape.

In addition, its acquisition of CNT will be well worth it in the long run. While there was some overlap with CNT's UMD, CNT's SAN extension business, the URA platform and professional services will be a complement to its business. In fact, the Yankee Group expects that with modular, affordable storage and a broader range of more affordable network transport options for telecom providers, there is a huge pent up demand for long distance disaster recovery solutions among both large and midsized businesses alike.

Greg Schulz: McData has what can be argued as the industry's combined deepest knowledge of mainframe storage connectivity and storage over distance, along with strong open systems experience.

Where is McData weakest?

Balaouras: McData's biggest weaknesses are not in the short term but the long term. Its acquisition of CNT was a good move, but the company may need additional acquisitions or close partnerships. As storage networking shifts to IP, whether it's NAS, content storage, or iSCSI SANs, it's critical that Brocade and McData transform themselves into pervasive data center networking vendors -- not just storage networking vendors. This is the only way to compete with Cisco for long-term viability and success. Both companies realize this to some extent; hence, McData's acquisition of CNT and Brocade's acquisition of Therion Software [Inc.] and investment in Tacit Networks [Inc.]. But it seems Brocade is much more aggressive about expanding into new markets outside its core area of expertise.

Schulz: McData, through their own organic growth combined with their acquisitions, has deep coverage and penetration of enterprise accounts. The downside to this is that many of those customers have had to experience one or more acquisitions or mergers in the past few years associated with the combined McData resulting in products being withdrawn from market. McData also is still digesting its recent CNT acquisition while rolling out products from its previous Sanera [Systems] and Nishan [Systems] deals. For example, the i10K director is now shipping. However, it is still maturing and going through qualifications with some OEMs. McData is late to the game with a blade or switch to support network or fabric-based storage services (aka virtualization) like EMC Invista. Granted, they have shown technology demonstrators in the past. But the good news for McData is that this market has yet to mature. It could be another 12-18 months before the market shifts from a discretionary (want to have), to a need to have market for fabric-based storage services really matures.

What is McData's strategic direction?

Balaouras: McData appears to be focused on strengthening its core business of multi-protocol routers, switches and directors, and expanding into complementary arenas such as SAN extension. The company will layer on value-added software (such as integrating McData and CNT software for end-to-end SAN-MAN [metropolitan area network]-WAN management) and services as the market demands it. It won't trail blaze into new markets where it doesn't necessarily have the expertise or reputation.

Schulz: Good question. I'm sure if you asked some at McData it would be to dominate the switching (or director) space. Others would say to dominate the routing, while others would say to dominate storage over IP. Others might say to become a storage management vendor or a services company. All [public relations] PR aside and in my opinion, McData's strategic direction is to become the go-to company for midrange to enterprise storage connectivity services and related solutions with a balanced portfolio. This means leveraging its existing installed base, brand recognition and OEMs to generate additional services and product revenue via technology replacements and upgrades.

Where does McData have an edge over its competition?

Balaouras: Its strongest competitive advantage could be the power of its core offerings, coupled with the SAN extension technology and services from CNT. McData should see how it can better productize long-distance disaster recovery solutions with its storage and telecommunication partnerships.

Schulz: Its legacy experience in the data center, services, broad portfolio of connectivity products, including switches, switching directors, matrix switches, SAN and channel extenders, routers, services; and software, including SANavigator. With the CNT acquisitions, McData has experience now as a reseller or [value-added reseller] VAR of storage solutions including storage systems, backup solutions and associated hardware, software and services. Not to sound like a broken record, their installed base in the large data center is also a key strength.

In which markets is McData most challenged in terms of growing or maintaining its market share?

Balaouras: The company is growing its market share in switches; its biggest challenge is fending off Cisco and Brocade in the director segment. The i10K is a solid platform and should keep the company competitive through 2005. What it needs to do long term is upgrade the platform regularly and take some risks bringing innovative features and functionality ahead of market.

Schulz: While the mainframe has been declared dead for the past 15-20 years, and granted, it is not a major growth market, it still represents a good market for large port-count switching directors, and storage over distance and channel extension. This is especially true with the advent of multi-hop or cascade three site business continuance and DR solutions from EMC, HDS and IBM. However, there is competition (Adva [Optical Networking Inc.], Bus-Tech [Inc.], Brocade, Ciena [Corp.], Cisco, Luminex [Software Inc.], NetEx, Nortel [Networks], QLogic [Corp.]) in these environments, especially for Fibre Channel and FICON related connectivity and distance. McData needs to retain and protect their installed base. But not at the expense of giving up and not gaining market share in the open systems and midrange environments. This means that McData must penetrate deeper and lower into their traditional environments as well as open up new markets.

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