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Broadcom acquisition of Brocade leaves three major FC vendors

Broadcom acquired Brocade in a $5.9 billion deal that will leave the Fibre Channel industry with three major vendors, but analysts predict FC will remain viable for years.

Broadcom Ltd.'s $5.9 billion deal to acquire Brocade Communications Systems Inc. will shrink the Fibre Channel...

storage networking industry to only three major vendors.

But storage experts said the pending Broadcom acquisition of the largest Fibre Channel (FC) vendor would have little impact on FC's long-term trajectory. Some predicted the end result could be a strengthening effect for the lossless storage networking technology that enterprises tend to favor for their most mission-critical workloads.

"Avago-Broadcom did not pay $6 billion just to kill off Fibre Channel," Russ Fellows, a senior partner and analyst at Evaluator Group Inc., in Boulder, Colo., wrote in an email.

Avago Technologies purchased Broadcom Corp. for $37 billion in February 2016, and it took the name Broadcom when the deal closed. Broadcom's newly acquired FC switches will complement the FC host bus adapters (HBAs) that Avago secured through its purchase of Emulex Corp. for $606 million in 2015.

Fellows noted the market cap of the two premier FC vendors, Broadcom and Cisco, now stands at about $68 billion and $150 billion, respectively. The third major FC vendor, semiconductor vendor Cavium Inc., disclosed plans in June to buy QLogic Corp., Emulex's HBA rival, for $1 billion.

The Broadcom acquisition of Brocade -- officially announced Wednesday -- caught some analysts and customers by surprise, while others said they expected an eventual sale.

"We've been talking about an acquisition of Brocade for years -- almost as long as we've been working with them," said Brocade customer Martin Littmann, CTO and chief information security officer at Houston-based Kelsey-Seybold Clinic. "The rumors of Brocade being acquired come in and out all the time."

Littmann said the Broadcom acquisition is "probably as good" an outcome as possible, with the least potential for conflict with Brocade's OEM partners.

In a blog posted Wednesday after the deal was officially announced, Brocade CEO Lloyd Carney wrote that he was not actively shopping Brocade, but Broadcom made an offer that was too good to refuse.

"We were not looking to sell the company," Carney wrote. "However, when Broadcom approached us with a compelling offer, we had an obligation to consider that offer, along with other alternative opportunities."

Divesting Brocade IP networking

Broadcom doesn't expect the acquisition to close before mid-2017. The semiconductor specialist plans to keep Brocade's FC SAN switching technology and divest Brocade's IP networking business, which includes wireless and campus networking, data center switching and routing, and software products.

The divestiture was disappointing to customers, such as Kelsey-Seybold Clinic, which uses Brocade FC and IP networking technology in the data center.

"It would be nice to have adapters for Fibre Channel directors and IP all under the same manufacturer to try to get them interoperable," said Chris Breaux, manager of IT systems technology at Kelsey-Seybold.

"We have always tried to keep an eye and limit the number of vendors that we have to deal with within the data center," Littmann added. "[The divestiture] affects us in that it automatically, effectively adds another vendor into our data center. But you just have to live with all the consolidations and divestitures that happen in the IT space."

Ed Czerwin, a senior systems engineer at Sonova AG, based in Switzerland, said he was planning to look into Brocade IP networking as a "competitor to the more expensive Cisco gear" with the company's next infrastructure refresh.

"We liked the prospect of their IP gear because we are already very familiar with their FC product, and it is stable and reliable," Czerwin said.

Reasons for Ethernet divestiture

Broadcom CEO Hock Tan said in a conference call that his company sells semiconductors primarily to OEM system vendors, such as Dell Technologies, Hewlett Packard Enterprise and IBM, just as Brocade does with its FC SAN switch business. But Brocade's IP networking technology would represent a competitive threat to those OEMs, since many of them also sell Ethernet switches, he noted.

"Needless to say, we do not intend to start cannibalizing our chip business, and we will never jeopardize our customer relationships," Tan said. He added that Broadcom would work immediately with Brocade to initiate the sales process for the IP networking assets.

Needless to say, we do not intend to start cannibalizing our chip business, and we will never jeopardize our customer relationships.
Hock TanCEO, Broadcom

Brocade's Ethernet and IP products generated $600 million in revenue in 2015, according to Alan Weckel, a vice president of data center research at Dell'Oro Group Inc., a market research firm in Redwood City, Calif. Weckel predicted annual revenue would be closer to $800 million this year as a result of Brocade's May 2016 acquisition of Ruckus Wireless.

Brocade's FC SAN switching business -- which Tan called "a very sustainable franchise, with phenomenal profitability" -- was responsible for $1.3 billion in revenue in 2015, according to Weckel.

"It's a good acquisition for Broadcom. On the Fibre Channel side, they now own the HBA business in Emulex and the switch business [of Brocade], so they get a tremendous amount of intellectual property. And Broadcom proper is going to be able to sell this at a higher margin, potentially raising prices in the Fibre Channel market," Weckel said.

Weckel said Brocade had to buy optics from a third party, but Broadcom sells its own optics and could remove one layer from the supply chain.

"And the customers fundamentally don't have an alternative," Weckel said. "It's a captive market. So, that doesn't force you to do price decreases to make your quarter. You can fundamentally keep the price or potentially raise the price with time. That's what Broadcom is going to look at to get more revenue out of the business than what Brocade could."

Dell'Oro projected FC switch and adapter port shipments will decline from 8.2 million in 2015 to 7.5 million in 2016. But revenue will remain roughly flat, dropping from $2.3 billion to $2.2 billion, according to Dell'Oro. The FC roadmap extends beyond the current 16 Gbps and emerging 32 Gbps technology to higher single-lane speeds in the future.

"Obviously, it's not a growing business compared to IP storage, but there is a surprising amount of business, especially in [the Asia-Pacific region]," said Dan Conde, an analyst at Enterprise Strategy Group Inc., in Milford, Mass. "For mission-critical workloads, people are not going to move off of Fibre Channel. They do realize that there is still a future for important workloads."

Frank Berry, a former QLogic executive who founded the IT Brand Pulse analyst firm in San Diego, is more skeptical about FC's long-term future in the wake of the Broadcom acquisition of Brocade.

"I expect its investment in development is going to be negatively affected," Berry said. "I think there's a 60% chance that 32-gig [Gbps] will be the last generation of FC to hit the market. But I don't expect the companies that design Fibre Channel to talk about that openly, because they don't want to affect their revenue today."

A Broadcom spokesman said the company intends to support future generations of FC beyond the latest 32 Gbps technology.

Berry predicted FC would remain in the market for five to 10 years. He said new technologies such as server SANs and nonvolatile memory express over fabrics (NVMe-oF) have the potential to outperform FC. He said most people prefer the Ethernet version of NVMe-oF, rather than NVMe over FC.

"It doesn't matter if the Walkman isn't going to have another generation. There are iPods now," Berry said.

Tan said, "The knock on FC is that enterprises continue to shift more of their workloads to the cloud, where the server-centric architecture tends to use lower-cost Ethernet and IP-based storage."

But Tan said Broadcom is finding large enterprises, such as financial institutions, telecommunications companies, cable operators and government agencies, want a dedicated, highly secure storage infrastructure on premises to manage and share mission-critical data. He said FC is designed to provide "a very secure, proven, reliable and dedicated closed-loop system with zero packet loss, which no other protocols can easily replicate."

Tan said Broadcom expects the FC market to remain stable for a "fairly long time," with its large installed base. He added that he expects all-flash arrays requiring high IOPS and low latency to drive additional SAN upgrades.

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