Cisco's Math In HP Server Battle Questionable

IDC stats show that Cisco is making a good showing in the server market, just nowhere near as good as the company would have you believe.

Mark Twain had it right when he popularized the saying "lies, damn lies, and statistics," warning about the ability of numbers to persuade even in the face of a weak argument. It's easy to take a little bit of good news found in statistical data and spin it to imply a sea change or mandate. And so it is with David McCulloch, the director of Cisco corporate communications, who took the time to respond to colleague Rob Preston's column.

In his column, Rob pointed out that industry bellwethers Apple, IBM, Microsoft, Google, and EMC all had impressive quarterly earnings reports. Rob went on to point out that it was only Cisco--whose report is due August 10--that is trimming its costs amid pricing and profit margin pressures. Rob went on to say: "[Cisco] faces ever-more sophisticated competitors, especially in the data center, where the likes of Hewlett-Packard, Brocade, and Dell are also looking to unite networking, servers, and storage into a single architecture. The fat profit margins of Cisco's core router and switch businesses can't survive that competition, and the company can't cut its way back to prominence."

Mr. McCulloch begged to differ, particularly with the reference to HP as a sophisticated competitor. Here's what Mr. McCulloch had to say:

"If anything, it is the likes of HP who are nervously looking over their shoulders at the threat from Cisco. After all, in just two years since pioneering the unified computing market with its Unified Computing System, Cisco has dramatically changed the data center landscape.

"Cisco has taken almost twenty points of share and become the number two player ahead of IBM and Dell in the x86 blade category in North America; the fastest growing segment of the server market overall. By contrast, HP's share slipped by 10.9%.

"Our success is global too; Cisco is now the #3 vendor in the same category worldwide."

In some ways, the quote is fair. I suppose it's accurate to say that Cisco pioneered the unified computing market; after all, it invented the term. And it did accelerate the process of creating more functional blade systems. Now whether HP is running scared with Cisco "hot on its heels"--that's another matter. The statistics Mr. McCulloch refers to come from IDC, which is about as good a source for server market size numbers as there is.

The report details market share numbers for servers worldwide and in various markets. One would think from Mr.McCulloch's claims that HP had lost a serious bit of market share. In fact, HP lost 0.3% market share, moving from 31.8% of worldwide share last year to 31.5% this year. And since the overall market grew at 12.1% HP's overall server revenue grew by 10.8%.

But Mr. McCulloch's numbers aren't wrong, it's just his use and interpretation of what they mean that's way off base. In his quote, he refers to IDC's worldwide blade server numbers, and that piece of the overall server pie is just 15%. Of that 15%, HP has 50%, IBM has 20.1%, Cisco has 9.4%, and Dell has 8.4%. To put it another way, Cisco now has about 1.5% of global server market while HP has 31.5%. While HP would be foolish to ignore what Cisco is up to, I hardly think "nervously looking over their shoulders" is the stance you're likely to find.

Here's the truth of the matter. Cisco plays mostly in the small, but lucrative and fast growing blade server market. Its UCS products are fairly novel and should appeal to certain customers. The sales it has seen over the first two years of product life are good, but certainly not great. Last year it entered the rack-mounted server market with a limited set of offerings and its products will have to catch on there at least as well as its blade servers have in order to make the likes of IBM and HP "nervous," and Cisco will never compete in some sections of the server market--namely RISC/EPIC based systems.

Mr. McCulloch's comments are mostly an exercise in diversion. Cisco's problems are real and the market has shown that it fully understands just how real they are by knocking about 40% off the company's share price since its recent high in April of 2010. It's seen margin erosion from competitors and even from its own products. A little less gaming of statistics and a little clearer enunciation of direction and strategy would serve Cisco better.

Art Wittmann is director of InformationWeek Analytics, a portfolio of decision-support tools and analyst reports. You can write to him at [email protected].

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