Why Cisco breaks up with EMC for partial exit from VCE

Enterprise networking vendor Cisco has decided to partially exit from VCE, a data center and cloud infrastructure vendor, after breaking up from EMC.

In the next phase of VCE, the struggling Cisco will have 10 percent stake from 35 percent earlier. VCE will be part of EMC for financial reporting purposes.

VCE CEO Praveen Akkiraju in a blog post said: “In the next phase of evolution for VCE, VCE will become an EMC business, with Cisco and VMware continuing as strategic partners and investors. VCE, EMC, and Cisco agree that this approach will provide a scalable, simplified business model that will best support VCE’s long-term strategy.”

VCE will continue operating as an independent entity, focused on advancing new solutions based on VCE Vblock Systems, and accelerating investment in creating hybrid cloud solutions.

EMC termed VEC as one of the industry’s most successful joint ventures. A Bloomberg report says Cisco lost $644 million on VCE since it was started in 2010.

EMC, Cisco and VCE jointly determined that this new structure would serve as the optimal model for VCE’s next phase of expansion, innovation, and long-term growth.

VCE surpassed a $2 billion annualized demand run-rate for Vblock and Vblock-related products and services exiting Q3 2014, its sixth consecutive quarter of greater than 50 percent year-over-year demand growth.

IT market research agencies Gartner and IDC say VCE is the leader in integrated infrastructure systems.

Cisco and EMC CEOs

More than 1,000 enterprises and service providers deployed over 2,000 Vblock Systems worldwide, realizing significant benefits in speeding application deployments, simplifying operations, increasing availability, and reducing costs, said EMC.

A recent IDC study revealed that VCE customers were able to deploy new services five times faster, reduce downtime by 96 percent, and lower their annual datacenter costs by 50 percent with Vblock Systems.

Why Cisco exited

In 2010, Cisco joined with EMC, virtualization company VMware and chipmaker Intel to form VCE. VCE said in May that sales are on pace to reach $1.8 billion in 2014, up about 80 percent from the year before.

Cisco Losses

Cisco, the San Jose, California-based networking gear maker had invested $716 million in VCE as of July 26 and it owned 35 percent of the venture. Cisco had also lost $644 million on VCE since it was started in 2010, according to a Bloomberg report.

According to the Bloomberg report, Cisco’s filing didn’t reflect how much VCE generated in revenue and profit for the parent companies. A person familiar with EMC’s finances said VCE is profitable, as are the various products it sells.

Bloomberg report says that the VCE change is set to decrease the entanglements between EMC and Cisco, two companies that have seen their relationship sour amid Cisco’s increasingly heated competition with VMware.

The Cisco-EMC war

In 2011, the EMC-owned VMware acquired software company Nicira that has technology that lets customers make do with cheaper networking equipment. Last September, Cisco said it would acquire Whiptail, a storage startup that competes with EMC.

Executives from Cisco and VMware have exchanged war of words at public events regarding each other’s plans for software-defined networking, an approach pioneered by Nicira.

Official response from EMC and Cisco

Joe Tucci, chairman and CEO of EMC, said: “VCE was created to be a disruptive force by radically transforming and simplifying IT data center architectures, accelerating a shift to cloud computing. It has been a huge success and has changed the conversation with CIOs.”

“Our commitment to increased investment will enable VCE to significantly expand the scale and scope of its solutions, helping customers take better advantage of hybrid cloud and next-generation IT opportunities,” Tucci said.

John Chambers, chairman and CEO of Cisco, said: “VCE represents an example of Cisco’s strategy of aggressively investing to drive key market transitions. VCE was created to positively disrupt data center architectures utilizing Cisco’s UCS and Nexus platforms, and we have been thrilled with the execution, results and customer demand the VCE team has delivered.”

Rajani Baburajan
[email protected]

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