Will Cisco's Project California Rock the IT Sector?

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If anyone is to take the lead in IT these days, they must conquer what's known as the cloud—the delivery and storage of programs and services over the Internet vs. traditional software in CDs or shrink-wrapped boxes. In a sign of the increased emphasis on cloud computing, the proportion of the eight million servers sold each year that reside in Internet data centers has risen to 50% today from 20% in 2003, says Jayshree Ullal, a former Cisco executive who is now CEO of startup Arista Networks.

An eight-blade virtualized box?

Cisco could play a strategic role in helping companies make their data centers run more efficiently, experts say. In recent years companies have used so-called virtualization technologies to make racks of servers behave as a single pool, able to run as many or as few programs as necessary. Storage and networking gear have also been virtualized to varying degree. But nobody has figured out how to virtualize the server, storage, and networks all together. That's one reason data centers remain terribly inefficient, with utilization of gear often running below 15%. "It takes too long to move an application from one virtual server to another," says James Yaple, a chief technology officer with the U.S. Veterans Administration, who has been briefed by Cisco. "Cisco could be a very dangerous competitor."

The company intends to effective erase those arbitrary distinctions between server, storage, and networks. According to sources, the first Project California box will be a rack that can hold eight "blades." These would include up to seven very densely packed servers featuring Intel's (INTC) new Nehalen processor, all tied together into one pool using server virtualization software from either VMware (VMW) or Microsoft (MSFT). The eighth blade would be a year-old Cisco networking switch called Nexus that will help the machine deliver the information over a wide range of communication technologies, offering varying degrees of bandwidth.

Cisco declined to discuss details of the system ahead of its splashy introduction, which includes video conferences in eight cities worldwide and featuring Intel CEO Paul Otellini and VMware CEO Paul Maritz.

Juniper moves to take advantage

Cisco's entrance into the server market pits the company against some of its most important partners, IBM and HP. Big Blue resells more than $2 billion of Cisco gear a year to consulting and services customers. Cisco tends to play down the significance of rivalries with partners. The company has long competed with Microsoft for so-called unified communications systems that let office workers integrate their phones, computers, and other devices; Cisco works in tandem with Microsoft in other areas. Yet it will be tough to brush off the significance of the company's server move. "Instead of being 5% or 10% overlap [with the big computer companies], it will now be more like 50%," Arista's Ullal says.

Cisco's rivals are already seeking to take advantage. Indeed, IBM recently announced a research and development compact with Cisco nemesis Juniper, whose CEO Johnson hopes the deal will lead to expanded sales through Big Blue. Johnson won't provide specifics, but says: "We're having conversations with many of these companies" in the server business.

For some, relying on a provider other than Cisco may not be easy. Most companies use Cisco gear, so server companies that resist providing it run the risk of losing contracts. Some Cisco rivals nonetheless have big hopes. "Everything chips away at the glacier," says Ron Sege, president of networking company 3Com. "And because of the recession, everyone is even more ready to consider alternatives" that may be cheaper.

That's just the bet Cisco is making: that customers will see it as a smarter, more economical alternative in servers.

Editor's note: Author Peter Burrows is one of the reporters whose private phone records were sought by investigators for Hewlett-Packard.

Burrows is a senior writer for BusinessWeek, based in Silicon Valley.