John Kelley, President, CEO & Chairman, McData Corp.

"Two years from now, I don't think we're going to be known as a SAN company, frankly. We're going to be known as a network company."

April 3, 2004

12 Min Read
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If McData Corp. (Nasdaq: MCDTA), like other SAN switchmarkers, has been on a wild ride this past year, its CEO, John Kelley, has adopted the swagger of a rodeo cowboy.

Kelley says the difficult market that's materialized since networking giant Cisco Systems Inc. (Nasdaq: CSCO) entered the storage director segment 18 months ago has strengthened his company.

But he can't hide the fact that it's been a tough go. Cisco's entry has affected McData more than rival Brocade Communications Systems Inc. (Nasdaq: BRCD), because McData holds market share dominance over the high-end SAN switch segment that Cisco wants. And Cisco has pursued its goal through a price-chopping battle that hasn't let up.

Besides feeling the sting of those particular arrows, McData has seen its relationship with its former parent EMC Corp. (NYSE: EMC) change; it hit a few tough quarters last year; and it suffered the layoff of 9 percent of its workforce in January. (See McData Maudlin Over Price Pressure), EMC Playing Hardball With McData?, and McData McDownsized.)

Through it all, McData's taken the offensive, buying switch companies Nishan Systems and Sanera Systems and investing in Aarohi Inc. to beef up its technology offerings. (See McData Sweeps Up Nishan, Sanera and McData Signs Deal With Aarohi.)We asked Kelley about it all in a recent interview, in which he talked with Senior Editor Dave Raffo about Cisco, the newly acquired technologies, and the emergence of a new order in storage networking.

Kelley came to McData from Qwest Communications International Inc. (NYSE: Q), where he served as executive VP responsible for local network operations. Before that, he was president of Qwest Wholesale Markets. He joined McData in August 2002 as President and COO (see Qwest Exec Moves to McData). He became CEO the following June, and last January succeeded McData founder Jack McDonnell as chairman of the board (see McData CEO Lights a Fire and McData Names Kelley as Chairman). He jammed yet another hat on his head from November to January, when he headed McDatas sales before promoting Gary Gysin to the job (see McData Sales Boss McExits and McData Promotes Gysin).

Click on the links below for specific portions of the interview :

— Dave Raffo, Senior Editor, Byte and Switch

Byte and Switch: How has the SAN switch market changed over the past 18 months or so since Cisco got into the game along with McData and Brocade?Kelley: For us, when you have a company the size and scope of Cisco, you have to wake up each day knowing they’re there. At the same time, we have some very compelling product sets in our road map. And we have products in more than 8,000 data centers and thousands of customers who really like us. If you check it out, the satisfaction level for McData is pretty good.

I think Cisco’s frustration is that, in six quarters now, they haven’t been able to really move that much in the SAN switch market. I don’t want to minimize their growth in this last quarter at all, but I think it’s kind of ho-hummer for a company the size of Cisco. But it looks like they grew, we grew, and Brocade grew.

Byte and Switch: So your market is still growing?

Kelley: The market is still growing. I don’t think it’s growing 100 percent a year, but it’s still growing.

Byte and Switch: Is there room for all three of the top SAN switch makers – McData, Brocade, and Cisco – over the long-term?Kelley: As aggressive as all three of our companies are, and with our desire to be the best in what we do, even with substantial growth it’s going to be a tough, slug-it-out environment. There’s probably not enough for all of us to do what we think we can do. Obviously, we’re bullish about our business.

Byte and Switch: Do you see this resolved by a merger or acquisition?

Kelley: I think anything is possible. But the thinking might be different than people expect, as it relates to acquisitions. So it might not be the little one gobbling the big one and that kind of stuff. You’ll see more strategic moves. I believe that the Juniper Networks acquisition is in that vein. They didn’t go look at [Ethernet switching vendors] Extreme Networks or Foundry Networks. Who did they go buy? [Network security vendor] NetScreen Technologies. The case of EMC buying VMware is the same thing. [See Juniper Buys NetScreen and EMC Gobbles VMware.] There are some more unusual kinds of configurations that might occur rather than the traditional ones. That may then trigger other moves. Now remember, I don’t have a good crystal ball.

Byte and Switch: What about resolution through market differentiation? Might we see the three vendors each carve a stronghold in one part of the market, such as Brocade on the low end and McData with director switches? [See Brocade & McData's Paths Diverge.]

Kelley: Well, you have Brocade doing a lot more on the low end –that’s not a market we’re going to chase. I don’t know where that line blurs with Emulex and QLogic – that’s not an area where we want to go. Medical records, disaster recovery, compliance... They all drive the enterprise, and that’s our business. On the other hand, with SATA and iSCSI coming along, I can see switches like ours sold at Circuit City someday.NEXT: Acquired Tastes

Byte and Switch: Last year you bought two companies, Sanera and Nishan, and invested in a third, Aarohi. Are you looking for any more acquisitions?

Kelley: We’re really looking to do well with the technologies we acquired. We need to do the Sanera and Nishan thing well, and Aarohi. This is probably a $4 billion dollar market total. We can do this well and stake a claim. Not many folks are doing the things we can do.

In the case of Aarohi, it’s getting intelligence into the network. How do you do that in a way that has flexibility, is sustainable, meets industry standards, and doesn't tie you to a lot of code? I think if we can get going well, then we can worry about the next steps.

Byte and Switch: Where are you with Sanera and Nishan technology? Are these technologies integrated into your current products?Kelley: On Sanera, not yet. So let’s do that one first. Sanera had product that was designed around their specifications, so we’ve spent the last six months getting some of our functionality, our operating system, our hot codec base – things McData’s known for – built into the box. That product set will be going to the storage companies pretty soon for testing. We’re hoping to get revenues from that by the end of the year.

By the way, there are some fun things in that product that are a little bit different. To touch on a feature: You can take the 256 ports in the Sanera box and partition them like LPARS [logical partitioning]. It's called dynamic partitioning, but we’re going to call it flex partitioning.

You can expand and contract those partitions, and data runs through there uncorrupted by what else is running. To the user, like LPARS, it looks like a separate switch, so you can have up to four switches to the target. We’re testing it on a campus setting. So that would be a very strong answer to VSAN [Cisco’s virtual SAN].

But the Nishan product is most exciting. We’re probably getting close to 200 customers now. Some of them we inherited. Those customers are doing a lot of distance connections.

The predominant use [of the Nishan product] in the Fortune 200 companies is disaster recovery and business continuance. But the great thing about the Nishan product is the routing. You can take SANs from different route levels, different products, and different suppliers – say, McData and Brocade – and you can route data between them with Nishan. I can come in and retrieve and send and store over both devices. It isn’t total interoperability, but to the user it looks like it is.The routing might be the largest opportunity. I think there’s around 300,000 standalone SANs out there today and a lot of customers like to route, so we have some degree of interoperability. This could be a very, very large opportunity for us. For customers, you don’t have to scrap the stuff you bought. It doesn’t matter who it’s from. You don’t have to throw it away. Let’s say its 1-Gig: You want to go to a 2-Gig world, you don’t have to leave the 1-Gig world behind.

The last thing with Nishan is iSCSI. As you know, there’s still a long way to go on iSCSI drivers, but if the customer says today, "Can you aggregate iSCSI over Fibre Channel?" the answer is "Yes, you can." We introduced a joint product, the Eclipse 1620, with Nishan. We already have it out the door. It’s a low-end device, two IP ports, two Fibre Channel ports. [See McData Speeds Out IP Switch.]

What I’d like to see from our engineers and what I’ve challenged them to do is to take the Flexport [flex partitioning] capability so the customer can have IP or Fibre Channel... with the flexibility to manage these ports. We don’t have that yet.

NEXT: New Technologies

Byte and Switch: What can we expect from McData as far as support for 4-Gbit/s and 10-Gbit/s?Kelley: We showed 10-Gig at SNW last fall. [See McData to Demo 10-Gbit/s FC.] We’ll have 10-Gig compatibilities [for switch interconnection]. When’s the market going to be there? What is the market for 10-Gig? What do you use it for? If you're putting in a data center and you're going to be using [multiple Fibre Channel switches], you want to know it's going to be there.

Four-Gig is a pain in the neck. We’re doing it, but half the customers are still using 1-Gig. Two-Gig’s utilized by the other half. I don’t know what’s going to happen that’s revolutionary to make more customers use 4-Gig. There’s not a lot of demand for 4-Gig. It's like, I drive an Audi 8A – the speedometer says it will go 190 mph. It’s not real practical.

Byte and Switch: Where does the intelligence you acquired from Aarohi fit into your product line?

Kelley: In the short term, there are some simple applications for intelligence. Tape backup is one example. The long-term value will be how to do it on a large scale. You don’t want too many moving parts.

We have gone a very different way than [Brocade’s] Rhapsody, which has an ASIC behind every port. That means when you come out with a new product you have to write more code to manage those ports. If you go from 16 ports to 32, the code base doubles. We don’t go down that road. If we have, say, 24 ports, we pass eight of them through the Aarohi chip. A high-speed virtualization chip is coming out – probably in early 2005. The customer can plug and play it into the virtualization switch. It’s very application specific.

Byte and Switch: What other changes in the SAN switch space do you see in the near future?

Kelley: Two years from now, I don’t think we’re going to be known as a SAN company, frankly. We’re going to be known as a network company.

Byte and Switch: So you’re going into Cisco’s business?

Kelley: There’s some truth to that. But if the users are in it for disaster recovery or business continuity, they don’t care about the differences between networks, SANs, IP, or telephony. [...] Our job is to make all that fit together. We need to be the experts to provide an appropriate connection for speed and quality.Byte and Switch: Does that mean you’ll have to expand to other areas of networking technology?

Kelley: Sanera and Nishan are some building blocks. If we’re successful with those [...] then we’ll need to expand. But in the short run, we’ve got enough.

NEXT: Relationship Management

Byte and Switch: Last quarter, you reported a strong increase in software sales. You’ve upgraded SANavigator. Does this put you in competition with the storage companies that buy your switches, especially EMC?

Kelley: We needed to make SANavigator more user-friendly. So we pushed toward more modular code. The storage companies said, "Software’s mine." EMC looked for us not to compete in front of the end user. We said, "We’re arguing over nits here."We tell the storage companies we’ll put capabilities in but we’re not changing the architecture. If the customer wins, everything is peaceful. People make money. Software is going to drag more hardware than hardware dragging software.

Byte and Switch: In analyst briefings , you’ve talked about a direct-assist sales approach where you deal directly with the end user, instead of only going through OEMs. How does that work?

Kelley: The market for switches is not hand-to-hand combat. It’s about how to get it through the VARS, system integrators, system vendors – and how to do that the right way. So we will assign representatives to large accounts. What they do is go in and work with each of the storage companies as a customer rep.

Our people work with storage companies to try to plan what to do if there’s a problem. [...] We’ve got a 20-year reputation and a lot of veterans in there. Cisco’s good on networking, but so far they have a lot to acquire as far having SAN configuration experience. That’s an advantage for us.

The storage companies aren’t going to influence the customers’ preference for Cisco, Brocade, or McData. So we’re trying to influence customers’ preference for us and still have that go through the storage companies that the customer has been dealing with.We need to take advantage of our relationship with the customer. I’m personally worried that the storage companies won’t have time, or they’ll be slower to deliver our capabilities. Customers want to hear about our networking and internetworking capabilities.

Somebody said, “Isn’t this going to cost a lot?" If we don’t do well, sure. But the size of these transactions tend to be $1 million, $2 million, $3 million, $4 million... so it doesn’t take many of those wins to justify this approach.

— Dave Raffo, Senior Editor, Byte and Switch

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