Mellanox and QLogic Play Duopoly

On Monday, Mellanox said it will buy Voltaire for $8.75 per share, or about $218 million. Excluding Voltaire's cash, Mellanox is getting the company for about $176 million. The $200 million per year InfiniBand networking market is now a duopoly comprising Mellanox and QLogic, the two suppliers that design their own adapter and switch chips.

The deal ensures the survival of Voltaire-branded products. According to Adam Zagorski, vice president of forecasting at IT Brand Pulse, Voltaire earned a leading 38 percent share of the InfiniBand switch market in the third quarter of 2010. However, I believe Voltaire was destined to be acquired because it was unprofitable, with no relief to the bleeding in sight. The company was unprofitable because its product costs were too high. Its product costs were too high because it sourced InfiniBand switch chips from its unsympathetic competitor, Mellanox. Voltaire's options for achieving lower product costs were to design its own chips or get acquired by chip providers QLogic or Mellanox.

This acquisition also marks a change in Mellanox's strategy. Until now, Mellanox was straddling the fence on the Voltaire relationship. It was supplying the dominant switch supplier with chips, but strangling them at the same time with high prices. All of this was happening while Mellanox was marketing its own switch line. Zagorski said Mellanox carved out 18 percent of switch market share in the third quarter of 2010. But it appears that the company came to the realization that it needs Voltaire's software, sales, and marketing to ensure it dominates the InfiniBand switch segment, just as it dominates the InfiniBand LOM and HCA segment. After the acquisition, the new Mellanox will start business with a dominant 56 percent switch market share.

QLogic garnered 14 percent of the InfiniBand host channel adapter market, and 27 percent of the InfiniBand switch market, in the third quarter of of 2010. Given that industry pioneer Mellanox now owns the leading technology, software, sales, and marketing machines for InfiniBand host channel adapters and switches, the company is well-positioned to fend off challenges from QLogic, a company focused on its Fibre Channel host bus adapter duopoly game versus Emulex. Qlogic's position was underscored in a Cannacord|Genuity Flash Update where Paul Mansky said, "QLogic currently has about 20 percent of the IB market and has pointed to OEM share gain as a future catalyst. Mellanox counts HP, Dell, and IBM as major customers, and Oracle recently acquired 10 percent of the company in the open market. Voltaire's key customers are HP and IBM (33 percent of sales). With this transaction, Mellanox takes a big step toward the 80/20 rule upper hand, thereby materially challenging QLogic's future IB market share potential."