Partners Mull VCE Future Without Cisco Funding

Some Cisco solution providers that work with VCE said they hope Cisco doesn't go through with potential plans to halt further financial investments in VCE, the converged infrastructure joint venture it created with EMC and VMware in 2009.

Sources told CRN this week that EMC may absorb VCE and make it part of the EMC Federation, a grouping of the storage giant's subsidiary companies, including VMware, RSA and Pivotal.

Cisco, meanwhile, is considering ending financial investments in VCE, but will maintain a stake in the company, according to sources. Cisco technology, including its UCS servers and switches, will also continue to be included in VCE's Vblock converged infrastructure offering, sources said.

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"Our biggest relationship is with Cisco -- it's about half of our business -- and with EMC. I would be disappointed to see [any changes with VCE]," said Gary Alexander, owner of Alexander Open Systems, an Overland Park, Kan.-based partner of Cisco, EMC and VCE. "We have been very successful in selling VCE and we are going to have a great year with them, so I would be disappointed to see that."

"Vblock is a very unique offering because of its integration. The NetApp [FlexPod] offering is more of a designed structure, but doesn’t have the integration that a Vblock has," he continued. "I like the idea of [Cisco and EMC] having an investment in each other and really working together."

Bill Smeltzer, CTO at Focus Technology Solutions, a Seabrook, N.H.-based Cisco, EMC and VCE partner, also said he would be surprised by Cisco stopping investments in VCE. He noted that if EMC ever bought out Cisco's stake in VCE, EMC could leverage its other partners -- such as Lenovo for blade servers and Brocade for networking -- for Vblocks.

"I personally think there would be more to lose for Cisco backing out of it than EMC," Smeltzer said. "What Cisco's motive is would be my big question."

Some partners and industry observers said there are numerous reasons why Cisco might cut financial support for VCE.

So far Cisco, which holds a roughly 35 percent ownership stake in VCE, has recorded no profit from its $716 million investment in the joint venture, including a $185 million infusion in fiscal 2014, according to Cisco's July 10-Q filing.

Cisco recorded cumulative losses of $644 million from VCE as of July 26.

NEXT: A Shifting Landscape

In addition, the converged infrastructure landscape has changed dramatically since VCE was formed five years ago. Those changes include HP's decision Monday to split into two companies and recent rampant rumors that EMC is an acquisition target for Hewlett-Packard or even Cisco itself.

One Cisco, EMC and VCE partner, who requested anonymity, said pulling back financially from VCE could be a way for Cisco to start severing ties with EMC in the event it merges with HP, a direct competitor of Cisco's.

"If HP buys EMC, suddenly Cisco is in a joint partnership with their arch-nemesis," the partner said. "VCE is a legal entity so, at that point, they would co-own a pretty sizable asset with HP."

"There could be a number of reasons [why Cisco would cut future funding to VCE]," said Zeus Kerravala, principal analyst at ZK Research. "There are a lot of rumors right now about what happens with EMC. There are rumors that Cisco has vehemently denied that they would put in an offer in for them, which I don’t think they would -- it's not Cisco's typical acquisition. However, if HP breaks up into these two companies, I could see them possibly merging with EMC. And if something like that happened, I could see [Cisco] possibly stopping the funding [for VCE]."

Another reason Cisco could choose to stop future VCE funding is that the entity is strong enough to stand without it, Kerravala said. At the end of 2013, VCE said Vblocks were on a $1.8 billion run rate.

"VCE is at a pretty decent run rate. I think they are at the point now where they could survive on their own without any more funding. The big funders have been EMC and Cisco and from what I hear, EMC brings VCE more deals but Cisco brings VCE bigger deals. And if you look at the combined channel VCE has now between EMC and Cisco … there is no reason it couldn't stand on its own."

Kent MacDonald, vice president of converged infrastructure and network services at Long View Systems, a Calgary, Alberta-based VCE, EMC and Cisco partner, said having fewer ownership stakes in VCE could actually be a good thing.

"When VCE was created, it was a concept of bringing architectures together, so having multiple parents to get it off the ground and to co-invest and co-risk it made sense. But if you look at VCE now having a $1 billion run rate you could say that the child is now big enough to stand on its own, and we need to reduce the complexity and the number of parents involved," MacDonald said. "It actually could be streamlining and simplifying VCE's corporate structure."

A Cisco spokesperson told CRN Wednesday, "We are not pulling out of VCE."

The spokesperson said Cisco remains "financially committed" to the company and that "VCE customers and partners can be assured that they have the full commitment of Cisco and EMC going forward." The spokesman declined multiple requests to explicitly state that Cisco would continue investing in VCE in the future.

An EMC spokesperson Wednesday declined to comment on whether EMC is planning to add VCE to its federation of companies, but said, "EMC, along with Cisco, is fully committed to VCE, its customers and partner ecosystem."

If one thing is clear amidst all of the uncertainty, it's that major changes are coming in the converged infrastructure market, said the solution provider who asked not to be identified

"Battle lines are being drawn, old alliances are fading away and new alliances are forming," he said.

Jennifer Follett contributed to this article.