EMC Pressures McDATA

Competition in the high-end Fibre Channel market has grown to the point that EMC is seeking – and winning – price concessions from its own spin-off.

EMC has apparently won 10-15% price concessions from McDATA on its high-end switches, according to analysts.

“EMC wanted McDATA to lower prices and they wouldn’t, so they stuffed the channel with Brocade , which did give them price breaks because they are hurting, so they forced McDATA to do the same,” says Nancy Marrone-Hurley, senior analyst at Enterprise Storage Group.

Marrone-Hurley calls Brocade’s move “very short-sighted.”

“They reduced prices, and EMC then forced McDATA to reduce prices, so now the game is even again — except Brocade and McDATA have smaller margins,”
Marrone-Hurley told Enterprise Storage Forum.

The stand-off with EMC was cited by McDATA CEO John Kelley for McDATA’s disappointing third-quarter results in a conference call Tuesday.

“Unfortunately, the company was not able to reach agreement with its largest OEM, EMC, in October on a variety of terms in a time frame that would allow
all orders to be fulfilled and recognized for McDATA’s third quarter,” Kelley stated.

Both EMC and McDATA downplayed any effect the spat will have on their relationship.

“We continue to work closely with EMC and value our strong, ongoing relationship,” Kelley said.

“We continue to see solid end-user demand for McDATA products, and we value and remain committed to our partnership with McDATA,” EMC CEO Joe Tucci said
in a statement.

Still, analysts speculated that EMC’s hardball approach could put pressure on McDATA to further diversify its business. McDATA receives about 60% of its revenues from EMC.

Marrone-Hurley believes McDATA “is still too heavily reliant on EMC to pursue a direct model at the moment.” However, she adds, “it makes them take a very strong look at how to get away from this dependency, which is causing them to reduce prices unnecessarily.”

Kelley wouldn’t divulge details of the company’s agreement with EMC, except to say that it “covered a wide range of issues … from pricing to the whole
gamut.”

Aside from delays caused by the dispute with EMC, Kelley reported that “demand remains strong … and we expect this demand to continue.”

Competition in the director-class market has increased markedly in recent months, with both Cisco and Brocade challenging McDATA’s dominance.

McDATA said it expects revenue for the third quarter, which ended Oct. 31, to be in the range of $93-$95 million, compared with the company’s previous expectation of $107-$112 million. That also includes about $2 million of anticipated revenue from the recent acquisition of Nishan Systems.

McDATA will report complete results on Dec. 1.

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