IBM and Cisco Systems have announced a multibillion dollar deal, making IBM the supplier of chips in Cisco's networking products, and Cisco the supplier of routers and switches to IBM’s customers.
IBM announced it will withdraw from competing in this field, selling 200 patents for routers and switches to Cisco for an undisclosed sum.
According to the agreement, Cisco will purchase semiconductors, chipsets and some storage for US$2 billion from IBM over the next five years.
"The chips will be embedded in all our future products," said Selby Wellmann, vice president of the Interworks Business Unit at Cisco, in a joint teleconference today.
IBM expects to stop manufacturing routers and switches within 12 months, but all existing contracts on network products will be fulfilled.
The company does not expect that layoffs will be necessary, according to Michel Mayer, general manager of IBM’s Networking Hardware Division.
IBM will continue to support existing customers using its routers and switches. Also, IBM will continue to support SNA (Systems Network Architecture), Token Ring and Ethernet adapters through its worldwide sales and distribution channels.
In cooperation with Cisco, IBM will also assist customers in migrating to Cisco’s network systems.
IBM declined to reveal the revenue it has generated in this market. "But it is safe to say that there is a multibillion dollar opportunity for Cisco there," said Mayer of IBM.
The two companies also announced a new relationship between IBM Global Services and Cisco, under which the two will jointly offer a range of services and develop systems for customers. Officials from the companies mentioned SNA-IP (Internet Protocol) integration, voice and data integration, services related to electronic commerce and services for Internet service providers.
IBM Global Services will offer support for Cisco's networking systems, in the areas of consulting, design, and implementation. Also, IBM will participate in several Cisco partner programs.
According to Cisco's Wellmann, IBM will be the company's primary partner in the services arena, and the company will "wind down" its relationship with the previous partner, International Network Services , which Cisco’s competitor Lucent Technologies I is buying for $3.7 billion.
The deal is considered a plus for the customers since “no one company can keep up with this warp speed,” according to Wellmann. The companies also expect to increase their revenue as a result of the alliance.
The losers seem to be resellers of IBM switches and networks. "They can expect to see a decrease in the business, but we will need some of them to continue," said IBM’s Mayer, referring to maintenance work and updates.
However, IBM and Cisco are working on a “channel migration plan,” to get IBM resellers in among Cisco resellers.
Cisco will not make IBM-like products based on the 200 patents, which already have corresponding products. The knowledge represented by the patents also overlaps with Cisco's own knowledge in some areas, but the technical information is necessary in order to ease IBM customer migration to Cisco technology, Wellmann said.
Both companies stressed that the agreements are not exclusive. If Intel Corp. or other chip manufacturers come up with better products, Cisco, for example, would consider using them, according to Wellmann. But first the matter would be considered by an executive committee that will be composed of three top-level executives from each company, Wellmann added.
The agreements between the two companies will last five years, but the companies have to wait for approval from U.S. government regulators before they are completed.
Asked whether Cisco might come into conflict with antitrust laws since it already has a big share of the networking product market, Wellmann said that the US Department of Justice will look at where the market is going, not where it was.
When it comes to voice and data integration, the market leader is not yet established, Wellmann added.
IBM Corp., based in Armonk, New York, can be reached at +1-914-765-1900 or at http://www.ibm.com/. Cisco Systems Inc., in San Jose, California, can be reached at +1-408-526-4000 or on http://www.cisco.com/.