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Why Cisco Considers White-Box Manufacturers Its Biggest Threat

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Facebook is leading an initiative to promote white-box manufacturers

Cisco’s (CSCO) CEO, John Chambers, has openly stated that white-box manufacturers are the company’s biggest long-term threat. What are these white-box manufacturers? Similar to server systems developed by branded players such as Cisco and HP (HPQ), white-box manufacturers are unbranded players. They’re also often called “original design manufacturers” (or ODMs). These systems are not only cheaper than branded systems, but they also provide an opportunity for companies to get systems customized according to their computing needs.

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Facebook (FB) has been leading this initiative by taking an open-source approach, trying to disrupt the data center hardware industry. Facebook launched the Open Compute Project, through which it will buy hardware directly from white-box manufacturers. These manufacturers will also meet Facebook’s specific requirements, providing customized solutions.

ODMs are experiencing the fastest growth among major players

Facebook is setting a dangerous precedent for Cisco here. Not just Facebook, but also Amazon (AMZN) and Google (GOOG)(GOOGL) have started to promote this trend by buying white-box systems. The result of this trend is that white-box manufacturers or ODMs are seeing rapid growth in their businesses.

According to a report from IDC and as the chart above shows, ODMs experienced revenue growth of 40.5% in 2014 compared to 2013. This was the highest growth achieved among all players such as HP, IBM (IBM), Dell, and Oracle (ORCL). HP, Dell, and Oracle experienced nominal growth, while IBM experienced negative growth.

You could invest in the PowerShares QQQ Trust, Series 1 (QQQ), if you were looking to get diversified exposure to Cisco. QQQ invests about 3% of its holdings in Cisco.

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