An important catch by Ray: During Cisco’s earnings call, the company said sagging sales to state and local governments, down about 25%, were a major challenge. However, HP CFO Cathie Lesjak claimed her company’s great quarter was partially due to rising sales in state and local government accounts.  Is this an early indication that government IT shops are looking to HP as a cheap alternative to Cisco in their networks? Will the private sector follow?

If [HP] brings in someone who says, ‘I’m not so sure [3Com] was a smart idea,’ they could have a few bumps in the road.

That’s for sure. Of course, given the amount of money laid out this year for the 3Com deal and the Palm acquisition, I think the board of directors will want to hire a new CEO who is committed to making those investments work. At the same time, a new CEO will probably be more willing to cut his losses with an acquisition that isn’t working if said acquisition didn’t happen on his watch.

So the board will probably hire a CEO who will commit to HP Networking’s 3Com/H3C/TippingPoint integration at least for a few years. But what about the rest of the company?

Over at CTOEdge, Mike Vizard pointed out that HP employees were suffering from low morale even before this Hurd scandal hit. He points to Glassdoor.com, a site where employees rate their CEOs and review what it’s like to work at their companies. HP has a Glassdoor rating of 2.4 on a scale of 1 to 5, based on 1,353 ratings. Hurd has an approval rating of just 34%. Employees tell the site that executives focus too much on numbers.

HP has enjoyed a lot of success under Hurd’s leadership. It has solidified its position as the #2 enterprise networking vendor, grown its share of server sales and made a lot of money on services with its EDS acquisition. But whispers of poor morale combined with this dramatic loss of its CEO certainly justifies some hand-wringing — by the media and by HP customers — especially since Cisco is being so aggressive in competing directly with it on networking and servers. As Vizard asks in his CTOEdge column: “Can an HP that is already pretty divided internally come together to drive the innovations needed to compete across a range of business segments that to one degree or another are under siege?”

HP’s CFO Cathie Lesjak will act as CEO on an interim basis while the company looks for a replacement.

I’m not going to bother looking into the details of what Hurd allegedly did. He’s gone now. And that’s huge. This is one of the biggest technology companies in the world. It is poised to compete for a huge share of the networking market. And suddenly the CEO who is credited with turning HP around after some years of struggle under mediocre leadership (*cough* Carly Fiorina *cough*) is gone.

What happens now?

HP ProCurve has long been a niche, low-cost networking vendor popular among small and midsized businesses and enterprise campus networks. Under Hurd’s leadership, the ProCurve business became the number two enterprise networking vendor, and took an even bigger leap forward earlier this year when it closed a deal to acquire 3Com and its promising H3C networking and TippingPoint network security brands.

Now Hurd is gone. There is no way of knowing what direction a new CEO would take the company. It’s probably safe to say HP’s board of directors will expects a new CEO to maintain a commitment to networking, given the sizable investment HP made in 3Com. HP has a lot of momentum in that area, but will we see some shifts in strategy under new leadership? Who knows?

It will be important to watch how other key HP executives respond to this scandal. Senior Vice President Marius Haas, general manager of HP Networking, has been widely credited with the rise of HP’s networking business. Above him is Executive Vice President Dave Donatelli, general manager of HP’s Enterprise Servers, Storage and Networking. If either of those guys jump ship, take note.

Also, HP is a public company. When a public company has a leadership shakeup in the midst of a run of success, Wall Street balks. If the stock price stumbles badly, HP’s leadership may be forced to make some short-range scrambling in response.

Historically, the major appeal of the HP ProCurve line was its low total cost of ownership. The lifetime warranty that HP applied to most of the ProCurve products was very straightforward. You buy it, we guarantee the thing will work for as long as you own it and will provide technical support forever. No need for expensive support contracts. I’ve heard from more than one network manager who said they switched from Cisco to HP ProCurve because the lower TCO was too tempting to pass up.

When HP bought 3Com and its young but promising sub-brand of H3C, it was hard to imagine that all of the high end 3Com products would find their way under the umbrella of HP’s lifetime warranty approach. And judging from this chart, that’s exactly the case.

You’ll find that the fixed-configuration H3C switches have been moved into the lifetime warranty program, including the A5810, A5800, A5500, A3600 and A3100 switches (Back in their H3C days, these switches started with the letter “S” rather than “A”).

The modular H3C switches are a different story. The big A12500 and A9500 chassis switches and the smaller A7500 and A5820 modular switches all have one-year warranties, with lifetime software and OS maintenance coverage and one year of free technical support.

The 3Com fixed-configuration switches, such as the E5500, E4800G, E4500G and E4200G are all covered under the lifetime warranty.

It looks like most of the TippingPoint network security products (IPS appliances, gateways and firewalls) will have one-year warranties.

Some folks worried that the old ProCurve lifetime warranty would disappear with the 3Com acquisition. It appears to remain in effect for the most part. It’s just not as broad as it used to be.

Haas said this transformation was aimed at combating the 80:20 conundrum (the familiar notion that IT spends 80% of its time maintaining infrastructure and 20% of its time innovating). The key to fighting this, Haas said, is simplifying infrastructure by consolidating networks, storage and servers into modular packages that can be deployed within data centers. HP has the expertise to deliver it all, Haas argued, especially since HP’s acquisition of 3Com. Haas emphasized that this vision includes an open architecture, but it’s an open architecture that can be all HP.

This begs the question: Do you want to get all of your infrastructure from the same vendor? Many IT organizations are hesitant to depend on one vendor for everything. They don’t want to get locked into one technology and get held hostage by their incumbent vendors.  Forget about getting servers, storage and networks from the same vendors. Some network managers like to have more than one networking vendor in their environment. They might pay premium for high end switches in their core, but go with a cheaper vendor at top of rack.

Cisco Systems has articulated a similar modular vision as it has expanded into servers with its Unified Computing System. Basically, you can buy a package of servers, LAN and SAN technology all from Cisco and plug it into your data center.

Obviously HP and Cisco have both decided to claim a larger individual footprint in each of their customers’ data centers. They’ve been moving in this direction for a couple years now. The question is, will customers want to let a big vendor like Cisco and HP to own so much of their infrastructure?

Wall Street has been displeased with Brocade’s Foundry results so far. As Munjal Shah, analyst with Jefferies and Stifel Nicolaus told the Wall Street Journal:

Brocade is facing challenges in integrating the Ethernet [business] as the sales model is different and Ethernet [original equipment manufacturers sales] are slow to materialize. Brocade has solid position in data center and relative valuation is low, but we believe it will take some time to resolve the execution issues.

Brocade has responded by appointing John McHugh as its new chief marketing officer. McHugh is a veteran of HP, where he is credited with starting up the ProCurve division. More recently McHugh was the head of Nortel’s enterprise solutions business. No surprise that he’s jumping ship after the Avaya acquisition. Burnishing the Foundry business appears to be a nice challenge for him.

Marks says Brocade also got away from what made Foundry a modest success in a crowded networking market: good support from sales engineers. Brocade tried to monetize those resources by turning what used to be free support into professional services. This alienated existing customers, apparently. Now Marks says he’s hearing from internal sources that Brocade is going back to the old Foundry approach, which should help it win over some new customers and perhaps retain some existing ones.

This is driving a lot of revenue growth, but some vendors are reaping the benefits more than others.  I asked dell’Oro analyst Loren Shalinsky for detials.

Cisco remains number one in the market by a huge margin, Shalinsky said. But Cisco did not have a good quarter. Its wireless LAN market share shrank by about four points he said, and revenue was down for the quarter (Shalinsky didn’t say by how much).

Motorola had an awesome quarter, growing by 40% sequentially from the third quarter, he said. The growth spurt nearly helped it overtake Aruba Networks as the number two vendor for enterprise wireless LAN. Aruba’s revenue grew by 7% in the same period. Shalinsky said total product revenue for the fourth quarter was $42 million for Aruba and $40.5 million for Motorola. Of course, Aruba would point out that it is also selling quite a few products through it’s OEM relationship with Alcatel-Lucent, which saw its revenue grow by 30%. Alcatel actually overtook Meru Networks in market share and claimed the number five position. (HP ProCurve is holding steady at number 4).

Bits quotes IDC’s chief analyst Frank Gens:

Networking, Mr. Gens says, is increasingly part of the package of capabilities the largest technology companies must offer corporate clients. He points to Hewlett-Packard’s recent purchase of 3Com and Cisco’s partnership with EMC as evidence of the trend.

“If you are going to be in the hardware systems business,” Mr. Gens says, “you need network competence.”

This year IBM has stepped up its networking business, first with an announcement in April of a broad OEM agreement to sell IBM-branded Brocade Ethernet products. Then a few months later IBM announced an expansion of that deal with Brocade and added Juniper and Cisco switches to its OEM offerings.

In IDC’s prediction document (which you can download for free), IDC admits that the IBM-Juniper prediction is, in basketball terms a “3-point shot.” But IDC says this prediction is driven by the “growing importance of in the IT world – especially with the emergence of cloud computing and the explosion of mobile devices” which are driving the convergence and integration of the network with computing and storage systems.

A purchase of Juniper seems like a logical step for IBM, if it wants to buy its way back into the networking business whole-hog. Although Juniper is probably best known as a service provider equipment vendor, it has made big strides with its enterprise Ethernet switching and data center networking business over the last year or so. IBM would certainly see the Juniper acquisition primarily as an opportunity to add data center networking into its overall product portfolio.

A IBM-Juniper merger would open the door to a huge three-way data center war among IBM, Cisco and HP. All three would offer soup-to-nuts technology for the data center. Buyers of networking gear would suddenly have three monstrous companies to choose from and companies like Brocade, Force10 and Extreme would be bigger underdogs than ever before.

Cisco’s leap into the server market seems to have some investors rattled. The profit margins on servers are so much lower than on some of Cisco’s core markets (switches and routers). As BusinessWeek quoted one investor who questioned Cisco CEO John Chambers at Cisco’s annual meeting earlier this month: “At what size does Cisco become so big and diverse that its growth and profitability will plateau?” Chambers’ answer: hopefully after he retires.

Analysts and investors are wringing their hands over whether Cisco can remain nimble as it expands into new markets and burns its longstanding partnerships with server vendors like HP, Dell and IBM. BusinessWeek points out that HP’s aggressive expansion into the networking market is in part a response to Cisco’s moves in the server market. However, among the comments on the BusinessWeek story, someone named “CS” disagreed that Cisco fired the first shot. “HP has been (unsuccessfully) targeting Cisco’s core market for years with ProCurve. Was Chambers expected to sit idle while one of his largest partners openly attempts to undermine him?”

I’m not quite convinced that ProCurve has been targeting Cisco’s “core” market for years. ProCurve greatest success has been in selling edge switches to the midsized enterprise market. Does that sound like Cisco’s core market? Prior to acquiring 3Com, did ProCurve have any core routers on the market? Did it have any switches that could creditably compete against the Catalyst 6500 or any of the new Nexus switches?

So who started this food fight? Once the fight has begun, does it really matter? No. It only matters who wins or loses.  Arguing over whether it was Chambers or HP CEO Mark Hurd who tossed the first plate seems like idle gossip.

Right now the winner looks to be enterprise customers. As Cisco expands and innovates, data center buyers have a new high-end server vendor to consider. And as HP integrates 3Com and H3C into its existing ProCurve division, enterprises networking buyers will find they have a truly viable alternative to Cisco to consider. Choice is always a good thing. And increased competition between vendors doesn’t hurt, either.

3Com controls 32% of the Chinese networking market (with $700 million in revenue) and has held Cisco at a dead heat there – something no other networking company has been able to do in other markets. If the acquisition goes through, HP would have a tighter grasp on that market – and a more complete portfolio with which to battle Cisco globally.

“I think this is 75% about geographic market acquisition (in China in particular) and 25% about product acquisition,” said Robert Whiteley, a Forrester Research director.

On the technology front, HP’s ProCurve chief Marius Haas said the acquisition would give HP an “edge-to-data-center core” portfolio and he promised barely any overlap between the two product lines.

That, in fact, won’t likely be the case since both have extensive and similar switching lines.

A more likely scenario is that HP – which has the most successful edge switch in terms of sales – will scrap its own core switching line, replacing it with 3Com’s H3C product.

“ProCurve built its own core switch a few years back, but it wasn’t gaining a lot of traction. With 3Com they get a much more scalable switch that is a better fit for high-end datacenter and cloud networking initiatives,” Whiteley said.

3Com will also bring a router story to the table.

“ProCurve never really had routers, so the H3C assets will help here again. I don’t think this is as big a deal, since the majority of enterprise refresh is on L3 switches, which are more relevant in the datacenter, and where Cisco doesn’t have quite the stranglehold it does on router,” Whiteley said.

The companies would not say Wednesday which, if either, of the ProCurve or 3Com H3C labels would be shuttered. Either way, the core and edge networking components would obviously be coupled with HP’s data center servers, giving Cisco a run for its money on that front too.

The two companies also swung at Juniper Networks, which consistently sells its components on being more economically efficient in operating costs because they run on one joint operating system – JUNOS. 3Com’s components were also engineered in-house and therefore share one operating system, said 3Com President and COO Ron Sege said, adding that the motto on the OS is, “Learn once and support many.”

In the same breath, Sege also promised that 3Com and HP together would provide networking equipment that wouldn’t be proprietary like Cisco’s causing vendor lock-in. It’s difficult, however, to sell a portfolio on having a joint OS if users aren’t being asked to buy into a one-vendor system.

3Com also brings its Tipping Point security line to the table, which brings HP in line with Cisco and Juniper on that front.

The acquisition is pending regulatory review.