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HP vs. Cisco hardware battle yields deep discounts for IT shops

As Hewlett-Packard and Cisco duke it out for new data center deals, IT shops get fire-sale prices on high-end hardware. Now, how much would you pay?

An epic battle between Hewlett-Packard and Cisco Systems for hardware sales is resulting in huge price cuts for...

smart data center pros.

Big IT shops are seeing unprecedented discounts on Hewlett-Packard Co. or Cisco Systems Inc. data center hardware, according to several IT sources.

“Three years ago, Cisco’s discount was typically around 42% … that has now become kind of the list price. Cisco’s [Unified Computing System] stuff is now often 70 to 75% off,” said a large Cisco and HP reseller.

HP offers similar discount levels in accounts in areas where Cisco competes. “Neither side will let price get in the way of a big deal,” he said.

A veteran IT consultant in the Midwest who works with customers of both companies confirmed these figures. “I’ve never seen anything like it. For really big customers, John Chambers is making many of these calls himself,” the consultant said, referring to Cisco’s CEO. He said he didn’t know if HP CEO Leo Apotheker has made similar sales calls, but added that he probably has given this hyper-competitive climate.

“This is war,” he said.

Neither vendor’s representatives returned calls requesting comment, but other sources confirmed the basic numbers. Two years ago, the end-user discount range for both vendors was 45% to 50%, but large accounts now easily get 65% to 75% off orders where a competitive bid is involved, said a Chicago area IT pro. But, he cautioned, “It has to be a very big order.”

He recalled a couple of direct bake-off situations between HP and Cisco for integrated data center infrastructure. Each deal was worth about $50 million list and the winning vendor got less than $15,000 profit on the hardware sale. Talk about razor-thin margin!

Bart Falzarano, CISO for Walz Co. in Temecula Calif., witnessed this vendor-versus-vendor competition firsthand.

When HP got wind that Walz was looking at Cisco UCS, “they definitely redoubled their efforts with respect to pricing,” he said. And Cisco was very competitive coming back. 

Price was thus not much of a differentiator in this case and Falzarano ended up replacing HP ProLiant rack-mount servers with a UCS environment.

 It’s 75% off. Now how much would you pay?
What may be truly scary from a vendor (and Wall Street) perspective is that this price war may only be just the beginning as HP and Cisco try to prove their relevance in the cloud.

Most of the big cloud players rely on commodity (a.k.a. “cheap” hardware),  not high-end Cisco UCS, HP or Oracle Exadata “appliances” that meld servers, storage and networking. All of those vendors need to show that their pricier boxes can do more and better than all those yoked-together Dell or white box servers.

Thus, the Chicago IT pro said the discounting will get nuttier as HP and Cisco try win over large hosting, outsourcing or cloud infrastructure accounts. Some of those buyers expect discounts of up to 90% off hardware list price, he said.

This is not the kind of news Wall Street wants to hear. Cisco and HP shares are already pressured by thinning margins.

Cisco UCS led to hardware war with HP
HP and Cisco were once the picture of IT vendor “co-opetition.” Cisco owned the networking router market and HP led in data center servers and also offered ProCurve networking, but at the “wiring closet,” or edge of the data center.

Many customers bought gear from HP and Cisco from resellers affiliated with both vendors. It was a mutually beneficial relationship.  

Cisco also bought a lot of HP gear while HP resold a lot of Cisco hardware. “HP did a billion dollars worth of Cisco business,” said a large Texas-based integrator who works with both vendors. “They were a huge part of each other’s ecosystem.”

Then, in March 2009, Cisco decided to get into the server business with UCS.

“Cisco threw the first punch [with UCS] and Hurd wasn’t going to take that,” said the VAR, referring to HP’s then-CEO Mark Hurd.

Suddenly, two companies that had participated in a mutually beneficial relationship were sworn enemies. “They each cut off their own nose to spite their face,” said the Texas integrator.

HP tried to displace Cisco routers and Cisco pitched UCS to replace HP servers as they tried to invade each other’s data center turf. HP bought 3Com to bolster its core data center networking lineup.

It’s been a battle for data center customers on every level since then. HP is also increasingly preoccupied with Oracle, another former ally, since Oracle got into the hardware business via its acquisition of Sun Microsystems.

While this bloodbath undoubtedly hurts both vendors, IT pros who parlay the HP-Cisco strife to their advantage can continue to reap price benefits.

Alex Barrett, executive editor, contributed to this report.

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