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Brocade Bags Rhapsody Networks

In yet another demonstration that the data storage sector is an arms race in which major factions are snapping up startups to bolster their offerings, Brocade Communications Systems late Tuesday snapped up rival Rhapsody Networks for $175 million in stock.

Privately-held, Fremont, Calif.-based Rhapsody Networks and San Jose, Calif.'s Brocade are makers of storage fabric switches -- devices that route a path or circuit for sending data to its next destination.

Seen as complementary to Brocade, Rhapsody Networks' products will bolster Brocade's already stocked armory of fabric switch products as it attempts to offer an open platform for fabric applications. Rhapsody's products support multiple protocols, including Fibre Channel and IP , and is accessed through an open API. The API will be integrated with the Brocade Fabric Access API for the development of storage and data management applications.

With Rhapsody Networks under its belt, Brocade expects to create a new class of fabric application switches, which will be interoperable with its flagship Brocade SilkWorm family of Fibre Channel fabric switches.

Brocade will then work with leading OEM and application partners to create fabric applications, including fabric-based volume management, fabric-based data replication, and fabric-based data management. Brocade hopes the first fabric applications based on these platforms will be available from some OEMs by the end of calendar year 2003.

IDC analyst Rick Villars told internetnews.com he saw the acquisition as something Brocade's OEMs probably wanted within a certain time frame.

"Brocade decided the best thing to do was to go ahead and buy a company that could embed the virtualization capabilities into a network storage controller," Villars said. "Rhapsody already has a presence in doing this, so they're saving themselves some time."

Enterprise Storage Group analyst Nancy Marrone said about the only thing surprising about the purchase is the timing.

"We expected they might hold off a bit and watch how well the newer intelligent platforms were received, however it is a positive move for them to do this now so they don't fall behind the competition," Marrone told internetnews.com. "From a market perspective, Brocade looked to be falling behind on the advanced technology front. They needed both the ability to support multiple protocols and to provide a platform for enabling storage services (such as virtualization, replication etc). Rhapsody has those capabilities, so obviously Brocade made the buy vs. make decision."

Brocade's goal is aligned with most storage providers, who are trying to simplify the management of heterogeneous storage environments. The larger companies are well aware of the importance of hooking the smaller fish in the storage sector, where the attitude is trump or be trumped.

In September, Sun Microsystems bought Pirus Networks -- another switchmaker -- for an undisclosed amount of stock. Cisco Systems made a huge play for Andiamo Systems in August, shelling out about $2 billion for that switchmaker.

Competition is fierce, no doubt, and Brocade's purchase of Rhapsosdy could irritate matters, according to a report from Webmergers.com, which predicted its purchase by Brocade or EMC in October.

"There is a danger that it will upset its core storage partners by moving into competition with them," the report said. "All the major storage vendors have OEM deals with the company, and if Brocade upsets them, they will be more likely to turn instead to Cisco. But Brocade's current market dominance makes it hard to ignore."

Indeed, as the leading fabric switchmalker for Fibre Channel SANs, Brocade seems poised to take such a chance.

As for terms of the deal, Brocade will acquire all outstanding shares of Rhapsody in exchange for 23.4 million shares of Brocade common stock, equivalent to roughly 10 percent of outstanding common stock as of November 5, 2002.

Brocade expects the transaction to close in January 2003.