Mellanox and QLogic Play Duopoly

On Monday, Mellanox said it will buy Voltaire for $8.75 per share, or about $218 million. Excluding Voltaire's cash, Mellanox is getting the company for about $176 million. The $200 million per year InfiniBand networking market is now a duopoly between Mellanox and QLogic, the two suppliers which design their own adapter and switch chips.

The deal ensures the survival of Voltaire-branded products. According to Adam Zagorski, VP of Forecasting at IT Brand Pulse, Voltaire earned a leading 38% share of the InfiniBand switch market in Q3 of 2010. However, I believe Voltaire was destined to be acquired because they were unprofitable, with no relief to the bleeding in sight. They were unprofitable because their product costs were too high. And their product costs were too high because they sourced InfiniBand switch chips from their unsympathetic competitor, Mellanox. Their options for achieving lower product costs were to design their own chips, or get acquired by chip providers QLogic or Mellanox.

This acquisition also marks a change in Mellanox’s strategy. Until now Mellanox was straddling the fence on the Voltaire relationship. They were supplying the dominant switch supplier with chips, but strangling them at the same time with high chip prices, all while they marketed their own switch line. Mr. Zagorski said Mellanox carved out 18% of switch market share in Q3 of 2010. But it appears they came to the realization they need Voltaire’s software, sales and marketing to ensure they dominate the InfiniBand switch segment, just as they dominate the InfiniBand LOM and HCA segment. After the acquisition, the new Mellanox will start business with a dominant 56% switch market share.

QLogic garnered 14% of the InfiniBand host channel adapter market, and 27% of the InfiniBand switch market, in Q3 of 2010. Given that industry pioneer Mellanox now owns the leading technology, software, sales and marketing machines for InfiniBand host channel adapters and switches, the company is well positioned to fend off challenges from QLogic, a company focused on their Fibre Channel host bus adapter duopoly game versus Emulex.

Qlogic’s position was underscored in a Cannacord|Genuity Flash Update where Paul Mansky said, “QLogic currently has ~20% of the IB market and has pointed to OEM share gain as a future catalyst. Mellanox counts HP, Dell and IBM as major customers, and Oracle recently acquired 10% of the company in the open market. Voltaire’s key customers are HP and IBM (33% of sales). With this transaction, Mellanox takes a big step toward the 80/20 rule upper hand, thereby materially challenging QLogic’s future IB market share potential.”


posted by: Frank Berry