Cisco Systems is planning a big move into the server space, threatening to chip away at the market-leading status enjoyed by Hewlett-Packard, Dell and IBM in the $50 billion server market, The New York Times reports.

Cisco’s first server, expected in the next few months, will cater only to virtualized applications, and will feature sophisticated software from VMware, of which Cisco owns a 2 percent stake, according to analysts.

For years, Cisco has dominated the networking market, making nearly $40 billion a year in revenue mostly from such products as routers and switches.

Cisco has traditionally complemented other hardware vendors, including Hewlett-Packard, IBM and Dell, that specialize in servers, personal computers and storage solutions.

Recently, however, virtualization technology has disrupted a historically staid market, and has opened up new avenues for companies such as Cisco and virtualization pioneer VMware to allow for a completely new vision for companies’ data centers.

In a recent interview with Channel Insider, Cisco’s director of operations, Danny Trevett, says virtualization is the linchpin of Cisco’s strategy going forward, and the networking giant had "aggressive plans" to increase customers' investments in the technology.

“Virtualization can allow companies to get a lot more ROI out of the infrastructure and investments they’ve already got,” he said, and also provide technology tie-ins to data center, WAN and wireless technologies as well as security.

Solution providers ranked virtualization software as the second most exciting technology for 2009 in the recent Channel Insider Market Pulse survey.

With customers looking to manage their data centers as a single entity rather than spread across separate units, the fight for customers’ data center dollars is heating up, especially as customers increasingly use the technology to create efficiencies and cut physical and personnel costs.

In December, Cisco’s Doug Gourlay, director of Data Center solution marketing for Cisco, told Channel Insider the networking giant was focused on a long-term "unified fabric" theory for bringing together customers’ existing infrastructure, networking and data center technologies. The goal, Gourlay said, was to imitate Cisco’s “The Network is the Platform” strategy for consolidating disparate networks.

“We’ve taken storage networks and server networks and pulled them together into a unified fabric. Then we made the network virtual-machine aware. So now we have to bring all those together into a unified compute platform,” Gourlay says.

Gary Middleton, director of performance optimization and data center networking at Cisco Gold partner Dimension Data, said in December that virtualization had changed the way his customers saw their data centers.

The explosion of virtualization will help accelerate adoption of a unified fabric approach, he says, as expanding virtualization capabilities impacts customers’ networks and performance.

“A lot of clients don’t realize that the network has to be a fundamental part of any data center implementation because of the additional traffic that’s going into and out of the data center,” says Middleton.

Cisco could unveil the first of its new server systems as early as March, according to The New York Times report, though no mention was made of exact product specifications.

Industry experts say that Cisco’s push into the highly competitive server market could be the first shot fired in an all-out war among server hardware providers, and suggest that former allies such as IBM and HP could respond by hastening development of competing products or allying themselves with Cisco rivals such as Juniper Networks.

Channel Insider sources say Cisco’s push into the server market could also rekindle its interest in the storage hardware market and acquisition a storage server manufacturer, such as NetApp or Sun Microsystems’ storage division.