It makes a lot of sense. Some of Cisco's recent products, the ASA comes to mind, are essentially x86 servers to begin with. Also, while the VMWare Infrastructure client is pretty handy, an IOS-like virtual machine management console would be a real win for us command line aficionados.
I honestly cannot imagine why someone would want to get into the x86 server market. It's a brutal race to the bottom. The only way to make money here is as a systems integrator.
It would be good to see some more competition here. Sun, Dell, HP, IBM, they each have interesting strengths. But Cisco does have a chance to shake things up.
