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Cisco & VMware Are Apple & Google of SDN

Mitch Wagner
4/14/2014
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Cisco and VMware can both come out as winners in the transition to SDN, following the lead of Apple and Google in the smartphone market, according to a report from Goldman Sachs.

Cisco Systems Inc. (Nasdaq: CSCO) plays the role of Apple Inc. (Nasdaq: AAPL) in the SDN arena, while VMware Inc. (NYSE: VMW) parallels Google (Nasdaq: GOOG), according to the report, authored by Simona Jankowski, Kent Schofield, Justin Jordan, and Doug Clark.

    Many investors appear to have assumed a "zero sum game" or "winner take all" outcome in SDN, pitting Cisco against VMware in this perceived battle. Instead, we believe both can benefit as platform leaders in the emerging market for networking software (both infrastructure software and applications). Indeed, we believe SDN fundamentally changes networking from a "box" business to a platform business, similar to what happened in the handset to smartphone transition. In that analogy, both Apple and Google emerged as big beneficiaries from the emerging smartphone platform market, rather than being zero-sum competitors -- and it was the traditional handset vendors who didn't capture the transition that lost.

Cisco's Application Centric Infrastructure (ACI) is like the iPhone in that it's vertically integrated, relying on Cisco's own ASICs, hardware, and operating system. Like Apple, Cisco keeps tight control of its ecosystem. (See What Cisco Wants in a Carrier Partner, Cisco's ACI Gets Physical With SDN, and Cisco Asks the Killer SDN Question.)

VMWare NSX, like Android, takes a horizontal approach, and runs on a wide variety of hardware. Goldman expects NSX to be most successful among the 50% of the switching market, measured by ports, that doesn't run Cisco, but instead runs HP Inc. (NYSE: HPQ), Juniper Networks Inc. (NYSE: JNPR), Brocade Communications Systems Inc. (Nasdaq: BRCD), Dell Technologies (Nasdaq: DELL), Arista Networks Inc. , and other hardware vendors. Those vendors are already technology partners for NSX.

The SDN market has shifted from hype to value creation -- and contrary to common wisdom, SDN will create more value for vendors than it destroys.

    While the market has been singularly focused on the risk to networking vendors’ margins and market share, what has been lost is that SDN is transforming networking from a "box" to a "platform" business, which will create significant value for 2 categories of companies: (1) the SDN platform vendors and (2) the new SDN application vendors. While it is too early to assess winners and losers in the second category, in the first category two vendors have broken out from the pack with strong products and solid emerging ecosystems: Cisco (with a network-centric platform, ACI) and VMware (with a hypervisor-centric platform, NSX).

But SDN will make life tough for device vendors such as Brocade and Juniper, Goldman says.

Creative Destruction: SDN Creates More Value Than It Destroys

The software infrastructure market, including Cisco ACI, VMware NSX, as well as network operating systems from vendors such as Cumulus, will be $1.3 billion by 2018, Goldman says.

Goldman echoes an observation that's central to the SDN vision: Networking is stuck in a decade-old paradigm built around integrated hardware and software boxes that are configured manually and don't scale. The rest of the industry has long since moved past that model.

    The market has correctly inferred that SDN will lead to a similar upheaval in the $50 billion networking equipment market as what server virtualization did in the $50 billion server market a decade ago...

Goldman's vision with regard to Cisco is contrary to many observers' theory that Cisco's business model is tied to hardware sales, and SDN has the potential to burn that business down. By that thinking, Cisco depends on the sale of expensive hardware, and SDN has the potential to replace that hardware with cheap whitebox switches. Cisco CEO John Chambers asked his top executives what would happen if Cisco plunged into the SDN market, a source told Business Insider, which adds: "They concluded it would turn Cisco's '$43 billion business into a $22 billion business,' our source said." Goldman suggests a different path, one by which Cisco can prosper with SDN. (See Cisco Watchers Blinded by SDN.)

— Mitch Wagner, Circle me on Google+ Follow me on TwitterVisit my LinkedIn profileFollow me on Facebook, West Coast Bureau Chief, Light Reading. Got a tip about SDN or NFV? Send it to mwagner@lightreading.com.


Want to learn more about SDN and the transport network? Check out the agenda for Light Reading's Big Telecom Event (BTE), which will take place on June 17 and 18 at the Sheraton Chicago Hotel and Towers. The event combines the educational power of interactive conference sessions devised and hosted by Heavy Reading's experienced industry analysts with multi-vendor interoperability and proof-of-concept networking and application showcases. For more on the event, the topics, and the stellar service provider speaker lineup, see Telecommunication Luminaries to Discuss the Hottest Industry Trends at Light Reading's Big Telecom Event in June.


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brookseven
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brookseven,
User Rank: Light Sabre
4/15/2014 | 4:01:39 PM
Re: Doubt it
 

You mean the Nokia handset business that was sold to Microsoft?

 

seven

 
Susan Fourtané
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Susan Fourtané,
User Rank: Blogger
4/15/2014 | 11:36:31 AM
Re: Doubt it
sam masud, 

Nokia is still a big brand name in the market and keeps selling well, especially in the developing countries where Nokia has been focusing for some years now.

On the other hand, BlackBerry keeps on trying to stay alive, even though it has been pronounced dead long time ago. 

-Susan
sam masud
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sam masud,
User Rank: Light Sabre
4/15/2014 | 10:33:32 AM
Re: Doubt it
I was thinking more about how both those companies were big brand names in the market at one time (and not so long ago).
Susan Fourtané
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Susan Fourtané,
User Rank: Blogger
4/15/2014 | 4:59:44 AM
Re: Doubt it
sam masud, 

"I keep thinking of Nokia and Blackberry...and how things used to be in the mobile phone business."

I wouldn't put Nokia and BlackBerry in the same bag. Nokia changed strategy and taget market, and sells, BlackBerry doesn't.

-Susan

 
Mitch Wagner
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Mitch Wagner,
User Rank: Lightning
4/14/2014 | 4:54:13 PM
Re: Doubt it
Goldman's argument regarding Cisco is compelling: SDN requires an entire network infrastructure, including services, consulting, and training. Cisco has the scale to deliver that. Small startups do not. 

For one thing, SDN requires a complete realignment and retraining of the IT department, from a hardware focus to software dev focus. 
sam masud
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sam masud,
User Rank: Light Sabre
4/14/2014 | 4:34:08 PM
Re: Doubt it
Mitch,

The reason why I'm not particularly sanguine about Cisco is that in the past Cisco was pretty successful in ensuring that new technology worked to its advantage--e.g. MPLS. But SDN is a sea change from traditional switch/router market, and I don't see Cisco particularly enthusiastic about SDN. At the same time, there are around two dozen vendors or so to whom one can attach the SDN label. In other words, I've not seen  challenges to Cisco's position coming from so many vendors at the same time.

It'll be interesting to see whether Cisco will be a player in AT&T's Supplier Domain 2 procurement--although I'll conceed that a swallow does not a spring make.

 

 

 
Mitch Wagner
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Mitch Wagner,
User Rank: Lightning
4/14/2014 | 3:55:32 PM
Nitpickery
Goldman says the Google/Apple metaphor breaks in that VMWare NSX runs on Cisco hardware, while Android does not run on iPhones.

Goldman is wrong about its metaphor being wrong in that respect (so to speak): While Android itself doesn't run on Apple hardware, Google services (Gmail, Google Maps, Google Calendar, etc.) most definitely do. In that respect, Google is in the enviable position of potentially winning no matter which platform the customer chooses. If the customer chooses Android, Google obviously wins. If the customer chooses the iPhone, Google can STILL win if it can put its services on that iPhone.

In that respect, the VMware/Cisco Google/Apple metaphor still holds up: VMware can still win even if a carrier or enterprise buys Cisco hardware.
Mitch Wagner
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Mitch Wagner,
User Rank: Lightning
4/14/2014 | 3:54:34 PM
Re: Doubt it
sam masud - "I keep thinking of Nokia and Blackberry...and how things used to be in the mobile phone business. Perhaps, there'a lesson (warning?) there for Cisco."

I keep thinking about Microsoft when I think of once-dominant players falling. 

And yet Cisco doesn't seem to be making mistakes. It seems to be keeping up effectively. 
Mitch Wagner
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Mitch Wagner,
User Rank: Lightning
4/14/2014 | 3:53:00 PM
Re: Google
DOSHea - "I think Google might make a strong argument for itself as the "Google of SDN.""

Good point. But Google is using SDN and network virtualization internally and in its own cloud services, not selling it to other companies to build their own networks and clouds. 
Mitch Wagner
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Mitch Wagner,
User Rank: Lightning
4/14/2014 | 3:48:44 PM
Re: Csco VMware
GmBroucek - Glad you liked the piece. I haven't really formulated my thoughts in that sector of the industry. Do you have any ideas?
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