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.
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.)
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.