Cisco: Turning The Tables On VMware In The SDN Market

Apr.10.13 | About: Cisco Systems, (CSCO)

This week, the Linux Foundation formally announced the much rumored OpenDaylight Project, an open-source and multi-vendor initiative that basically aims to make the Software Defined Network (SDN) Controller an open-source platform for all technology companies to port developed software applications for the next generation SDN based data center. I believe Cisco (NASDAQ:CSCO) made a very smart strategic move in following IBM's (NYSE:IBM) lead in supporting and pushing forward the OpenDaylight Project. This approach by Cisco will allow it to better leverage their large installed base of networking equipment, give the impression that Cisco is supporting not opposing the migration to SDN and also potentially turning the tables on the competitive actions of VMware (NYSE:VMW) as it tries to use SDN as a way to extract value out of the traditional networking industry.

Brief SDN Background

In a traditional Data Center, the switching/networking layer is comprised of switches from companies like Cisco. These switches bundle from a single vendor the feature applications, control software and data switching fabric all in one product. The promise of SDN is to separate these three components into three distinct layers so that software features and control are no longer bundled with the data switching fabric. The interfaces between these three layers would be standardized and open. In theory, this should allow for a more open environment for feature application development and potentially less cost for pure switching fabrics.

Demonstrate To Enterprise Customers That Cisco Supports An Open-Source Path To SDN

By supporting and being active in pushing OpenDaylight forward, Cisco is basically telling the world that it is in full support of the architectural shift to SDN. Cisco is telling its customers we are not going to fight this disruptive shift in technology, but rather support it. This gives the impression to end user customers that even though Cisco owns a vast majority of the installed base of networking equipment in Data Centers, it is not going to pursue a vendor "lock-in" strategy. This is an important statement, as customers do not want to feel controlled by vendors that have large market share. Customers view SDN as a way to "un-lock" the significant vendor "lock-in" that Cisco has today. By joining and leading the OpenDaylight effort, customers may feel less concerned about Cisco's vendor lock-in strategy in the future. Cisco on the other hand will continue to develop its onePK SDN software development kit that will ultimately lead to software applications that run on top of the OpenDaylight open-source controller. While other companies will also compete in these software applications running on OpenDaylight, an open-source controller will make it less likely a new company can emerge and lead in the controller market. Rather competitors will now need to compete purely in the software applications and switching planes. Since Cisco has such a large installed base of current networking equipment, the path of least resistance for the general enterprise customer may be to continue to buy from Cisco given this "sense of security" around potential vendor lock-in given an open-source controller until SDN is more mature of a technology in the future.

Turning The Tables On VMware

In July of 2012, VMware acquired privately held Nicira, a leading company in the SDN Controller market for about $1.2B. This was an amazing acquisition in that at the time Nicira was likely generating immaterial revenues. The large multiple paid by VMware was reflective of VMware's view of the potential disruption of SDN to the networking industry and specifically the controller being an integral part of this disruption. The impact of this acquisition was felt in the market place as Cisco lost about $5 billion in market capitalization the day after the acquisition was announced. Prior to the Nicira acquisition, VMware was already trying to disrupt the networking market through its vSwitch, which provided a software-based switch for Virtual Machines (VMs). With Cisco's endorsement and support of OpenDaylight this week, combined with its huge installed base of networking equipment, Cisco is basically trying to turn the tables on VMware. Cisco in my view is attempting to "commoditize" the controller by making it open source and reduce the potential of VMware being a new disruptive force as the networking market migrates towards a virtualization model using SDN as the architecture.

Obviously, the OpenDaylight Project needs to deliver on its promise of being open-source and competitive vs. stand-alone controller efforts from companies like VMware, private company Big Switch and others. But in the meantime, Cisco is clearly trying to change the game and turn the tables on an emerging competitor VMW.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. NT Advisors LLC is a consulting firm for the technology, private equity and venture capital industries.