After attending the Software Defined Networking (SDN) conference called ONS this week, it continues to be clear that Enterprise, Data Center and Service Provider end user customers of traditional networking equipment from companies like Cisco (NASDAQ:CSCO), Brocade (NASDAQ:BRCD), F5 (NASDAQ:FFIV), Palo Alto (NYSE:PANW) etc. view SDN as a renaissance of networking that will drive innovation and reduce cost and complexity in their networks. On the other hand, when I listen to these end users speak about their initial SDN use cases and trials, they tend not to use much networking equipment from traditional networking vendors. One could easily infer from these initial use cases that SDN will be a renaissance for the end users, but a potential epitaph for traditional networking suppliers. While the SDN market is very embryonic, which makes answering the question above difficult at this time, SDN is likely to cause some type of disruption in the next three years. The "overhang" of SDN has and will likely continue to impact valuations of networking companies until there is more clarity on the ultimate impact of SDN.
Two use cases that struck home the potential disruption SDN offers were from Goldman Sachs and Google. Goldman Sachs talked about how it wrote its own basic firewall security application in their SDN trial. While it is likely this security application was not fully featured like a traditional firewall security appliance in the enterprise, the point is that Goldman Sachs was able to replicate enough of the basic security application through its own software development. Google discussed an application where it wrote its own load balancing code and developed its own Ethernet Switch using merchant silicon. Once again, load balancers and Ethernet Switches were not purchased from traditional networking companies, but rather developed by Google on its own.
Coincidentally, we have recently seen networking companies in the security market like Fortinet (NASDAQ:FTNT) and in the load balancing and application delivery controller market like Radware (NASDAQ:RDWR) and F5 miss 1Q13 Wall Street Estimates. It is a stretch at this point to say that these companies missed estimates due to a shift to SDN. But, it is fair to say that leading Web2.0 companies like Google (NASDAQ:GOOG) and Facebook (NASDAQ:FB) are already implementing some basic Layer 4-7 functionality in their networks on their own using the SDN construct, and large financial institutions like Goldman Sachs are trialing some internally-developed Layer 4-7 functionality. The more we hear about end users actually writing their own code for basic networking functionality in an SDN environment, and networking companies showing slowing or weak growth, the market has and will likely continue to discount lower valuations for such companies.
Disclosure: I am long GOOG, FB. 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.
Additional disclosure: NT Advisors LLC is a consulting firm that services the technology, private equity and venture capital industries.