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Cisco (NASDAQ:CSCO) recently sends Wall Street two clear messages, according to SearchSDN: "SDN will not cannibalize our hardware business" and "VMware (NYSE:VMW) will not eat our network virtualization lunch."

Cisco's SDN (software-defined networking) strategy, better known as Cisco Open Network Environment (Cisco ONE), is still more vision than products. Cisco isn't giving customers SDN as such. It's a wait and watch game for Cisco as of now. But for investors Cisco's SDN initiative is huge. It is designed to unlock the value of $180 billion worth of installed Cisco hardware.

What is SDN?

SDN is the way of virtualization of networking devices, which essentially helps access networks smoothly and cheaply. SDN can be explicitly defined. There are three basic architectural layers to an SDN network:

  1. Physical Network: It's the lowest layer that consists of the physical devices like routers and switches, Cisco's bread and butter.
  2. SDN Applications: It's the most visible layer that includes switch/network virtualization, firewalls and flow balancers.
  3. SDN Controller: It's the middleware that integrates all the physical and virtual devices in the network.

The physical networks still matter to Cisco: For Cisco, the physical networks are even more important today, says Dave Ward, Cisco's CTO of Engineering. Every virtual network layer lies on top of the physical network layer, as explained above, which is the foundation of an entire SDN. Nobody knows better than Cisco that without its routers and switches, it's impossible to build a software-defined network. So it makes perfect sense for Cisco to capitalize on its existing hardware business to profit from SDN.

Cisco's SDN Strategy: It's Hardware in Disguise

Cisco introduced onePK, its new API and SDK that runs on all of Cisco's major operating systems: IOS, IOS-XR and NX-OS. Leveraging onePK, customers or third-party developers can write their own SDN applications. This will enable them to access all of Cisco's switching and routing platforms.

Cisco has 710 unique onePK APIs to enable programming. The company has no plans to offer software-only licensing for its operating systems. Cisco President of Development and Sales Rob Lloyd said, "The separation of IOS or any of our operating systems from hardware doesn't work because in the hardware you have specific hooks into the ASICs."

Cisco will simplify software licensing. "Our collaboration portfolio includes WebEx, call control, Telepresence, Jabber. There are separate licensing mechanisms that exist for those," Lloyd said. "They should be combined. We have a roadmap that will simplify the way [customers] buy collaboration. Simplification in that area is job one. We're creating an enterprise software licensing program for collaboration, and we will expand that to other software and services."

VXLAN, an emerging technology, is an integral part of Cisco's SDN strategy, apart from its own hardware. It is the brainchild of Cisco, VMware, Red Hat and other industry leaders to enable Layer 2 connectivity over a Layer 2 domain. With VXLAN, Cisco's Nexus 1000v virtual switches are gaining traction in the marketplace.

VMware can't Compete with Cisco's SDN Initiative

VMware's acquisition of Nicira, a key player in SDN, will have no significant long-term negative implications for Cisco. As I said above, Cisco's clever strategy to link the physical network with the software overlay via onePK will make Cisco the undisputed leader in the SDN game. On top of that, Cisco's acquisition of Cariden will help Cisco tighten the link.

Although VMware was Cisco's valued partner in the past, the company doesn't appear relevant anymore to Cisco. Cisco is now partnering with Red Hat (NYSE:RHT) and IBM (NYSE:IBM), apart from a growing relationship with Citrix (NASDAQ:CTXS). VMware is just another hypervisor provider. Dave Ward said, "We don't sell hypervisors. We want to work with all of them. The hypervisor can sniff out what's happening on the network."

Conclusion

Cisco reported in February that its earnings grew 44% during the second fiscal quarter. Cisco brought in $12.1 billion in revenue, a 5% year-over-year increase. CEO John Chambers said, "So I like our cards, I like how we're positioned and we don't miss market transitions." Given Cisco's competitive advantage in SDN, the stock appears dirt cheap for long-term investors.

Source: With SDN, Cisco Will Unlock Value Of Installed Hardware Worth $180 Billion