Cisco: Hitting The Next Tipping Point?

| About: Cisco Systems, (CSCO)

Software defined networking, or SDN, is the latest buzz in networking operations after virtualization, cloud, and mobility. It is gaining momentum because of its ability to decouple network logic and policies from the underlying network, resulting in security, scalability, and control in the network.

Seeing the potential in SDN, Cisco (CSCO) has opened its business model to software and services via SDN. Cisco's SDN will turn the high-end control features in switches and routers into software that can run on cheap hardware. Investing in SDN will not cause any long-term harm to Cisco's hardware sales as, without routers and switches, it's impossible to build a SDN. Cisco sees SDN as an opportunity to unlock the value of $180 billion worth of its installed hardware and to double its software revenue in next five years by developing application programming interface, or APIs. These APIs will work for network programmability. Cisco's SDN ties virtualized services to hardware across the access networks, clouds, and wide area networks. As a result, end users will be able to virtualize services and find the physical links used to deliver the service.

Unlike Cisco, virtualized service from VMware (NYSE:VMW) doesn't have this tie into the physical layer across the entire network. Cisco's One Platform Kit, or onePK, was the largest step towards SDN. It provides a strong API library, allowing users to build applications and services for their network requirements. It's an easy-to-use toolkit that facilitates software developers to reach, extend, or customize the broad set of software functions provided by Cisco routers and switches. It also gives the control needed to keep the network system secure. It operates across Cisco's operating systems (IOS and NX-OS) and is currently in beta testing with 50 customers. Moreover, Cisco management has made it clear that SDN will drive router and switch sales and hence there will be no cannibalization. With the help of high-performance, application-specific integrated circuits, or ASICs, Cisco's hardware will perform better in the onePK platform compared with slower, lower quality non-Cisco hardware.

Though the first phase of SDN is still in its beta trail, Cisco has moved towards the second phase of its SDN strategy, by providing SDN solutions using open standards that work across its hardware as well as in heterogeneous environments. Cisco's contribution in the OpenDaylight project is a step towards the second phase of SDN. In this ecosystem, it offers open APIs to provide network information like jitters, delays, and workloads to application providers, which will help them to improve the applications in return. For instance -- think of video content pushed to a cell phone on demand. Cisco's solution would guarantee quality, catch the content in the cloud, and then provide guaranteed bandwidth throughout the network. This kind of service could not be provided via solutions that exclusively focus on the virtual domain, like VMware and HP.

Peers embracing SDN

VMware acquired SDN vendor Nicira, the leading vendor behind Open vSwitch technology, which provides an SDN virtual switch. VMware gives SDN solutions for any cloud environment and on any hypervisor in the enterprise with service providers. Though VMware was Cisco's important partner in the past, it is no longer a relevant company to Cisco. In SDN, VMware is just a hypervisor provider, while Cisco is focused on linking physical networks with the software overlays via API, and this makes Cisco SDN ahead of VMware SDN. To challenge Cisco in SDN, Hewlett-Packard (NYSE:HPQ) also unveiled its SDN FlexFabric architecture, which is designed to make networks simpler, scalable, and automated.

The new FlexFabric virtual switch 5900v software, in union with the HP FlexFabric 5900 physical switch, will deliver advanced network functionalities like policies and quality of service to a VMware network. In addition, FlexFabric architecture also consists of a virtualized services router, which will allow services to be delivered on a virtual machine, removing needless hardware, by leveraging a carrier-class, software-based network function virtualization. The FlexFabric products strengthen HP's SDN portfolio, which also consists of virtual application networks that it introduced last year. According to IDC forecast, the SDN market will be worth $360 million in 2013, and by 2016 it will grow to $3.7 billion. As a result Cisco, HP, and VMware will get additional benefits in revenue from SDN in coming years.

OpenDaylight project

In order to further accelerate network innovation and performance, network giants Big Switch Networks, Brocade, Cisco, Citrix, Ericsson, IBM, Juniper Networks, Microsoft, NEC, Red Hat, and VMware led a community initiative with the OpenDaylight project, to foster an open SDN ecosystem and drive adoption of SDN technologies across enterprises and service providers. Cisco is the key player in this project and has already contributed a service application layer and an application framework from its Open Network Environment, or ONE, controller, which facilitate application-centric and intelligent networking by giving programmability in software, hardware, and ASICs. Cisco has a competitive advantage in this project due to its extensive portfolio and large installation base. On the contrary, other network goliaths like Arista, Big Switch, Brocade, Citrix, and Dell are focused on selling hypervisors that are a part of the analytics essential to get a full view of the physical network resources with no ties to the physical underlay. Whereas Cisco is the only vendor offering a SDN platform delivering on this hardware level visibility, which is very useful for service providers to meet minimum quality of service.

To sum up

Though SDN initiatives are still in infant stages, there is a huge potential for the OpenDaylight project and SDN to drive network innovation, which may bring compelling software and service opportunities for Cisco, HP, and VMware that will clinch the trend over the time. The rising demand for network security and high scalability will further spur the need of SDN in years to come. Being a leader in SDN, I advocate Cisco's stock for long-term growth, followed by VMware and Hewlett-Packard.

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.