Cisco (NASDAQ:CSCO) is going to formally announce the much-anticipated Nexus 9000 data center application centric infrastructure product from its spin-in company Insieme on November 6th in NY. Network World Magazine has provided some good articles on the technical aspects of this product over the past few months. Cisco provided a few more clues on this product at the Interop NY trade show this past week in a keynote presentation by CEO John Chambers and a technical presentation from Frank D'Agostino, Senior Director, Technical Marketing and Solutions Engineering at Insieme Networks. While the technical/vision goal of Insieme is to foster the age of Application Centric Infrastructure in the data center, my assessment from the Interop show is Cisco has at least three business strategic objectives in this company/product launch:
- - Attack Nicira/VMware's (NYSE:VMW) pure software approach to Network Virtualization via a converged hardware/software approach to be delivered by Insieme's Application Centric Infrastructure solution
- - Attack lower cost and "White Box" data center Ethernet switches potentially enabled by VMware and/or Software Defined Networking (SDN)
- - Expand into non-traditional markets or markets with limited market share in the data center via virtual implementations of traditional security and Layer 4-7 appliances (and perhaps even some elements of flash storage)
As I wrote in a prior article, VMware formally launched its Network Virtualization platform NSX, primarily based on technology obtained from the Nicira acquisition, in August of this year. NSX is a software solution that is part of the VMware software defined data center architecture and theoretically uses well crafted overlay technology to work with any networking switch vendor hardware in the data center including Cisco. VMware is basically seeking control and management of the networking layer of the data center via NSX, much like it did in sever virtualization, and is not in the business of selling networking hardware.
Cisco, however, is the dominant supplier of data center networking switch products with over 60% market share. Switching as a category represents about 30% of overall Cisco revenues and Cisco historically has obtained a significant price premium for its switches vs. competitors in the switch market given its large installed base and other competitive factors. Thus, Cisco does not want to cede control of the networking layer in the data center to VMware or anyone else as it could potentially impact its large and lucrative switch business. Success of VMware and/or other SDN approaches could open up the path to "White Box" and/or more open switching platforms that offer more robust software operating systems than Cisco has traditionally offered. The concern over "White Box" switches by Cisco was clearly telegraphed in an interview of CEO John Chambers by Barron's on September 26th, linked below.
Cisco will likely use the Big Bang event on November 6th to convey that true networking data center agility and scalability cannot be achieved by network virtualization software alone (as proposed by VMware), but a combination of purpose built converged hardware and open source control software allowing networking applications to be created, monitored and managed much like virtual machines are implemented today in the compute side of the data center. In doing so, however, Cisco is likely to take aim at some of the major concerns of Wall Street, namely, the competitive threat from VMware NSX and emerging SDN software startups, and "White Box" and more software agile Ethernet switch vendors with better price points.
It is likely Insieme will have dramatically lower price points than traditional Cisco Ethernet switches, thus minimizing the desire for customers to move to cheaper solutions that might be enabled via VMware NSX or those offered by new SDN companies. In a sense, John Chambers may have been setting up the market with the White Box concern in the Barron's interview, and then plans to shoot it down when Insieme is launched. If so, Cisco will be following the old Intel mantra of cannibalize yourself rather than let your competitors do it. Insieme, however, is likely to be more than just lower price points.
Insieme is also likely to converge Cisco's UCS blade server platform and potentially some elements of flash storage (obtained via the WHIPTAIL acquisition), thus, expanding Cisco's reach into other hardware centric elements of the data center. Insieme's application centric approach is also likely to leverage Cisco's Open Network Environment (ONE) and the OpenDaylight controller to expand Cisco's reach into network control and the data center security and Layer 4-7 appliance markets where Cisco does not have meaningful market share today. As security and Layer 4-7 appliances migrate to virtual instances in the application centric model, Cisco is likely to use this discontinuity to penetrate these segments of the data center market.
The aggressive actions by Cisco over the past year to address the competitive threats around network virtualization and SDN may also impact the numerous start-ups that have funded over the past couple of years in the SDN market. While SDN start-up valuations received a big shot in the arm when VMware acquired Nicira for over $1.2B in July of 2012, the launch of the open source OpenDaylight controller by Cisco/IBM in April of this year, the planned launch of Insieme on November 6th and small amounts of SDN revenues being generated by most SDN start-ups has likely created a bit of a valuation reality check for most privately held SDN companies. One privately held SDN company that might benefit from the Insieme launch on November 6th, however, is Plexxi given it seems to share the same common vision around application centric infrastructure as Insieme. If customers and the market end up buying into the Insieme vision of networking, Plexxi could be one SDN startup that could see enhanced awareness from Insieme.
Disclosure: I am long CSCO. 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 may in the past, present or future solicited and/or earned consulting services from any company mentioned in this article.