The battle between once-partners VMware (NYSE:VMW) and Cisco (NASDAQ:CSCO) seems to be heating up in the software-defined networking (SDN) domain, with VMware announcing its NSX licenses to be sold via channel partners. VMware already has about 10 partners on board and the company is looking to add more in the coming quarter. VMware is planning to roll out a NSX-competency channel program at the VMworld conference in August to scout for more channel partners.
Back in October 2013, VMware launched the VMware NSX, which merged the company’s existing vCloud networking product line with the network virtualization platform of Nicira (which it acquired in 2012) into a single product family. The company saw strong demand for the SDN platform, with about 30 large corporate clients at the time. NSX’s client base has since grown to over 100 customers in June.
VMware’s CEO mentioned that Cisco had declared VMware to be its “public enemy number one” following the NSX launch. These comments could be a result of the partnership between VMware and Cisco’s rival Juniper Networks (NYSE:JNPR), which leveraged VMware’s NSX to virtualize Juniper’s networking equipment (see Juniper Partners With VMware To Combat Cisco As SDN Takes Off).
Before launching the NSX platform in October, VMware management stated that the company does not intend to harm its partnership with networking giant Cisco by launching competing SDN products. However, a software-centric approach to networking threatens to cannibalize Cisco’s market share. The VMware NSX creates software-based network overlays on top of existing hardware, thereby decoupling networking-related intelligence from the hardware. This makes networks programmable and scalable, and gives enterprises the flexibility to implement technology changes through mere software upgrades. What makes SDN even more appealing to enterprises is that it allows them to put third-party software on cheap white-label networking hardware, making it potentially much cheaper to implement than installing Cisco’s hardware products that come with embedded software. Moreover, the NSX can be integrated with vSphere, VMware’s existing server virtualization platform. This makes the VMware NSX suite an attractive option for new customers, especially small and medium enterprises (SMEs) as it cuts huge capital expenses required for hardware and equipment.
On the other hand, Cisco’s approach to SDN is more hardware-centric, with the platform built on top of its Nexus switches, which are controlled by application policy infrastructure controllers (APICs). This approach attempts to improve troubleshooting problems faced by virtualized networks by making applications the center of all network-related decisions. As a result, the data center can dynamically match resources with the needs of applications rather than the other way around. The APIC-model coupled with Cisco’s recently launched Open Network Environment (stylized as Cisco ONE), is the company’s bet against purely software-based virtualized networking.
According to SDN Central, software-defined networking is set to grow at a CAGR of 80% from a $3.4 billion market at present to become a $35 billion market through 2018.  This provides a huge opportunity for SDN players. Given the advantages of the software-defined networking model, a large number of SMEs could opt for the NSX (or other purely software-based platforms) in the coming years. Additionally, other networking players such as Juniper, Big Switch and Brocade also favor the virtualized network model over the APIC approach, as evidence by the Juniper-VMware deal.
The list price for a perpetual NSX license starts at around $6,000 per CPU, which is higher than our estimated average price per license for VMware.  The mix of NSX licenses among all licenses sold by VMware is likely to increase since the server virtualization market has matured in the last few years. We forecast VMware’s average price per license to grow to about $5,300 per license by the end of our forecast period. A 7-8% increase in the average price translates to a 5% upside to our $100 price estimate for VMware’s stock. Our price estimate is slightly higher than the current market price.
Disclosure: No positions.