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The whole idea behind the cloud is to replace proprietary systems with scaled commodity systems.

It's about saving money.

Open source saves money on development, so open source projects predominate in the cloud. Commodity servers save money, so high-end proprietary hardware has to go. Proprietary storage will, in time, be replaced by commodity storage based on open source systems like Red Hat's (RHT) Gluster, not because it's cheaper.

The cloud rolls over these forces at its own pace. Proprietary vendors kick, and scream, and cry foul, but they either adapt or they will be rolled over.

What's clear in today's news is that this attitude has finally reached the network itself. The fall in Cisco's (CSCO) shares this year, down 15% so far, and its continuing layoffs - another 1,300 are now slated to go says our Clayton Reeves - are not an aberration, or a sign of network sickness.

It's a sign of things to come.

VMware (VMW), whose parent EMC (EMC) is being threatened by the coming onslaught of commodity cloud storage, is nevertheless aware of the trend. Profits will come from services, from enabling clouds and helping build clouds, rather than just selling products (even software) for clouds.

So its purchase of Nicira, a privately-held producer of software-defined network switches, for $1.26 billion, makes perfect sense.

And it spells a perfect storm for Cisco.

As VMware CTO Steve Herrod wrote in a blog post heralding the deal, the aim is to build a "software defined data center." All aspects of running a data center - storage, computing, networking and security - will be abstracted to software, not defined by hardware.

In other words, a network switch, even a high-end network switch working in the cloud, is just another kind of computer.

This has been known for a very long time, but it may not have sunk into the heads of investors yet. Systems like Nicira's Open vSwitch, available for free download under the Apache 2.0 license, support standard network protocols, supporting multiple physical servers like the Cisco Nexus 1000v.

There is a key clue in this for all investors. When looking at cloud, understand it's about saving money. Look at every datacenter and see what can be replaced by something cheaper. Look at where hardware can be replaced by software. That hardware will, over time, be squeezed out.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Source: VMware Aims The Cloud At Cisco