Carrier Network Virtualization Conference Takeaways

by: Edward Schneider, CFA

I attended and participated on various panels at the Carrier Network Virtualization conference in Palo Alto from December 9- 11, 2013. This conference was the US sequel to the SDN World conference in Barcelona that took place in June of this year. I encourage readers to review my June SDN World article and prior SDN literature as they provide a primer on Network Function Virtualization {NFV} and Software Defined Networking {SDN}, and constitute a frame of reference for this ensuing update.

NFV and SDN continue to gain mind-share in the telecom arena. While the data centers are still the main implementers, the carriers created a vendor-free NFV industry group as a path to implement network virtualization. This carrier consortium already published their first guidelines/white paper in October. In a few smaller niches, some carriers even gave vendors ultimatums to convert to a software subscription service model (versus a licensing model on proprietary hardware) by as early as next year.

On the other hand, the carrier transition to full NFV is going to take at least ten years, and will be back-end loaded at that. Carriers today have complex heterogeneous networks with voice, data and video with stringent quality standards that do not lend themselves easily to straight-forward virtualization.

Cisco (NASDAQ:CSCO) sees the writing on the wall. Its model of proprietary, robust-yet-costly routers proliferating all over the network is the antithesis of SDN's centralized intelligent switching with fast-but-cheap edge-routers. Thus, Cisco, IBM (NYSE:IBM), and others are repositioning themselves as NFV supporters via the vendor-supported OpenDaylight project. The good thing about OpenDaylight is that it is open-source, Linux-based. On the other hand, each vendor wants to keep its existing protocols as much as possible, leading to multiple protocols at various layers/functions that diminish the gains that SDN and NFV implicitly provide.

The data centers serve as the beacon of light for the carriers. They can easily lead the way because they have homogeneous, digital networks without legacy voice service issues. They are programming-based, versus being hampered by slow-moving OSS/BSS protocols, enabling applications to be globally distributed in weeks instead of months or years. Google (NASDAQ:GOOG) led the way a few years ago by building its own software-defined network using the independent OpenFlow standard (not coincidentally, OpenFlow's newer versions that expand its initial capabilities are being muddled by the late-coming OpenDaylight initiative). In addition to Google, Facebook (NASDAQ:FB), Ebay/PayPal (NASDAQ:EBAY), and other data centers are deploying SDN today.

Overall, I am negative on the SDN market from an investor point of view. Data center spending is only a tiny sliver of total network equipment expenditure. According to Ovum, network equipment spending was about $160 billion last year, and only about 4% of that went to data centers. A plethora of VC-backed SDN vendors are chasing a limited number of early adopters today. We were negative on the one public SDN pure-play Cyan (CYNI) at $11.41 in our June write-up. At $4.31 today, we are more neutral, although the short-term outlook is murky at best.

Incumbent vendors' core business will not fall off a cliff. Instead, they will feel the pain in small increments, as witnessed by Cisco's latest quarterly warning.

If I were to choose one SDN company that excites me, it would be Cumulus Networks. They have a very disruptive, open-software-based business model embedded in high-speed-yet-low-cost (a.k.a. bare metal) hardware switches from third-party partners. They correctly chose a Linux-based operating system to power its customers' networks. Linux is more mature/less buggy with richer networking features than other open-source standards. Cumulus is a vendor partner with Facebook in its Open Compute initiative, and has the attention of other data center customers.

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. I have no business relationship with any company whose stock is mentioned in this article.