VMware’s acquisition of Nicira posted a big risk on Cisco’s future control of networking market. The risk was in fact there from day one of VMware ESX with virtual switches and then distributed virtual switches, which reduces the need for customers to buy physical geeks from Cisco because virtual machines use “free” virtual ports. For the inter-physical server communication, customers still need Cisco and other vendors even though the volume is not as high as otherwise. That is why Cisco quickly came up with its own distributed virtual switch Nexus 1000v to stay relevant in the virtualization market.
The Nicira acquisition, however, further amplified the risk to next level, which can potentially hurt Cisco’s core businesses. No wonder the financial market reacted with 5% off on Cisco’s stock following the news.
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As you may have known, the OpenFlow technology abstracts the intelligence out of traditional switches and routers to centralized controllers. Without the intelligence, the traditional networking hardware is basically commodity which every vendor can do and probably do better than Cisco. This not only hurts Cisco’s revenue stream, but also opens up the doors for other vendors like Huawei to grab away its existing accounts. In other words, it may threaten its survival in the future of Cisco as a company.
So the stakes are too high for Cisco. Now, what can Cisco do strategically?
First thing most people would think is to support VMware’s competitors like Microsoft on the hypervisor. This is indeed a common practice in the industry. For example, when Cisco got into server market years ago with its Unified Compute System (UCS), its longtime allies like IBM went away to partner with Juniper and even considered buying a company as HP bought 3Com, and Dell bought Force10.
This is not game to play, however, because Cisco has already partnered with Microsoft on Hyper-V from very beginning of UCS and it has supported other open source cloud platform like OpenStack as well. Still, Cisco is probably a little bit closer to VMware than with other players in the hypervisor and cloud game. There are more common interests than difference for the current Cisco and VMware relationship in general.
If you remember my article The Physical is New Virtual, Cisco’s UCS has some virtualization capabilities built in. Cisco can definitely further develop and leverage the capabilities to next level. Given Cisco’s current market share, it may take time to see a big impact though.
Secondly, play the OpenFlow game. As we’ve seen, Cisco was a little bit reluctant to play the game initially due to the reason I just discussed above. But I saw the change in a recent interview with John Chambers. For any emerging technology, denial is mostly not a good answer. Getting involved and influencing the direction to Cisco’s strength is normally a better strategy.
To play the game effectively, Cisco can develop its own product, or buy a company like Big Switch, another eminent player in the OpenFlow market. Either way works. But remember that the technical challenges of the OpenFlow is really with the controller, which requires expertise in distributed computing rather than the networking that Cisco is good at. Therefore an acquisition, or the spin-in model, may be the easier and quicker solution.
Thirdly, commoditize OpenFlow and continue the networking game on top of it. If we look at the history of hypervisor, it was exciting at the beginning and then quickly commoditized. The focus has since shifted to the management and solutions. If Cisco can aggressively push the commoditization of OpenFlow, the game will quickly come back to its strength given its unparalleled expertise in networking. While this process is not fully controllable, but it can definitely be heavily influenced by the networking king.
To make this strategy more effective, Cisco should push for diversification of the OpenFlow implementations. In the end, it’s a war of platform – if you cannot control it, make sure nobody can.
It’s All About Execution
Like any other technology, the adoption will take years if OpenFlow will eventually become main stream. So Cisco and other traditional vendors still have some time to adapt and even lead. They may also have extra grace period depending on the execution of the new team at VMware.
In most acquisition cases, the startup employees lose motivation right after being acquired. VMware knew that and allocated about $200M as award for future execution. The detailed requirements of the award are not clear, but on average that is about $2M for each Nicira employee. What would other VMware employees think about this? I am sure you know the answer. But VMware cannot do the same for other existing employees, probably even not for key talents. That is really double edged sword that VMware management has to carefully manage.
By the way, although OpenFlow has its great potential, I think its potential is mostly limited to within an enterprise or a few data centers. It won’t be the technology for the global network. I will explain why later on.