Remember when networking was cool? When I started my career in 1997 as a wet-behind-the-ears intern in Yankee Group’s data communications practice, networking was the coolest thing around. Billions of dollars were flowing into the market to drive the emerging Gigabit Ethernet wave, build out the Internet core and jump-start the carriers (CAPs/IXCs/ CLEC/BLECs) that had been spawned by telecom deregulation the year before. Some, such as Juniper, Foundry, Extreme and F5, became well-known players in the space, while others, like Qtera, Xros and Sirocco, were gobbled up in billion-dollar-plus acquisitions, never to be heard from again. Far more were crushed in the collapse of the Internet and telecom bubble, leaving behind little more than memories of over-the-top launch parties.
And as the chart above makes clear, networking and communications have fallen out of favor, with VC investment in the segment decreasing faster than VC investment in technology overall. While this data is admittedly a little coarse, and mixes telecom and data networking together, it nonetheless makes clear the direction such investments are taking. Indeed, as anyone investing in networking and communications will tell you, there just aren’t that many new ideas walking in the door. Many investors who made their living at layers 1-4 have moved onto cleantech, digital media and the online advertising economy. So can networking be made cool again?
It can, and here’s why:
M&A Landscape — Cisco catalyzed a significant change in the M&A landscape with the introduction of its Unified Communications System. By declaring open war on HP, IBM, and Dell, Cisco has made networking relevant again for the major OEMs who need a networking story — and subsequently turned them into potential startup acquirers. The market capitalizations of Juniper, F5 and Riverbed mean they could pay a price that would make the VC math work, and virtualization’s impact on networking puts VMware and Citrix into the mix as well. Three years ago, it was more or less Cisco or bust. Today there’s a long list of companies that could be home for VC-backed networking startups.
One part data center + one part cloud + one part virtualization=hot startup — Yesterday’s networking gear isn’t well-suited to today’s application workloads, traffic patterns and multitenant business models. Legacy architectures evolved from the LAN and designed for email and enterprise client server applications won’t cut it when it comes to those based on Map Reduce, nor will they work for collaborative filtering, putting together a Facebook page or renting CPU cycles by the hour. The data center has/will emerge as a distinct category of networking products. Legacy constructs like VLANs and subnets are wrapping cloud providers up in webs of complexity and management headaches, causing them to leave money on the table as servers fail to be fully utilized. Customers want SLAs but deep visibility into network behavior and performance remains elusive. Solving these issues will require not just new routers, but new ways of thinking about building networks.
Commoditizing forwarding — Much has already been written by James Hamilton of Amazon and others about the commoditization of networking and the router vs. mainframe comparison. Imminently, dense, non-oversubscribed 10GE switches will be available from ODMs for any OEM that wants to put a badge on them. Silicon and reference designs from Broadcom/Dune and Fulcrum will take new levels of price performance into the heart of the Cisco chassis switching lines. While they won’t have the full Cisco feature set, they won’t have the outrageous gross margins either. As this ecosystem emerges and technologies like OpenFlow and other efforts to bring the routing out of routers take hold, these advanced features may be provided by a community of third-party applications, decoupled from propriety chassis and operating systems.
Capital efficiency –- Building a networking company no longer requires $50-$100 million of venture funding. The appliance model is well understood in networking. An Intel Nehalem server can forward a lot of packets (PDF)! Perhaps more interesting, the virtual appliance model has emerged, meaning firewalls, load balancers and WAN optimization products can now be downloaded and run on hosts.
It’s ironic that as Sun Microsystems gets absorbed by Oracle, its long-held mantra — “the network is the computer” — has never been more true. For proof, look no further than social networking, search, SAAS and the cloud. And with them comes a host of interesting networking problems to solve. In other words, there hasn’t been a better time to start a networking company in recent memory. So what are you waiting for? Find some buddies and a whiteboard, and dream up something new.
Alex Benik is a principal at Battery Ventures
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