VMware’s planned acquisition of Nicra for $1.25 billion represents the evolution of networking beyond the hardware-dominated point of view that has sustained the industry for decades. On the same day Cisco (s csco) said it would cut 2 percent of its workforce,VMware (s vmw) said it would spend roughly 20 percent of its cash buying a networking startup with around 100 employees. Those two seemingly unrelated moves are actually signposts in the journey to networking’s future.
Even as Cisco was detailing its restructuring, VMware punched it in the gut with this purchase, essentially telling its longtime partner that it can stick around for the ride but it will have to stay in the trunk. Meanwhile, the bevy of startups that have identified themselves as part of the software-defined networking zeitgeist are thrilled by the valuation and the events this deal will set in motion.
The clouds guys versus the switch guys.
The data center is changing, brought about by the needs of companies like Google (s goog) or Facebook (s fb) building out massive data centers and by the stresses and opportunities created by server virtualization. These things are changing the types of gear put into data centers as well as economics of IT. If you are Facebook or Google, every dollar you spend on compute needs to produce a dollar of revenue, which is why both spend so much time developing optimized low-cost computing for their workloads. At the same time, data centers and IT infrastructure requires huge amounts of hardware, and the customers of that hardware want simplicity.
The story is similar for cloud providers, but they also have a greater variety of workloads running on their systems and a greater variety of hardware. Tied to the rise of the cloud is also the looming irrelevance of enterprise computing and, with it, specialty enterprise gear.
In networking, this plays itself out in the rise of companies such as Arista, which offer high-performance boxes made with merchant silicon. Or in the forms of Cumulus Networks or Pica8, both startups seeking to disrupt the hardware side of networking with simpler boxes and a fabric to pull them all together. Those fabrics would run underneath a Nicira controller, making these hardware components complimentary to the emergence of the software-defined data centers. At the core, these value-adds are in the software, not in the hardware.
A similar shift has occurred in the server market as it matured. Server vendors gradually saw their hardware margins erode as their boxes became more commoditized and their manufacturers begin competing with them. The server business is realigning to meet the needs of webscale and cloud computing. VMware, along with many venture capitalists and entrepreneurs, is betting that same shift will occur in networking.
Who controls the control points?
As Kyle Forster of Big Switch, a rival startup to Nicira, explained to me, there have been two ways of attacking the problem in the networking world — from the point of view of the hypervisor or from the top-of-rack switch. Forster says Nicira and his company both started in the middle and Big Switch has drifted over to the hardware top-of-rack side, while Nicira tended to drift toward the hypervisor. That makes the VMware buy a perfect match, but it also highlights where the lines may be drawn when it comes to the future of networking.
The future is still open for a switch-centric vision (with most of the value still tied to software running on that switch), but it underlies the fact that the fights here are about where the points of control — and profits — are in the data center. And no one really believes it’s about the hardware as a stand-alone box. Even companies like Cisco or Juniper (s jnpr) that still sell big boxes are investing in software. Their boxes are packed with software that drives up the cost and complexity associated with their gear. But as Facebook’s Frank Frankovsnky and just about everyone I spoke to for this story notes, the data center of the future is getting pulled apart.
This means the hardware is less complicated and disaggregated, but also that the software running on that hardware will be tied together using orchestration layers. The money will be made by selling services tied to those orchestration layers. Maybe you buy a hypervisor or controller that already has what you need, or maybe those who own those control points parcel out deep access to them via partnerships and licenses that will net the owners money or influence. Probably, it will be a mixture of both.
VMware provides that orchestration layer for servers while Nicira is the one providing it for the logical layers of the network. The hardware startups mentioned earlier are providing it for the physical transport of the bits around a data center. That leaves room for other startups at the higher layers such as Embrane, Varmour, LineRate Systems and others.
So who is the next SDN buy?
Dante Malagrino, the CEO of Embrane, said this deal is exciting not just because of the incredible valuation (although, as the CEO of a startup, that’s plenty exciting) but because the deal validates the model of a disaggregated and software-based approach to networking. “VMware is sending a very strong signal to HP, Brocade, Cisco and soon-to-be-former partners, all of which have been fairly active and vocal about networking as hardware,” Malagrino said. “The network is the fundamental ingredient of the software-defined data center and VMware is absolutely acknowledging that.”
However, Malagrino noted that Cisco or Juniper and other hardware-focused players shouldn’t be counted out. Perhaps that’s because he thinks that his startup is a good potential acquisition target, noting that to counter the Nicira and VMware duo, the hardware guys can hedge their bets by buying services that play on top of this software defined data center. There’s also Cisco’s spin out of Insieme, its stealthy attempt to address some of the networking needs of scale-out data centers.
However one slices it, the VMware-Nicira deal was a high-water point for the myriad networking startups out there trying to bring the old way of networking into today’s cloud and webscale world. And this deal won’t be the last. When asked if anyone has tried to acquire Big Switch, Co-founder and CEO Guido Appenzeller said, “We’ve been asked, but we haven’t returned their phone calls so far.”