SDN is the Success Switch for this Networking Giant

Shweta is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

A new hype-cycle has emerged in the networking industry around the evolution of the service providers and enterprises towards SDN-based networks. According to a recent report from IDC, in 2013 the revenue from the SDN market will be ~$360 million, and by 2016 it will become a ~$3.7 billion industry.

The tech giant Juniper Networks Incorporated (NYSE: JNPR) recently acquired a SDN startup company named Contrail for ~$176 million to capture a part of the growing industry. Contrail is developing an OpenStack-enabled network controller for web-scale large enterprises and it could be the base for Juniper's SDN framework with commercialization by late 2013. This deal provides Juniper more flexibility and control over its SDN direction and suggests that the future SDN market will be increasingly fragmented and addressed by switch vendors and independent vendors. I anticipate that the introduction of SDN in Juniper's portfolio will be a key transition and could lead to long-term gains in the ~$23 billion switching market. 

Peer Group SDN Strategies

Recently Citrix Systems Incorporated (NASDAQ: CTXS) implemented its plans for using SDN technology with the launch of its upgraded NetScaler SDX application delivery platform, along with a partnership with Palo Alto Networks that optimizes the unification of sales, technologies, and product roadmaps. Citrix's ideology is that in order to utilize SDN's full potential, it needs to become more application-aware. So NetScaler helps the user create a unified application control layer for third-party network services. This ability in NetScaler will help make the current Layer and controllers more app-aware. The Citrix-Palo Alto strategic alliance will run through phases, and the first one will be for policy and interoperability. Future phases will strengthen the technology integration, along with the go-to-market strategy.

Alcatel-Lucent S.A. (NYSE: ALU) has also declared its strategy for 2013 regarding SDN, and it is taking a different route from most of the network vendors. Instead of concentrating on OpenFlow to enable control and programmability it has expanded its Application Fluency approach to intelligent aware network by adding Representational State Transfer (REST) to its API's. This allows other applications, controllers, and platforms such as OpenStack and CloudStack to interact with the Alcatel-Lucent OmniSwitch tools at a faster speed and make overall application delivery more efficient. However, it is expected that the company will not provide direct support to OpenFlow until 2014, as it believes that focusing on API will benefit the enterprises in the short term. 

Controlling Expenses in the Short Run

While Juniper is betting on SDN in the long run, in order to increase its short term profitability it has also deployed a cost reduction plan that is anticipated to save ~$150 million in the year 2013. Most of the savings will be earned by the middle of the year. The company will lay off ~500 employees, which comes to ~5% of the total workforce, by the end of 2013. This will save ~$110 million annually in the form of reduced operational expenses. Along with that, in November 2012 Juniper ended its partnership with Celestica and Flextronics. This made the company terminate its contract with Plexus, from which it bought switches and network gear for the partnership. This action will result in a cost saving of ~$40 million in the next year. Two-thirds of the expense reduction will come before June 2013, and the remaining one-third is expected to be achieved by September. 

The Foolish Bottom Line

Summing up, I see a very good entry point in Juniper both for the short run as well as the long. With the acquisition of Contrail to achieve a significant share in the SDN industry, I think it opens an opportunity for long term investors, while its cost reduction strategy will bring returns in the short run. 

ShwetaDubey has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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