The Coming Leadership Battle in Network Virtualization
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There is perhaps no hotter area in the technology space than cloud computing and network virtualization. Two recent deals put the spotlight on that fact: the $1.26 billion acquisition of Nicira by VMware (NYSE: VMW) and the purchase of Xsigo by Oracle (NASDAQ: ORCL) for an undisclosed sum. Xsigo's software simplifies cloud infrastructure and data center operations. Oracle now can offer clients a full set of virtualization capabilities for cloud-based computing.
Both Nicira and Xsigo have some of the world's biggest companies among their customers and the deals highlight how fast the market for virtualization software is consolidating. It also shows the growing conflict coming between virtualization software firms and the network equipment companies.
The move by VMware, 80 percent-owned by EMC Corp. (NYSE: EMC), is particularly interesting. It already has a leading position in the market for virtualizing servers in data centers. Now VMware will be able to add a leader in virtualized networks products to its portfolio. Its chief technology officer, Steve Herrod, said that Nicira software-defined network virtualization will provide “the architecture for the cloud” to its users. Its main benefit is that it will provide corporate users the ability to cut hardware costs and offer lots of flexibility and speedy deployment.
In effect, this purchase by VMware fired a close shot across the bow of network equipment companies like Cisco Systems (NASDAQ: CSCO) and Juniper Networks (NYSE: JNPR), whose stocks initially lost 6 percent and 3 percent, respectively, on the day of the announcement of the Nicira deal by VMware. Israel Hernandez of MKM Partners said that there are “significant negative implications for Cisco and Juniper” from the Nicira-VMware deal. Both Cisco and Juniper have been pushing into the nascent network virtualization market with their own technologies, albeit slowly. The overall global data networking market is currently valued at $37 billion.
Many Wall Street analysts believe that Cisco has the most to lose from VMware's push into this sector. The fear is that what VMware did to the server hardware industry – allowing companies to share servers in data centers – it will now do in networking routers and switches. Cisco does have a strategic partnership with EMC and VMware in virtual computing.
There is a real question out there as to whether Cisco has missed the market. That would be a difficult pill to swallow for Cisco, whose chairman and CEO John Chambers has always said that he was proudest of his company's “ability to capture market transitions that matter most.” It did lay off 1,300 employees due to slowing demand for IT equipment. But competitors like Alcatel also struggled due the weak global economy. And don't forget that Cisco has a $100 million investment in a Nicira competitor, Insieme.
Both Cisco and Juniper had better speed up their move into the network virtualization market, through acquisitions if necessary. Or else someday companies like AT&T and many others will wake up, slap themselves in the head and ask, "why have we been buying all this expensive gear from Cisco and Juniper?" It will dawn on these companies that they no longer have to do so.
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