Does the Street have it right when they say NFV could hurt Cisco? A Barron’s blog suggests that SDN doesn’t pose much of a threat to Cisco but NFV does, citing a financial analyst’s report. The perspective of Wall Street on tech is sometimes helpful because it exposes the issues that could drive stock prices. Sometimes it just exposes technical biases in the Street’s thinking. Which is it this time?
The report suggests that enterprises are moving apps to the cloud and to high-density servers, which reduces the need for switching—particularly top-of-rack stuff. SDN doesn’t enter into this threat because enterprises lack the software skill to implement it. That assumption doesn’t square with what I hear from the enterprises.
I’ve not found any enterprise who says they are reducing data center switching because of cloud use or dense-core servers or hyperscale. It may be that switching would grow more rapidly without multi-core, but of course we’ve had multi-core servers for decades. I have to dismiss the argument that something unusual is happening here.
As far as the cloud goes, enterprises tell me that they are migrating some applications, and some pieces of others, to the cloud, but that this process has had more impact on stranded application-specific servers than on the data center. None of them told me that they saw a reduction in data center switching arising from the use of cloud computing.
The question of whether SDN’s threat to Cisco is mitigated by lack of enterprise software skill is hard to survey because it amounts to asking someone “Are you as dumb as the Street thinks you are?” What I have found is that it is difficult for a business to justify a shift to a white-box data center because most of their data center technology has at least three years of useful life remaining. The biggest reason for a lack of SDN adoption is that inertia. If SDN “saves money” or “reduces capex” then why not reduce it further by simply not buying anything?
The problem with SDN, IMHO, isn’t the software skill of the buyer it’s the positioning skill of the seller. Capex reduction is an incredibly weak justification for modernization because it usually requires a forklift update to “modernize” and a lot of what’s getting lifted is really being tossed out while there’s still residual depreciation. These projects have a negative ROI unless you can cover that stranded cost with some other benefit. What that benefit might be isn’t for buyers to puzzle out, it’s for sellers to articulate and prove.
But is SDN a threat to Cisco? As I pointed out in an earlier blog, at some point central control of forwarding and connectivity in the data center is going to happen. My model says that even in 2018 there will be significant impact from these trends. They don’t force white-box substitution but they do encourage buyers to think about transitioning from expensive brands (like Cisco) to cheaper formulations. I personally think that SDN will be less an impact than virtual switching and routing, and that white-boxes with an operating system that supports legacy switching/routing will be easier to introduce. I think Cisco will see an impact from that source as early as the end of next year.
NFV is (as you’d expect) more complicated. The article suggests that the goal of NFV is to replace switches and routers with virtual appliances, but that hasn’t been the focus of NFV at all. Dynamic deployment and optimization is most useful for customer-specific elements of the network, or for dynamic multi-component ecosystems (like IMS or CDN). A virtual router is really a hosted router, not a VNF.
Enterprises are likely to be transitioned to virtual switching and routing as a part of an expansion in the scope of VPN/VLAN services, something that is already starting to shape vCPE to include network edge switch/router technology. This is probably the greatest impact point for Cisco because there are a lot of edge devices in a network, and so losing even a percentage of that TAM would hurt. But NFV isn’t really the driver here, it’s just lent its name to a notion of hosting edge functions on commodity multi-purpose devices. I’ve pointed out in the past that you don’t need NFV for vCPE.
NFV deployment at an optimum level would actually benefit Cisco, though. NFV could create a market for hundreds of thousands of new servers and switches. Cisco makes both. The NFV data center market alone could increase data center switch TAM by 25%. Since UCS has lower margins than switching/routing today, server gains might not boost profits the way Cisco would like, but by 2018 margins on switching/routing will be lower too. Any port in a margin storm.
I think the analysis of SDN and NFV impact on Cisco that the Barron’s article cites doesn’t hold water. This doesn’t mean Cisco skates by on SDN and NFV impact. The biggest problem for Cisco is actually something that I’ve blogged about all last week—intent models.
In a software-based network, where “devices” are really virtualized collections of software features, a new target of interoperability has to be defined. You can’t look for box equivalence. That new target, I think, will be the “black box” or intent-model feature set. Anything that can look like an intent-router is a router. That includes virtual equivalents, but also real ones. If you can harmonize a virtual function set to look like a physical device, you can harmonize real device behavior to look like that same thing. Where then is Cisco’s brand superiority going to take it?
That’s the truth of the “impact of SDN and NFV” for Cisco. Neither of these two technologies are going to prove out without strong adoption of intent models. Intent models, not SDN or NFV technology as we know it, poses the threat to Cisco, by anonymizing the way that network features are created. Anonymize the features, and you anonymize the vendor.
The solution to this would be for Cisco to be a feature leader, but the company is legendary for seeking a “fast follower” role. Wait till the market develops it and then kill early players with your massive brand. That works when brand matters, but the time when it does—at least matters in the traditional sense—may be passing.
