I love deals, don’t you? For the past few years I’ve been tracking the evolution of the software-defined networking (SDN) market. Deals make good signposts to where the market is going — whether they are outsized financings, acquisitions, or big partnerships.
Deals are the hallmark of business — a good one can make you, and a bad one can break you. I’ve predicted in “SDN Revolution: An Ecosystem Report” that 2014 would be a year of deals in the SDN market. There have been a few notable deals so far, but nothing outlandish. I predict bigger things by year-end.
As the SDN ecosystem develops, business couplings are key to understanding the strategic direction of the technology. The nature of SDN is that it brings together different components of the new networking stack. Let’s review what’s happened in SDN so far, and then later I’ll give you some predictions.
Here are my top five deals of the SDN market to date:
1) VMware Buys Nicira — 2010 ($1.15 billion)
This was the landmark deal in SDN. And it still is. Nobody has usurped VMware’s leadership in data center SDN, and recent reports, including a report right here on SDNCentral indicating that Nicira‘s NSX product, under the tutelage of VMware, may be gaining momentum, with revenue now surpassing $100 million.
The SDN game is currently VMware’s to lose. The reason is that SDN is yet another form of virtualization, and VMware took over the data center with its original implementation of virtualized servers. So, it’s a natural evolution for VMware, with NSX, to virtualize networking as well.
2) Cisco Buys Insieme — 2013 ($860 million)
Now that I’ve said that VMware is the one to beat, I can hear Cisco executives screaming, “WHAT ABOUT US?” Okay, so, Cisco, made a splash in 2013 with the purchase of Insieme and the launch of its Applications Centric Infrastructure (ACI). But this is early days, and the product is only just now entering the market. It was an impressive “pivot” for the world’s most powerful networking hardware company to move to the ACI strategy, but considering that Nicira was bought in 2010, Cisco was late to the SDN game and is now playing catch up.
There is no doubt that Cisco has the resources to put behind its SDN efforts — as demonstrated by its recent move to acquire Tail-f for $175M. But SDN is going to require a huge cultural shift for a company built around hardware, rather than software. And whereas VMware’s NSX is a more mature product, Cisco has more work to bring ACI to the market and convince customers that it will have a solid interoperability strategy.
3) Cumulus and Dell Partner up — 2014
2014 has been a big year for Cumulus Networks, the maker of a purpose-built Linux OS for networking. In startup circles, Cumulus got a lot of buzz with its rumored juicy valuation north of $300 million.
Much of Cumulus’ value was driven by its perceived leadership behind Dell’s new bare-metal strategy, in which Dell would ship networking boxes that could be loaded with any network OS. Cumulus was the first of those operating systems to be selected. Some competitors might now be crying that it’s not fair that Cumulus got the lion’s share of the publicity, but like it or not, Cumulus is perceived as the market leader.
Big Switch, Pica8, Pluribus, and other companies with their own SDN operating systems also have components of the bare-metal switch — but Cumulus made the biggest splash, and it was the first to land a deal with Dell.
4) NTT Acquires Virtela — 2013 ($525 million)
Remember that one? Japanese service provider giant NTT’s acquisition of Virtela flew a bit under the radar. But like many technology deals coming out of Asia, it was a leading indicator of what’s next in the global markets.
Virtela made it easier for service providers to deploy cloud services using IP-based virtual private networks (VPNs). Norwest Venture Partners’ Vab Goel, a former engineer at Qwest Communications and a familiar name to telecom veterans, was a founder of the company. Allowing service providers to quickly virtualize and provision new WAN services was attractive to NTT, which was interested in scaling up its global VPN business. So NTT paid about $525 million to beef up its cloud services business.
5) Brocade Buys Vyatta — 2012 (deal size not disclosed)
Brocade deserves more credit for being one of the earlier mid-sized networking firms (aka, “not Cisco”) to jump on SDN. By purchasing virtual-router manufacturer Vyatta, Brocade started to rebuild its strategy around software, and the company has enjoyed a positive leadership perception in the market because of it.
Vyatta delivers software-based routing, security services, and VPN functionality. Brocade moved to quickly integrate this technology into its portfolio, and it has good customer traction. Vyatta is being used by some top cloud providers, including Rackspace, to deliver networking applications. I put this deal on the list even though we don’t know the size, because it’s a great example of exactly how a key acquisition can be used to reshape a company’s strategy.
Now, time for the predictions.
I predict at least two more big M&A moves by the larger networking players this year. The buyers will be Cisco, VMware, and maybe Dell. My top candidates for acquisition are Cumulus and Pluribus Networks. I expect that one of these deals will be in the $400 million-plus range.
You noticed I’m not ready to predict another Nicira — yet. But I do believe that it’s possible for an SDN startup to stay independent and exceed a $1 billion market capitalization. And I also believe that will happen in the next two to three years. Which company is it? The one that chooses not to be acquired, and then executes on a focused plan to drive one of the key technology elements of SDN into the market.
The leading acquisition candidates in the SDN ecosystem are detailed in “SDN Revolution: An Ecosystem,” a comprehensive, 30-page industry review that includes detailed information about more 24 startups, the position of leading incumbents, and a ranking of the top companies. It is available now from the Rayno Report for $899.