I attended the Lightreading Ethernet Expo Conference held in NY last week. The Ethernet Expo conference focused on the Carrier Ethernet market. A link describing the conference, the agenda and photos from the conference is as follows:
While technical topics at this annual conference like 100G, Ethernet based wireless backhaul, small cells, Carrier Ethernet 2.0 etc.… were all prominent, I was fascinated to see how much Software Defined Networking (SDN) permeated the presentations and discussion as compared to the conference a year ago. With the first Open Networking Summit taken place only about a year ago in October 2011 at Stanford University, it is spectacular to see in the course of only one year how much discussion in both the networking industry and investment community SDN now comprises vs. the actual level of SDN network deployment and revenues.
My current observations regarding the pace of the SDN deployment and the impact to the investment community are as follows:
- SDN Is Unstoppable: SDN is unstoppable and will be disruptive across Cloud, Carrier and Enterprise Networks, likely in that order. There are too many smart people and disruptive companies within the technology industry working to make this happen. Early high visibility adopters like Google and the recent significant increase in VC funding into the SDN area are also adding to this momentum.
- The Pace of SDN Deployments Will Not Match the Current “Hype”: The pace of truly open SDN deployment via agreed upon OpenFlow standards will likely be slower relative to the current level of industry and Wall Street “hype”. This is not, however, unusual for a new disruptive technology like SDN. A simple example is key features that are required in the Carrier community like MPLS, IPv6 and VLAN Stacking still need to be broadly developed and tested across the vendor community. In addition, open standards around the Northbound Interface for APIs from the Controller Layer to the Orchestration and Feature Layer are not yet fully specified.
- Risk To Proprietary Northbound Interface Implementations High: I think there is material risk to a truly open standards approach on the northbound controller interface. I believe early adopters/innovators in the cloud operator and/or vendor community will drive pre-standard implementations of the northbound interface to facilitate a competitive and time to market advantage over the competition. The standards work right now seems more focused on controller to data plan standards work (and rightfully so) given the magnitude of work that needs to be done in that area. To me this raises the question, will SDN see a couple of leading operating systems around the control layer through early leadership in the northbound interface that will lead to only a couple of dominant winners like we see today in server virtualization (e.g. VMW) or Smartphones (Apple and Android operating systems that drive application development)? When I posed this question to the carriers at the Ethernet Expo conference, they all were cognizant of the risk, but felt that the SDN northbound interface will not follow the server virtualization or smartphone model. The carriers point to the standards process in place to avoid this risk. Even so, a cloud provider like Google or a leading SDN controller company’s desire to differentiate itself through a more rapid feature deployment via a time to market advantage of the northbound interface could be very tempting.
- The Window For Early Exits for VCs Is Narrow: There is a short window for early exits for VCs in their SDN portfolio companies. While there have some nice early exits in 2012 for SDN companies (i.e. Nicira), I think the window will be short for such exits as actual SDN revenues and deployments will be minimal in 2012 and 2013. My advice to companies and VCs in the SDN market, is don’t be greedy if your exit strategy is to sell the company. The iron will not always be hot as it is now and don’t let investment bankers fill your head about lofty valuations just because of the VMWare/Nicira deal. Facebook announced the acquisition of Instagram for over $1B in April of this year. Do you think Instagram would sell today for over $1B????
- Valuation Impact to Publicly Traded Networking Companies Is Semi-Permanent: Even though the migration to SDN will be gradual over the next 3 years, the negative impact to valuation metrics for publicly traded hardware based networking companies is likely to remain. SDN will take time to penetrate carrier and Enterprise networks, but as I said earlier it is unstoppable. Investors looking at companies like Cisco, Juniper, F5, Brocade etc.… will constantly have the overhang of what SDN will do to the business models of these companies over the next 3-5 years.
A case in point at the Ethernet Expo conference in NY this week was the presentation from AT&T. AT&T clearly articulated that their vision of an SDN based network of the future will not only utilize standard, low cost and high volume Ethernet Switches, Storage and Servers, but also the ability to eliminate the deployment of application specific appliances (e.g. DPI, Firewall, Load Balancing, SBC, CDN etc.…). AT&T envisions these specific network appliances being replaced by virtual appliances written by independent software vendors. Thus, SDN not only creates an overhang on Switch/Router companies but also network specific appliance companies. We are likely to see the successful networking companies transform themselves by quickly endorsing the SDN model and selling features as software/virtual appliances rather than hardware with their embedded features. The challenge they will face is start-ups are being funded to break into the virtual appliance/software model given the technology discontinuity created by SDN.