Cumulus — which offers an operating system to run on white box switches — says companies like Cisco and Arista are cutting prices in an effort to sway customers from jumping the legacy ship. The theory goes like this: End users are looking toward open networking methods, and white box models lend an opportunity to act upon that vision. (Arista declined to comment on rumors; Cisco didn’t immediately return a request for comment.)
But price-cutting won’t be enough to save the big guys, says Reza Malekzadeh, vice president of business at Cumulus Networks.
“Customers talk. An incumbent offers a low deal, and then others wonder why they didn’t get the same deal,” he says. “This creates an imparity in the customer base. Loyalty won’t remain.”
This sentiment won’t be unique to end users, he says. Partnerships are at risk as well.
He goes on to claim that white box will become the biggest chunk of the market over the next five years, as richer platforms become the norm from manufacturers and diverse hardware ecosystems emerge. Despite the thinking that white box was just a small part of the conversation, Malekzadeh and Cumulus believe it will become more mainstream as the market continues to embrace openness.
Dell’Oro Group analyst Alan Weckel says white box models have grown in popularity, due in part by the fact that some of the biggest cloud providers are already using them. Cost and customization are key components to consider, and for large companies like Amazon and Google, the economics of white box models can’t be beat, he says.
Tailoring white boxes to specific business needs also gives cloud providers the ability to execute tasks they’ve never done before at a scale they’ve never been able to achieve, Weckel says. Beyond that, white box methods give customers the ability to experiment and do things that Cisco or Arista boxes were never built for.
Still, Cisco did announce a 6 percent rise year-over-year in switching revenue during its third quarter, which ended in April. That led outgoing CEO John Chambers to say the “garbage” about white boxes threatening Cisco’s business was “just wrong.”
It may sound like a win, but considering Cisco’s relatively low sales last year, when third-quarter switching revenue fell 6 percent, it might be too soon to say Cisco conquered the battle, let alone the war.
“Cisco’s switching revenues may have gone up this past quarter, but growth is still slowing, and it’s early in the game,” Malekzadeh says. “There have been very real changes in the networking supply chain over the past couple of years that give customers more alternatives than ever and present a long-term challenge to Cisco’s business model. As more and more customers adopt open networking, the pricing pressure will build, forcing them to sell products at even steeper discounts to be able to compete. Those margins are not sustainable.”
But Cisco’s margins have held up so far. So have Arista’s — the company just reported first-quarter non-GAAP profits of 50 cents per share, obliterating Wall Street’s 37 cents-per-share consensus forecast.
Unlike Cisco, Arista is willing to entertain the idea of a white-box model, but only when the market is large enough. Arista’s recently introducted subscription pricing seems to be a nod toward a software-based future.
While white box switches have advantages, incumbents do offer expertise and offset the need for an in-house networking team, Weckel says. He’s expecting some surprises this year as to which companies go with white boxes or not.
“Google and Amazon are already white box — it can’t really get worse for Cisco and Arista,” Weckel says. “But will Apple and eBay stay with their vendors?”
Malekzadeh concedes Cisco and Arista might see short-term success with their strategies. But he says they are going to have to face facts and restructure their pricing models to reflect the state of the market.
“Open networking is inevitable — customers will demand choice,” he says. “They are very strong companies with a great history of execution, but I don’t think they will be able to force their current business model on customers.”