In particular, he cited the difficulty of moving away from a business model that’s based on selling expensive network gear. The emerging combination of commodity hardware and new focus on software that integrates disparate components, said Levine, means “We can replace large pieces of iron with an operating model that drives a new economics.”
“I see a world where the data center is a billion cell phones lashed together with software,” he said. “The question is, can they [incumbents] live with the new model as part of the operating plan? If I’m paying sales people to sell huge boxes and now it’s software, can your business adapt?”
I think the answer is yes, the incumbents will adapt. But because of that adaptation, incumbents have little incentive to pay enormous sums for the startups that disrupt the high-margin status quo. In other words, the technology and market forces that the startups are unleashing against the incumbents also lowers the ceiling on their own purchase price.
VMware had good reasons to spend a billion dollars on Nicira. That acquisition kicked open the door to the networking market for VMware and made it a viable competitor in a relatively short period of time. It also didn’t hurt that VMware got a significant amount of talent in the deal, including Martin Casado, who may be the closest thing in the SDN realm to a superstar.
Looking at other players in the field, it’s hard to name a startup that could match the scale of value Nicira brought to VMware. Thus, it’s hard to see a player that could command a similar purchase price.
This isn’t to say we won’t see more SDN acquisitions, or that startups aren't doing interesting things. There are so many elements necessary to realize a programmable, scalable, application-aware architecture that incumbents are likely to dip into the startup market to round out a portfolio and/or remove a piece that might be strategically valuable to a competitor.
There’s also plenty of room for innovation. While the major pieces of data center SDN systems are coming together (controllers, APIs, and so on), there’s a lot that can be done, for example, to better instrument overlays and underlays or marry high-level application requirements to nitty-gritty ports and protocols.
Startups have a role to play in the development of the SDN market, and I expect we’ll see acquisitions for tens or a few hundreds of millions of dollars. That’s still a lot of money for a young company and a decent yield for investors.
Where it falls short is prestige. There’s so much money sloshing around Northern California that an SDN startup selling for $50 or even $100 million is merely a ripple compared to the tsunami of dollars that Google, Facebook and their ilk will pay for thermostats and text-messaging services.
The SDN track at Interop Las Vegas provides essential technology details from independent experts and thought leaders to bring much-needed clarity to the market. Register now and use the code SMBLOG to get $200 off the current price of Total Access and Conference Passes.
Drew is formerly editor of Network Computing and currently director of content and community for Interop. View Full Bio
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