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3/6/2014
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Nicira: The Last Billion-Dollar SDN Acquisition?

Nicira's billion-dollar purchase price may have been an outlier in the SDN market that won't be repeated.

Nicira’s billion-dollar acquisition by VMware may turn out to be the high-water mark for venture capitalists that are backing a host of SDN startups.

This notion occurred to me during a VC panel at the 2014 Open Networking Summit. One panelist, Peter Levine, General Partner at Andreessen Horowitz, was talking about the challenges that incumbents face.

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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Drew Conry-Murray
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Drew Conry-Murray,
User Rank: Ninja
3/10/2014 | 5:10:49 PM
Re: Market entry vs portfolio expansion
Thanks for the reply. VMware picking up Cumulus is an interesting idea, but it also sort of goes against the story they've worked very hard to promote about NSX working over any hardware--VMware says that with network virtualization, there's no need to rip and replace the underlay. If VMware owns Cumulus and wants to see Cumulus in the enterprise, it also has to convince the enterprise to buy white-box hardware (even if VMware doesn't sell the hardware itself). I think that's going to be a harder sale than NSX by itself as an overlay for your existing network.

That said, if the white box model starts to get some traction in the enterprise, I suppose I could see a scenario where VMware buys Cumulus and says to customers, "We're here when you're ready to introduce white boxes as you refresh your network hardware."

But even if that's the play, and Cisco wants to get into a bidding war to quash it, I don't see a billion-dollar runup on Cumulus.
mbushong
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mbushong,
User Rank: Apprentice
3/7/2014 | 10:47:40 AM
Market entry vs portfolio expansion
It's tough to justify the ultra-huge valuations when you are talking about filling out a portfolio. But as the article points out, heading into a new space makes larger payouts possible. 

The question is: what companies might use SDN to move into a new space? It's hard to see any really, though Oracle has been playing around the edges for some time.

The other dynamic in the big price tag was companies competing for the acquisition. So is there another company that could see similar bidding dynamics? I would think Cumulus fits the bill. VMW could use Cumulus to drive down HW costs, which allows them to make better traction with Nicira. As long as HW is a requirement and it is priced high, NSX is limited in how much they can price. If they drop the HW costs down, the balance can be spent on NSX.

This obviously creates problems for Cisco. VMW can arbitrarily drop the price of HW and monetize the SW. But Cisco isn't in the same position. A defensive move might be interesting for them. It would also give them a cleaner OS to work forward from.

These dynamics could drive the price well above what the business justifies. A similar thing that happened with Nicira.

Mike Bushong (@mbushong)

Plexxi
Laurianne
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Laurianne,
User Rank: Author
3/6/2014 | 5:11:05 PM
Talent Costs
I think Drew hit upon one reason VMware was able to justify the Nicira price: Talent. It was the same when Google bought Nest -- unusual talent.
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