AT&T Inc., Goldman Sachs Group Inc., Facebook Inc. and other companies are embracing software to run their networks -- a shift that poses a challenge to hardware makers led by Cisco Systems Inc. (CSCO:US)
Instead of buying expensive new routers and switches that move Internet traffic, they’re opting for networks that rely more on software and inexpensive hardware. The new technology is called software-defined networking, or SDN, and lets users add speed and features while cutting costs.
All of the companies have embraced SDN within the last two years, a rapid pace in an industry not known for quick adoption of technologies. That spells trouble for traditional networking-equipment providers. While the top three manufacturers -- Cisco, Juniper Networks Inc. (JNPR:US) and Alcatel-Lucent -- are warming to SDN too, they remain dependent on sales of traditional routers and switches, an area that hasn’t expanded by more than 3 percent a year since 2011.
“I’m a tinkerer, I need to see under the hood,” said Mike Dawson, an Indianapolis-based networking consultant who used to buy equipment from Cisco and Juniper until he decided last year to set up a cloud-computing company for schools, businesses and government agencies.
Instead of buying hundreds of thousands of dollars worth of equipment from brand-name suppliers, Dawson spent less than $10,000 on switches from TAM Networks Inc., a San Ramon, California-based manufacturer that builds bare-bones equipment in China.
Using SDN software from Pica8 Inc., Dawson manages the entire network on a computer screen, rather than configuring each type of equipment separately. If a customer asks for a new feature, Dawson said he can write the code instead of waiting for Cisco to build the capability into its machines.
“There’s no chance in hell that Cisco is going to put something in its product road map for me,” Dawson said.
SDN-compatible gear is on track to make up 38 percent of the $61 billion Internet-switch market in 2017, up from about 5 percent this year, according to Michael Howard, co-founder of Campbell, California-based Infonetics Research Inc. Similar to the shift to cloud computing over the Internet, SDN is poised to erode the profitability of incumbent suppliers. While routers and switches typically carry profit margins of more than 60 percent, some bare-bones SDN servers have margins of less than 20 percent.
“A year ago, SDN was embryonic -- now it’s crawling, but there is an awful lot of investment going on,” Howard said. “SDN lets you see the big picture of how your network operates, so you can make intelligent decisions about how to make traffic flow.”
National carriers such as Nippon Telegraph & Telephone Corp. and Deutsche Telekom AG are also embracing software-defined networking, following the lead of large Internet companies such as Amazon.com Inc. and Google Inc. that pioneered the approach.
Cisco, as the biggest provider of networking equipment, faces the biggest challenge from SDN. For now, Cisco is focused on offering more flexibility in a way that doesn’t threaten its hardware sales. Cisco has introduced a machine, the Nexus 9000, which works with a broad range of software. Still, the company requires customers to buy its hardware.
Cisco Chief Executive Officer John Chambers said last month that more than 1,000 customers have ordered the Nexus 9000 and predicted Cisco will be the leader in SDN by early 2015. Cisco unveiled plans in May to introduce software packages that were previously sold as features of its networking equipment, and other services aimed at companies that don’t want the hassle of building their own SDN-based networks.
Rob Lloyd, Cisco’s president of development and sales, said that SDN will ultimately prove to be an opportunity for the company.
“In the last one or two years, a lot of people thought SDN was going to kneecap us,” Lloyd said at Bloomberg’s Next Big Thing Summit yesterday in Sausalito, California. “We feel like it’s about to be payday, when we demonstrate that we are going to be a leader.”
Mike Marcellin, senior vice president of strategy and marketing for Juniper, said the company has been named as one of AT&T’s partners and has embraced SDN.
“SDN will create winners and losers, and we are confident Juniper’s strategy will enable our customers to take full advantage of the SDN opportunity,” Marcellin said.
While many companies aren’t jumping on the SDN bandwagon, phone-service providers and financial firms that rely heavily on networks are moving more quickly. Instead of upgrading gradually to test new technologies and prevent outages, carriers are embracing SDN because it offers a way to reduce operating costs and use more of their networks. It also frees buyers from being locked into buying new equipment from the same vendor to ensure that network machines work together.
“If you come to us and say, ‘I have this high-performance software that’s baked into our hardware,’ we won’t even look at it,” John Donovan, AT&T’s senior executive vice president for technology and network operations, said in an interview in March. “You’re going to have to change your model.”
While Cisco remains AT&T’s largest supplier, according to data compiled by Bloomberg, the manufacturer isn’t among the six equipment providers selected by the carrier for a new network-building project.
“It’s not just AT&T,” Howard said. “Deutsche Telekom, Telefonica, British Telecom, NTT and China Telecom are all telling suppliers they want to build their networks in a new way.”
SDN is also making it easier for carriers to roll out cloud-based services to companies that would rather pay a monthly fee for a virtual firewall or videoconferencing system, rather than buying and operating devices to handle these jobs.
“If we wanted to roll out a new service in the past, we had to get Cisco or Juniper to support it in their hardware,” said Yukio Ito, senior vice president of service infrastructure at NTT Communications Corp., an NTT subsidiary. “That can take 18 months. By using SDN, we want to free ourselves from vendor lock-in.”
On the software side, Cumulus Networks Inc., Big Switch Networks Inc. and Tail-F Systems AB are offering SDN products and services aimed at companies seeking more control over their networking equipment. On the hardware side, customers are going directly to manufacturers such as Quanta Computer Inc. and Accton Technology Corp. and getting them to build routers and switches to their exact specifications.
Don Duet, co-chief operating officer of Goldman Sachs’s technology division, a Quanta customer, said proprietary networking equipment has become the chokepoint for information-technology departments that want to innovate more quickly. In order to change software on Goldman’s network, Duet’s administrators can “reconfigure the computing in minutes, but it might take two weeks to change the firewall,” he said.
Martin Casado, considered one of the key architects of software-defined networking, said the industry is in the midst of a disruptive revolution that’s making it harder for established suppliers to compete. The days of selling equipment at gross margins of more than 70 percent are over, he said.
“In the past when you chose a vendor, you were pretty much stuck with them,” said Casado, who was at Stanford University and co-founded SDN pioneer Nicira Corp. before it was acquired by VMware in 2012. “SDN creates different pricing pressures, different competitors, different everything.”
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