How Much Has VMware Progressed In Network Virtualization?
Virtualizati0n and cloud computing provider VMware (NYSE:VMW) has performed well in the network virtualization domain, which it ventured into relatively recently. The company launched the VMware NSX in late 2013, which merged its existing vCloud networking product line with the network virtualization platform of Nicira (which it acquired in 2012) into a single product family. VMware has since witnessed strong demand for the NSX, with the number of customers growing from just 30 to over 400 by the end of 2014. [1]
The biggest challenge for VMware at this point is winning the ‘perception battle’ against once-partner Cisco (NASDAQ:CSCO). The networking giant has taken a different approach to network virtualization and software-defined networking (SDN) compared to VMware. VMware’s approach holds the potential to make high-end and branded networking hardware/equipment redundant in the long term, which is a major concern for Cisco. In mid-2014, VMware’s CEO mentioned that Cisco branded VMware to be its “public enemy number one” following the NSX launch. [2] These comments could be a result of an agreement between VMware and Cisco’s rival Juniper Networks (NYSE:JNPR) which leveraged VMware’s NSX to virtualize Juniper’s networking equipment (see Juniper Partners With VMware To Combat Cisco As SDN Takes Off).
More recently, Cisco’s outgoing CEO reiterated the idea that the software-centric approach or white-box products are unlikely to negatively impact Cisco’s earnings in the long run. [3]
See our complete analysis for VMware here
Players In The SDN Market: VMware And Cisco
The VMware NSX creates software-based network overlays on top of existing hardware, thereby decoupling networking-related intelligence from the hardware. This makes networks programmable and scalable, and gives enterprises the flexibility to implement technology changes through mere software upgrades. What makes SDN even more appealing to enterprises is that it allows them to put third-party software on cheap white-label networking hardware, making it potentially much cheaper to implement than installing Cisco’s hardware products that come with embedded software. Before launching the NSX platform in 2013, VMware management stated that the company does not intend to harm its partnership with Cisco by launching competing SDN products. [4] However, a software-centric approach to networking threatens to cannibalize Cisco’s market share. Comparatively, Cisco’s approach to SDN is more hardware-centric, with the platform built on top of its Nexus switches which are controlled by application policy infrastructure controllers (APICs). This approach attempts to improve troubleshooting problems faced by virtualized networks by making applications the center of all network-related decisions. As a result, the data center can dynamically match resources with the needs of applications rather than the other way around. The APIC-model coupled with Cisco’s recently launched Open Network Environment (stylized as Cisco ONE), is the company’s bet against purely software-based virtualized networking.
The key problem area for VMware’s customers catered to by the NSX implementation is networking bottlenecks in data centers. Many clients have implemented server virtualization in the past and can successfully migrate computing resources via the deployed solutions by virtualization providers such as VMware, Citrix or Microsoft (NASDAQ:MSFT). However, the industry is transitioning towards a software-centric approach to segments including storage as well as networking. VMware has entered both these domains, offering software-defined storage and software-defined networking solutions. Some top-tier enterprises have already or are planning to sign up to upgrade their IT setups to include SDN as a part of their data center strategy.
According to IDC, more than 70% of large and mid-sized enterprises are likely to rework their networking setups over the next three years. VMware’s management mentioned that the company is witnessing strong momentum, which is likely to continue over the next few years. [5] Many of VMware’s customers continue to upgrade their networking and security requirements owing to the hardware-bound limitations in their current architectures. On the other hand, non-IT small and medium enterprises (SMEs) are likely to migrate to a newer technology once it fully matures. Correspondingly, VMware could witness an increasing mix of large-scale license agreements and implementations in the coming years.
Opportunity For VMware
Among VMware’s 400 customers for NSX, more than 50 have the product deployed on a very large scale, with implementation costs of over $1 million. This was evident in some of the largest deals signed by VMware in recent times. Eight out of the ten largest enterprise license agreements (ELAs) signed by VMware in the most recent quarter included NSX as part of the agreement.
According to SDN Central, software-defined networking is set to grow at a CAGR of 80% from a $3.4 billion market at present to become a $35 billion market through 2018. [6] VMware’s internal metrics estimate that the company’s total addressable market for software-defined data center (SDDC, which includes server virtualization, software-defined storage and software defined networking) could grow at a CAGR of about 20% to reach $33 billion by 2017. [7] This provides a huge opportunity for SDN players. Given the advantages of the software-defined networking model, a large number of enterprises could opt for the NSX (or other purely software-based platforms) in the coming years. Additionally, other networking players such as Juniper, Big Switch and Brocade also favor the virtualized network model over the APIC approach, as evidence by the Juniper-VMware deal.
More recently, VMware recently announced that it has expanded the range of NSX to include deployment on Cisco’s latest Nexus 9000 switches. In its Q3 FY 2015 earnings this month, Cisco reported that the number of Nexus 9000 clients jumped from 970 at the end of Q1 FY2015 to 2,650 by the end of the fiscal third quarter. VMware had received numerous customer requests to deploy the NSX on Cisco architecture, with the hardware infrastructure running on the basic IP-based fabric and VMware’s software layer handling the virtualization. [8]
The list price for a perpetual NSX license starts at around $6,000 per CPU, which is higher than our estimated average price per license for VMware. ((VMware Reveals Plans Around NSX Software-Defined Networking, CRN, June 2014)) The mix of NSX licenses among all licenses sold by VMware is likely to increase since the server virtualization market has matured in the last few years. We forecast VMware’s average price per license to grow to about $5,300 per license by the end of our forecast period. An 8-10% increase in the average price translates to a 6-8% upside to our $90 price estimate for VMware’s stock. Our price estimate is roughly in line with the current market price.
View Interactive Institutional Research (Powered by Trefis):
Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap
More Trefis Research
- VMware’s Latest NSX Tally: 400 Customers, SDN Central, January 2015 [↩]
- VMware Reveals Plans Around NSX Software-Defined Networking, CRN, June 2014 [↩]
- Cisco CEO: It’s ‘garbage’ to think Facebook’s and VMware’s network projects will hurt Cisco, Business Insider, May 2015 [↩]
- VMware CEO: NSX Isn’t Going To Hurt Cisco Partnership, And It Could Help, CRN, August 2013 [↩]
- VMware Q1 2015 Earnings Call Transcript, Seeking Alpha, April 2015 [↩]
- SDN Market Size to reach $35B by 2018, SDN Central, April 2013 [↩]
- VMware Analyst Day 2014 Presentation, VMware Investor Relations, August 2014 [↩]
- Deploying VMware NSX on Cisco Nexus 9000 & Cisco UCS Infrastructure, VMware Blog, April 2015 [↩]