Some Thoughts on VMware’s Strategic Acquisition of Nicira

If you were a regular or occasional reader of Nicira Networks CTO Martin Casado’s blog, Network Heresy, you’ll know that his penultimate post dealt with network virtualization, a topic of obvious interest to him and his company. He had written about network virtualization many times, and though Casado would not describe the posts as such, they must have looked like compelling sales pitches to the strategic thinkers at VMware.

Yesterday, as probably everyone reading this post knows, VMware announced its acquisition of Nicira for $1.26 billion. VMware will pay $1.05 billion in cash and $210 million in unvested equity awards.  The ubiquitous Frank Quattrone and his Quatalyst Partners, which reportedly had been hired previously to shop Brocade Communications, served as Nicira’s adviser.

Strategic Buy

VMware should have surprised no one when it emphasized that its acquisition of Nicira was a strategic move, likely to pay off in years to come, rather than one that will produce appreciable near-term revenue. As Reuters and the New York Times noted, VMware’s buy price for Nicira was 25 times the amount ($50 million) invested in the company by its financial backers, which include venture-capital firms Andreessen Horowitz, Lightspeed,and NEA. Diane Greene, co-founder and former CEO of VMware — replaced four years ago by Paul Maritz — had an “angel” stake in Nicira, as did as Andy Rachleff, a former general partner at Benchmark Capital.

Despite its acquisition of Nicira, VMware says it’s not “at war” with Cisco. Technically, that’s correct. VMware and its parent company, EMC, will continue to do business with Cisco as they add meat to the bones of their data-center virtualization strategy. But the die was cast, and  Cisco should have known it. There were intimations previously that the relationship between Cisco and EMC had been infected by mutual suspicion, and VMware’s acquisition of Nicira adds to the fear and loathing. Will Cisco, as rumored, move into storage? How will Insieme, helmed by Cisco’s aging switching gods, deliver a rebuttal to VMware’s networking aspirations? It won’t be too long before the answers trickle out.

Still, for now, Cisco, EMC, and VMware will protest that it’s business as usual. In some ways, that will be true, but it will also be a type of strategic misdirection. The relationship between EMC and Cisco will not be the same as it was before yesterday’s news hit the wires. When these partners get together for meetings, candor could be conspicuous by its absence.

Acquisitive Roads Not Traveled

Some have posited that Cisco might have acquired Nicira if VMware had not beaten it to the punch. I don’t know about that. Perhaps Cisco might have bought Nicira if the asking price were low, enabling Cisco to effectively kill the startup and be done with it. But Cisco would not have paid $1.26 billion for a company whose approach to networking directly contradicts Cisco’s hardware-based business model and market dominance. One typically doesn’t pay that much to spike a company, though I suppose if the prospective buyer were concerned enough about a strategic technology shift and a major market inflection, it might do so. In this case, though, I suspect Cisco was blindsided by VMware. It just didn’t see this coming — at least not now, not at such an early state of Nicira’s development.

Similarly, I didn’t see Microsoft or Citrix as buyers of Nicira. Microsoft is distracted by its cloud-service provider aspirations, and the $1.26 billion would have been too rich for Citrix.

IBM’s Moves and Cisco’s Overseas Cash Horde

One company I had envisioned as a potential (though less likely) acquirer of Nicira was IBM, which already has a vSwitch. IBM might now settle for the SDN-controller technology available from Big Switch Networks. The two have been working together on IBM’s Open Data Center Interoperable Network (ODIN), and Big Switch’s technology fits well with IBM’s PureSystems and its top-down model of having application workloads command and control  virtualized infrastructure. As the second network-virtualization domino to fall, Big Switch likely will go for a lower price than did Nicira.

On Twitter, Dell’s Brad Hedlund asked whether Cisco would use its vast cash horde to strike back with a bold acquisition of its own. Cisco has two problems here. First, I don’t see an acquisition that would effectively blunt VMware’s move. Second, about 90 percent of Cisco’s cash (more than $42 billion) is offshore, and CEO John Chambers doesn’t want to take a tax hit on its repatriation. He had been hoping for a “tax holiday” from the U.S. government, but that’s not going to happen in the middle of an election campaign, during a macroeconomic slump in which plenty of working Americans are struggling to make ends meet. That means a significant U.S.-based acquisition likely is off the table, unless the target company is very small or is willing to take Cisco stock instead of cash.

Cisco’s Innovator’s Dilemma

Oh, and there’s a third problem for Cisco, mentioned earlier in this prolix post. Cisco doesn’t want to embrace this SDN stuff. Cisco would rather resist it. The Cisco ONE announcement really was about Cisco’s take on network programmability, not about SDN-type virtualization in which overlay networks run atop an underyling physical network.

Cisco is caught in a classic innovator’s dilemma, held captive by the success it has enjoyed selling prodigious amounts of networking gear to its customers, and I don’t think it can extricate itself. It’s built a huge and massively successful business selling a hardware-based value proposition predicated on switches and routers. It has software, but it’s not really a software company.

For Cisco, the customer value, the proprietary hooks, are in its boxes. Its whole business model — which, again, has been tremendously successful — is based around that premise. The entire company is based around that business model.  Cisco eventually will have to reinvent itself, like IBM did after it failed to adapt to client-server computing, but the day of reckoning hasn’t arrived.

On the Defensive

Expect Cisco to continue to talk about the northbound interface (which can provide intelligence from the switch) and about network programmability, but don’t expect networking’s big leopard to change its spots. Cisco will try to portray the situation differently, but it’s defending rather than attacking, trying to hold off the software-based marauders of infrastructure virtualization as long as possible. The doomsday clock on when they’ll arrive in Cisco data centers just moved up a few ticks with VMware’s acquisition of Nicira.

What about the other networking players? Sadly, HP hasn’t figured out what to about SDN, even though OpenFlow is available on its former ProCurve switches. HP has a toe dipped in the SDN pool, but it doesn’t seeming willing to take the initiative. Juniper, which previously displayed ingenuity in bringing forward QFabric, is scrambling for an answer. Brocade is pragmatically embracing hybrid control planes to maintain account presence and margins in the near- to intermediate-term.

Arista Networks, for its part, might be better positioned to compete on networking’s new playing field. Arista Networks’ CEO Jayshree Ullal had the following to say about yesterday’s news:

“It’s exciting to see the return of innovative networking companies and the appreciation for great talent/technology. Software Defined Networking (SDN) is indeed disrupting legacy vendors. As a key partner of VMware and co-innovator in VXLANs, we welcome the interoperability of Nicira and VMWare controllers with Arista EOS.”

Arista’s Options

What’s interesting here is that Arista, which invariably presents its Extensible OS (EOS) as “controller friendly,” earlier this year demonstrated interoperability with controllers from VMware, Big Switch Networks, and Nebula, which has built a cloud controller for OpenStack.

One of Nebula’s investors is Andy Bechtolsheim, whom knowledgeable observers will recognize as the chief development officer (CDO) of, and major investor in, Arista Networks.  It is possible that Bechtolsheim sees a potential fit between the two companies — one building a cloud controller and one delivering cloud networking. To add fuel to this particular fire, which may or may not emit smoke, note that the Nebula cloud controller already features Arista technology, and that Nebula is hiring a senior network engineer, who ideally would have “experience with cloud infrastructure (OpenStack, AWS, etc. . . .  and familiarity with OpenFlow and Open vSwitch.”

 Open or Closed?

Speaking of Open vSwitch, Matt Palmer at SDN Centralwill feel some vindication now that VMware has purchased a company whose engineering team has made significant contributions to the OVS code. Palmer doubtless will cast a wary eye on VMware’s intentions toward OVS, but both Steve Herrod, VMware’s CTO, and Martin Casado, Nicira’s CTO, have provided written assurances that their companies, now combining, will not retreat from commitments to OVS and to Open Flow and Quantum, the OpenStack networking  project.

Meanwhile, GigaOm’s Derrick Harris thinks it would be bad business for VMware to jilt the open-source community, particularly in relation to hypervisors, which “have to be treated as the workers that merely carry out the management layer’s commands. If all they’re there to do is create virtual machines that are part of a resource pool, the hypervisor shouldn’t really matter.”

This seems about right. In this brave new world of virtualized infrastructure, the ultimate value will reside in an intelligent management layer.

PS: I wrote this post under a slight fever and a throbbing headache, so I would not be surprised to discover belatedly that it contains at least a couple typographical errors. Please accept my apologies in advance.

20 responses to “Some Thoughts on VMware’s Strategic Acquisition of Nicira

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  4. Never mind the typographical errors, not that I spotted any, your analysis is razor sharp and worth several thousand $$$s worth of Gartner reports.

  5. kudos, extremely well-written, cogent analysis… really enjoyed seeing this and sadly i agree with most of what you said!

  6. One company you have left out of the mix which we all need to watch is VYATTA!!!

  7. BigSwitch could and should sell for more then Nicira, not less. Their technology supports not only the software tunneling that Nicira does but also can control all the hardware switches (like Arista, BNT, HP, etc). The issue with Nicira is the same as the BGP full mesh issue – lets take 40 servers in a rack and 2 racks (2 data centers). With a tunnel per server to every server in the other rack – well….you can do the math. BSN on the other hand – OpenFlow switch, single tunnel in SW today (traffic from each server goes to the OpenFlow switch and then can be directed at the SW tunnel) and in the future that OpenFlow switch (next-gen) can do NVGRE or VXLAN or the like in HW for the tunnel. Much clean, scales better.

    The reality is you can not ignore the HW part of the network no matter how much you want to. BSN provides the ability to orchestrate the HW and the SW.

    Also you have to wonder about the VMware long term commitment to the OSS side of the Nicira technology. While they have publicly said they are committed to it, you have to wonder if that really makes sense in the context of supporting KVM or Xen which are competitor to the VMware solution. Helping your direct competition seems unwise long term.

    • Sah, you misunderstand how Nicira’s software works! Contrary to your thinking , Nicira’s controller does not create a full mesh to every hypervisor.

      There is a tunnel from hypervisor to hypervisor only and only of a logical switch port on hypervisor A belongs to a tenant that also has a logical switch port on hypervisor B.

      Look at Nicira’s scale numbers, they are able to already, and at very early in the stage of the game, support 5000 + hypervisors with a single controller cluster. That number will double or triple before year end.

      By the way , who will care about openflow on physical switch when all that moves to a commodity switching fabric you by from some unknown vendor in china because all the smarts of switching,routing, security has been moved in to the software stack controlled by network controller.

      I’ve been at VMware since 2005 and what I am seeing now is the the same type of rhetoric we saw in 2005, “who need this virtualization stuff, it will never fly, it cant do what physical servers do….”

      All I can say is , watch out below….

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  9. Great article! As you conclude, the ultimate value will reside in an intelligent management layer. Real-time visibility allows the management layer to automatically adapt to changing demand, improving efficiency and performance by optimally placing workloads, load balancing traffic etc.

    A significant challenge VMware customers will face when deploying Nicira’s Distributed Virtual Network Infrastructure will be managing the tunneled traffic on their physical switch infrastructure. End-to-end virtual network visibility is neatly solved by the sFlow standard monitoring supported by the Open vSwitch and almost all major switch vendors – with the notable exception of Cisco. Implementing sFlow on a physical switch platform requires hardware support, so Cisco will face significant challenges addressing this requirement.

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  12. VMware EE..

    So if a client has VMs on 10 servers in a rack in DC1 and they also have VMs in the same network (L2) on 10 servers in DC2…what is the number of tunnels. Let’s see:

    DC1-srvr1 to DC2-srvr1
    DC1-srvr2 to DC2-srvr1
    DC1-srvr3 to DC2-srvr1
    ……..
    And so on.

    Sound a bit like old school N^2 to me. Feel free to take the marketing view of well, not everyone needs to talk but that is not reality. You need tunnel entrance and end points to be consolidated other wise the number of tunnels becomes unscalable. Seems to me that VMware believes this also, after all this is what VXLan was designed to help with.

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