The Significance of Software Defined Data Centers

There are several inter-related factors leading to VMware's acquisition of Nicira, and they all have significant ramifications for the broad IT industry.  A recent TechNote on why VM is acquiring Nicira discussed how the global leader in virtualization and cloud infrastructure will leverage the acquisition to increase revenues both by the sale of Nicira's current NVP product and by providing more L4-L7 services.  That will no doubt come at the expense of some of VMware's existing partners.  There are two other drivers of the Nicira acquisition.

The hot topic at the recent VMworld conference was software defined data centers (SDDCs).  VMware is heavily promoting this new software-centric concept where all of the data center infrastructure is virtualized and delivered as a service, while the control of this datacenter is entirely automated by software.  As VMware explained at the conference, in blogs and in interviews, the company's vision is that the data center will be built largely on commodity processors, and that software will provide everything that's needed to adapt the data center to new situations and new applications.  It will manage everything from storage to switches to security.  While SDDC is a relative new buzz phrase, it's not just VMware that is using the phrase.  About ten days before the VMworld conference, CEO John Chambers announced that Cisco would lead the shift to SDDC.  Microsoft has also chimed into the discussion stating that its data center offerings are also software defined.  In addition, whether or not they use the phrase SDDC, industry leaders HP, Dell and IBM are all advocating similar concepts.

At the VMworld conference, VMware executives also laid out how they saw the size of the data center addressable market potentially changing.  They claim today's total addressable date center market is roughly US $50 billion and of that amount, $30 billion is addressable by VMware itself.  They also stated that the broad adoption of SDDC would increase the size of the total addressable data center market to $80 billion and of that amount, $50 billion was addressable by VMware.  It's possible to use these numbers to create an argument for the acquisition of Nicira that says, why not spend US $1.26 billion to acquire technology that is key to increasing your addressable market by US $20 billion a year?  If VMware were only able to realize a quarter of that increase, that would result in increasing its annual revenues by US $5 billion and certainly justify spending a quarter of that amount to acquire Nicira. 

On the surface this argument seems to totally justify VMware's acquisition of Nicira, but it leaves one nagging question.  If network virtualization and software defined networking are key to VMware's vision of a SDDC, why did they have to own that capability?  Why not just leverage the functionality provided by their good partner Cisco?  That question is particularly relevant because if VMware had not acquired Nicira, Cisco most likely would have made the move.

There are two possible answers to that question.  One is that VMware believes that it will make enough money just on the Nicira functionality alone to justify the high acquisition cost.  While that is a possible answer, it doesn't seem like a compelling answer.  Another possibility is that VMware didn't trust Cisco to deliver the functionality desired.  Most likely, the real answer of why not just leverage the functionality provided by Cisco is a combination of those two.

So the reasons VMware is acquiring Nicira are in part to make some money directly from the Nicira technology; in part to leverage that technology to significantly increase VMWare's addressable market; and in part because the company doesn't totally trust Cisco.  This is not the end of the VMware - Cisco relationship, but it does place a damper on it.  VMware's acquisition of Nicira also sends a message to the rest of VMware's partners that the market is shifting and VMware is going to do what makes the most business sense for VMware, even if that means upsetting some of its close partners.  That is not a new message.  Cisco sent that same message to the marketplace a couple of years ago when it announced its entry into the server marketplace.

The IT industry continues to be in a state of dramatic flux. One of the primary technology drivers of this flux is the ongoing adoption of virtualization that started with server virtualization and is just now impacting the network.  Another driver of the flux is the ongoing spate of mergers and acquisitions and the continual adjustments in partnerships on the part of key vendors.  One implication of this flux is that now more than ever IT organizations need a plan for how they will evolve their network.  In future TechNotes we will provide our insight into how to best create that plan.