Software Defined Networks Explained

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Every 25 years or so, telecom networks get totally re-designed. The last big re-build came with the internet in the early 1990s. Now “IP networking” technology is giving way to another technology cycle known as “software defined networking”. SDN is a new architecture for telecom networks in which the emphasis shifts from hardware to software. It will be hugely disruptive because it fundamentally changes who controls the telecom network. In the report we predict some of the winners and losers.

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Software Defined Networks Explained

  1. 1. SYNC. Global investment themes: Telecoms, media and technology Software Defined Networks Who’s who and who’s impacted? September 2013 Cyrus Mewawalla www.researchcm.com Authorised and regulated by the Financial Conduct Authority CM Research
  2. 2. Technology Investment Themes Software Defined Networks September 2013 Contents WHAT IS SDN? 3  PROS AND CONS OF SDN 7  COMPETITIVE LANDSCAPE 10  HISTORY OF NETWORKING 21  TECHNOLOGY BRIEFING 27  WHO’S IMPACTED BY SDN? 32  COMPANIES SECTION 38  CONCLUSIONS 55  APPENDIX 1: WHO’S WHO IN THE SDN VALUE CHAIN? 57  APPENDIX 2: SOME OF OUR OTHER INVESTMENT THEMES 58  www.researchcm.com 2
  3. 3. Technology Investment Themes Software Defined Networks September 2013 What is SDN? www.researchcm.com 3
  4. 4. Technology Investment Themes Software Defined Networks September 2013 SDN Definition  Software defined networking is an emerging architecture for data networks Every 25 years or so, telecom networks get totally re-designed. The last great shift in telecom network technology occurred 25 years ago and was called IP networking, based on a communication standard called internet protocol. Now “IP networking” technology is giving way to another technology cycle known as “software defined networking”. SDN is a new architecture for telecom networks in which the emphasis shifts from hardware to software. It will be hugely disruptive because it fundamentally changes who controls the telecom network. SDNs allow software – rather than hardware – to control the network path along which data packets flow. The implication is that SDNs will transfer the intelligence currently held in a network equipment box to a software layer, enabling the network to be centrally controlled and programmed. This means that they will allow telecom operators to manage their networks more efficiently and offer new services more quickly. It also means that industry outsiders can programme telecom networks themselves to allow their services – say Netflix’s video streaming service – to run better. A good analogy for what SDNs might do for telecom customers is what smartphones did for mobile phone subscribers. Through mobile operating systems like Android and iOS, smartphones allowed users to control their mobile digital lives via apps that were easy to download and use. But, in the process, competitive power shifted from hardware makers like Nokia, Motorola and HTC to software developers like Apple and Google. And since SDNs are based on open technology standards, in our analogy SDNs would be closer in nature to Google’s Android than Apple’s iOS. www.researchcm.com 4
  5. 5. Technology Investment Themes Software Defined Networks September 2013 Value chain As SDN technology proliferates, the value within the networking hardware industry will move from hardware to software. And since the interfaces would be open, the proprietary vendor ecosystems of Cisco, Juniper, Ericsson, Huawei and others would see barriers to entry fall. Software defined networks will turn intelligent telecom equipment hardware into dumb boxes How will the telecom equipment value chain evolve? Whereas vertically integrated, single vendor systems are common in telecom networks today, future networks based on SDN technology would have open hardware, control and application interfaces. This would allow industry outsiders to enter the high-value segments of the telecom equipment value chain. Source: CM Research www.researchcm.com 5
  6. 6. Technology Investment Themes Software Defined Networks September 2013 Timing In 2006, SDN was a just a concept within a research project run by Stanford University. By 2011, the large internet companies like Google, Microsoft and Facebook – as well as some operators like Verizon and Deutsche Telekom – were publicly backing SDN’s open networking standards. By 2012, the first serious SDN players like Big Switch Networks sprung up. This year, there has been substantial M&A activity as the big telecom equipment players begin to acquire SDN start-ups. In July 2012, for example, VMware acquired Nicira for $1.3bn and in January 2013 Cisco acquired Intucell for $475m. We are early in this investment cycle. But as new SDN technologies rapidly develop, dominant players can very quickly make strategic mistakes that later become impossible to correct. Just ask Blackberry management what they thought of iPhones only four years ago. Software defined networking is moving from the R&D phase to the commercialisation phase SDN product cycle timeline SDN Commercialisation SDN Research & Development Stanford Univ Research Project into SDN 2005 Open Flow Switching specification released 2006 2007 2008 MIT Technology Review coins the phrase,  "software defined networking" 2009 Open Networking Foundation founded by Google, Facebook, Microsoft, Yahoo Deutsche Telekom and Verizon 2010 2011 2012 Several SDN start‐ups acquired by equipment makers 2013 SDN technology begins to go  mainstream 2014 2015 Source: MyEtherealMind, GigaOm, CM Research www.researchcm.com 6
  7. 7. Technology Investment Themes Software Defined Networks September 2013 Pros and cons of SDN www.researchcm.com 7
  8. 8. Technology Investment Themes Software Defined Networks September 2013 Benefits Software defined networking will make data networks simpler, more cost-efficient and more innovative. Simpler SDN technology makes networks simpler for operators to manage because a plethora of legacy network systems will be replaced by a single network operating system with open interfaces between hardware, software and applications, cutting down operational complexities. In addition, by centralising control across multiple network elements, operators can build virtual networks over a common physical network. Configuration of the networks will now largely be done by software rather than hardware and expensive, proprietary hardware platforms will no longer be necessary. Cheaper SDN technology makes it cheaper for operators to run their networks. Operators can make Capex savings by cutting down on expensive network hardware upgrades because in an SDN most of technological advances will be largely confined to software upgrades. They can also make Opex savings because greater automation of network functionality will reduce the need for an army of on-site network hardware engineers, although the number of software engineers will increase. More innovative SDN technology speeds up innovation for network users by allowing software companies and corporations to programme the network themselves – using open interfaces – instead of asking the network operator to do so for them. New network applications will emerge rapidly, just as new apps emerge every day on Apple’s App store. www.researchcm.com 8
  9. 9. Technology Investment Themes Software Defined Networks September 2013 Risks Software defined networks will lead to higher security risks and lower reliability levels for all users. For telecom operators it could also result in a loss of control of the network. Cyber-security risk SDNs transfer the intelligence currently held in a network equipment box to a software layer, enabling the network to be centrally controlled. Like many areas of the digital world, that means physical protection barriers are replaced by cyber-security protection barriers. But it means that anyone, anywhere in the world, can potentially hack into the telecom network. Whilst hacking of telecom customers is commonplace today, SDNs could make hacking of the telecom network itself more likely, effectively enabling an enemy of the state to take over control of a country’s telecom network. Lower reliability Traditionally, telecom networks were famed for their “five-nine” reliability levels – that is, that communication links have a 99.999% probability of working as expected. The advent of IP networking technology introduced some degree of open standards to telecom networks and reliability levels have fallen as a result. But SDN technology will open up interfaces much more, reducing equipment hardware to commodity boxes and raising the likelihood of hardware failures. That means network applications are less likely to work as well as they do today because a single vendor no longer takes responsibility for them. Loss of control Today network operators make money by charging large corporations to reserve dedicated bandwidth and to charge for a range of network services. SDNs will allow customers to programme the network themselves and make more efficient use of the bandwidth they consume. Third party software developers will also be able to sell their customers more innovative network services, bypassing the network operator entirely. Operators therefore risk losing control of their network to industry outsiders. www.researchcm.com 9
  10. 10. Technology Investment Themes Software Defined Networks September 2013 Competitive landscape www.researchcm.com 10
  11. 11. Technology Investment Themes Software Defined Networks September 2013 Market size Today SDN technology has successfully moved from the R&D phase to the commercialisation phase with over $300m of venture capital invested in start-ups in the sector and global SDN equipment sales in 2012 of around $250m. All the established telecom equipment vendors are busy defining their version of SDN. This is an indication of how seriously they take the threat. Growth estimates for the SDN equipment market vary wildly. Whilst SDN is unlikely to account for more than 1% of the estimated $68bn global networking equipment market in 2013, it will be the fastest growing element for the next decade. By 2020, SDN-related sales could account for a third of all network equipment sales. $bn Cisco, the world The network equipment sector is worth $68bn this year Today SDN accounts for less than 1%, but by 2020 SDN could account for 32% of network equipment sales leader in networking equipment has the Global network equipment market most to lose. While  100 Cisco has taken an  90 early lead in  80 Software defined networking  70 developing SDN Data center equipment  60 products, it has a Application delivery  50 number of IP Networking  40 heavyweight rivals Wireless LAN  30 including Juniper  20 Routing  10 Networks, Huawei, Switches  ‐ NEC, Hewlett Packard, 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Dell, Brocade and Source: IDC, Gartner, CM Research VMware. www.researchcm.com 11
  12. 12. Technology Investment Themes Software Defined Networks September 2013 Networking equipment market SDN technology will be highly disruptive for the network equipment market. In 2012, the network equipment market was worth $68bn. Switches and routers accounted for 56% of the market by revenues with data centres – which accounted for 17% – being the highest growth sector. SDN technology threatens to replace proprietary networking hardware with open hardware standards and open application programming interfaces (APIs). This will reduce the expensive networking equipment products of today – switches, routers, application delivery hardware – to commodity hardware. The global network equipment market is worth $68bn Revenues by product, 2012 IP  Networking 10.7% Switches 35.8% Data  centres 16.8% Application  delivery 4.2% Wireless  LAN 12.0% Competitive power and profitability will shift to those who make network Source: IDC, Gartner, CM Research applications and the network operating software. Routing 20.6% www.researchcm.com 12
  13. 13. Technology Investment Themes Software Defined Networks September 2013 Switches and routers Switches and routers direct the flow of internet traffic between computers on a network: switches tend to focus on local area network traffic while routers direct traffic on wide area networks. Routers are therefore sophisticated switches. In 2012, the global market for network switches and routers was worth $23.3bn and $13.4bn respectively, but growth has slowed to 1% or 2% per annum. Cisco dominates both markets with over 50% market share. Its closest competitor in switches is Hewlett-Packard with an 8.4% market share. In the market for routers, its closest rivals include Juniper Networks, Alcatel Lucent and Huawei which have market shares of 15.3%, 12.8% and 9.8% respectively. The switch and router markets face the biggest threat from SDN technology. OpenFlow, an open-source network communication protocol, makes today’s intelligent switches and routers look over-engineered and therefore far too expensive. It would make sense for operators to stop using speciality switches from Cisco and opt instead for “white-box” switches based on off-the-shelf “Ethernet chips” made by Intel or Broadcom. Cisco dominates the market for switches and routers – the sector most at risk from SDN technology Switches Global market share by 2012 revenues ($23.3bn) Others 15.9% F5 3.1% Citrix 1.3% D‐Link 1.4% Cisco 59.0% Huawei 2.0% Juniper 2.4% Adtran ZTE 0.6% 0.5% Brocade 0.5% HP 1.6% Huawei 9.8% Brocad e Dell 2.1% 1.7% HP 8.4% Routers Global market share by 2012 revenues ($13.4bn) Alcatel‐ Lucent 2.8% Juniper 15.3% Tellabs 0.7% Others 3.7% Cisco 52.6% Ericsson 1.7% Alcatel‐ Lucent 12.8% Source: IDC, Gartner, CM Research www.researchcm.com 13
  14. 14. Technology Investment Themes Software Defined Networks September 2013 Wireless LAN Wireless local area networks (WLANs) connect computing devices in relatively close proximity (say 10 meters) to the internet wirelessly. The most common type of WLAN is a Wi-Fi network. In 2012, the global market for WLAN equipment was worth $7.8bn. Cisco has a quarter of this market and is investing heavily in it. Its market share has increased from 18% in 2008 to 25% in 2012. Netgear, Aruba and TP-Link are its closes rivals in this market, with each growing their market share over the last three years. The WLAN market, especially in the enterprise space, is expected to see high growth because more and more employees are working on their smartphones and tablets. WLAN is already based largely on open standards like IEEE 802.11, so SDN technology is unlikely to have much of an adverse impact on the sector. Cisco is the market leader in WLAN Wireless Local Area Networks (WLAN) Global market share by 2012 revenues ($7.8bn) TP‐Link 11.0% ZyXEL 2.3% Cisco 25.3% Technicolor 2.1% Ruckus 2.7% Aruba 5.5% Others 26.4% HP 2.8% D‐Link 5.3% Netgear 11.6% Linksys 5.1% Source: IDC, Gartner, CM Research www.researchcm.com 14
  15. 15. Technology Investment Themes Software Defined Networks September 2013 Application Delivery Application delivery networking (ADN) equipment improves the performance of web applications by managing internet traffic intelligently. The technology they use is sophisticated because it must be able to deal with several types of traffic, handle a range of web applications and connect to disparate proprietary legacy networking systems. In 2012, the global market for application delivery networks was worth $2.8bn. The leaders in this market are F5 Networks and Riverbed Technology. In the long term, SDN technology will make this market largely redundant by offering open interfaces between applications and the network control plane. But this disruption is still at least five to ten years away, once telecom networks have got rid of most of their legacy networking equipment and replaced them with SDN technology. In the short term, the application delivery market is likely to grow rapidly as more cloud applications flood the web and customers demand higher quality of service. F5 Networks is the market leader in application delivery Application Delivery Networks Global market share by 2012 revenues ($2.8bn) Riverbed 19.0% Silver Peak 2.1% Cisco 13.9% Brocade 1.8% Radware 4.3% Blue Coat 2.6% F5 29.4% Allot 2.9% A10 3.7% Citrix 12.7% Others 7.6% Source: IDC, Gartner, CM Research www.researchcm.com 15
  16. 16. Technology Investment Themes Software Defined Networks September 2013 Data centres Today’s data centres are sophisticated data networks that require complex architectures to ensure that they crunch data reliably and fast. In 2012, the global market for data centre equipment was worth $10.9bn and is growing at around 12% per annum. It is dominated by Cisco, which commands a 52% market share. Brocade is its closest competitor with 14% of the market. Data centres are one of the first areas that will be disrupted by SDN technology because they are mini-telecom networks that can be built from scratch, discarding legacy network equipment. Barriers to entry will fall relatively quickly – say in the next two to five years. New entrants who build data networks entirely using SDN technology will be able to offer more innovative services at cheaper prices because SDNs simplify data centre architectures and can be upgraded faster. Cisco dominates the data centre market, but Brocade is close behind Data centre equipment Global market share by 2012 revenues ($10.9bn) Riverbed 1.3% Mellanox 1.8% Citrix 2.8% Others 13.7% F5 7.1% Cisco 52.1% Brocade 13.7% Dell 1.7% HP 2.8% Huawei 0.9% Juniper 2.1% Source: IDC, Gartner, CM Research www.researchcm.com 16
  17. 17. Technology Investment Themes Software Defined Networks September 2013 IP Networking In 2012 the market for IP networking equipment was worth $7.0bn. Cisco dominates the IP networking markets, but Avaya is close The market has been stagnant for a behind IP Networking couple of years as prices have been Global market share by 2012 revenues ($7.0bn) falling. Large sections of this market have already been commoditised to some extent and will gradually be commoditised further by SDN technology. Cisco has a 31% market share, Avaya and 24% share and Alcatel Lucent 8%. ShoreTel 2.6% Siemens 6.2% Cisco 31.5% Mitel 3.8% Avaya 24.2% Aastra 2.1% Others 16.1% NEC 5.3% Alcatel‐ Lucent 8.1% Source: IDC, Gartner, CM Research www.researchcm.com 17
  18. 18. Technology Investment Themes Software Defined Networks September 2013 Servers In 2012, the global market for servers was worth $51.3bn. Industry revenues fell by 1.9% compared to 2011 while worldwide unit shipments fell by 1.5% to 8.1m units, according to IDC. IBM, HP and Dell dominate the global server market with market shares of 31%, 28% and 16% respectively. The server, a critical hardware component of data networks, is under attack from open standards. Facebook’s Open Compute Project is an example. IBM, HP and Dell are exposed to SDN in the server space Servers Global market share by 2012 revenues ($51.3bn) Cisco 3.2% Hitachi 1.5% SGI 0.8% Others 8.7% I 30 This scenario is just a distant vision right now, but Facebook has taken concrete steps to make it a NEC reality: today severs need to be designed by 2.0% reference to the CPU chip that powers it, so IntelOracle based server architectures cannot, for example, install 5.2% AMD chips. What Facebook has done is designed a motherboard that will allow customers to insert a chip Fujitsu from any semiconductor manufacturer into it. That 4.1% Dell would allow anyone to build a server from scratch, HP 15.8% rather than relying on tested server designs from IBM, 27.8% Dell or HP. Many Internet companies are pushing for such open-source server hardware designs because it Source: IDC, Gartner, CM Research would give them more control and flexibility over their data networks. If this happens the server market will be dead in the water with the chip manufacturers providing the only value-add in an open standard server. www.researchcm.com 18
  19. 19. Technology Investment Themes Software Defined Networks September 2013 Network storage market Data storage is moving from physical storage on a hard disk drive (HDD) to network storage. In 2012, the HDD storage market was worth $37.7bn and was dominated by Western Digital and Seagate. That market is expected to decline by at least 5% this year. IBM, HP and Dell are exposed in the network storage space Network Storage The market for network storage equipment, Global market share by 2012 revenues ($8.1bn) however, is on the rise. In 2012, the market for NEC Others network storage equipment increased 19.7% to Oracle EMC reach $8.1bn. Whilst growth is likely to continue at 0.9% 10.1% 2.4% 22.9% double digit rates for the next couple of years on the back of the world’s data explosion, the network Fujitsu storage market itself faces an existential threat 2.4% from SDN technology. As the chart on the previous page illustrates, EMC is the leader in network storage with a 23% global market share. Like its rivals IBM, HP, Dell and NetApp, the company offers a proprietary storage solution based on a closed, vertically integrated system. But new technologies like “software defined network storage” threaten to commoditise the network storage business in the same way as other parts of the IP networking value chain. Hitachi 7.0% HP 17.9% NetApp 9.5% Dell 11.6% IBM 15.2% Source: IDC, Gartner, CM Research www.researchcm.com 19
  20. 20. Technology Investment Themes Software Defined Networks September 2013 Software market In 2012, the infrastructure software market – including cyber-security software – was worth $191.5bn and grew by 6%. The application software market – including video game software – was worth $182.3bn and grew by 7%. There will be huge growth opportunities for Microsoft, IBM, Oracle and SAP if SDN takes off Infrastructure software Global market share by 2012 revenues ($191.5bn) Microsoft Others 18.6% 37.5% IBM 12.9% Trend Micro 0.6% Citrix NetApp 1.0% 0.7% Hitachi 0.9% SAS 1.0% Applications software Global market share by 2012 revenues ($182.3bn) Microsoft SAP IBM Oracle 12.6% 6.7% 2.4% 5.2% Adobe 2.0% Oracle 9.6% Symantec HP 3.3% 2.5% BMC Fujitsu VMware 2.2% 1.0% 1.2% SAP 2.5% EMC 2.4% CA 2.2% Others 59.4% Autodesk 0.9% Cisco 0.8% SunGard 0.7% Synopsys 0.9% Intuit 1.3% Siemens 1.3% Salesforce 1.3% Dassault 1.2% Sage Infor 1.0% 1.3% Activision 0.9% Source: IDC, Gartner, CM Research If SDN technology goes mainstream, the software sector is likely to be one of the biggest beneficiaries. Cloud software companies like Netflix, which install their a content delivery network hardware within various telecom networks (often for free) will be able to provide the same level of service without distributing expensive hardware, but simply by programming the telecom network from the comfort of its own offices. www.researchcm.com 20
  21. 21. Technology Investment Themes Software Defined Networks September 2013 History of Networking www.researchcm.com 21
  22. 22. Technology Investment Themes Software Defined Networks September 2013 It started with circuit-switching The Public Switched Telephony Network (PSTN) is the worldwide circuit-switched network on which many voice calls are still made today. Circuit-switched technology is over a hundred years old and was originally developed for analogue voice calls. The PSTN connects two parties to a call by 'switching' parts of the circuit to provide a dedicated, end-toend connection through which analogue voice signals are transmitted. The switched bit of the circuit is not available to anyone else whilst the call is in progress. In peak usage times, the Plain Old Telephone System (POTS), as this network architecture is often called, can create bandwidth capacity constraints resulting in no 'dial tone'. Then came packet-switching Progressively through the 1970's and 1980's, telecom networks all over the world began a shift from analogue to digital services. Digitisation usually started in the core of the network and is now gradually being rolled out to the “last mile” which connects the customer. As digital data transfer became critical to the modern business world, operators developed new technologies such as Frame Relay and ATM, which were based on packet-switched technology. Packet-switched networks transport information by breaking up the data into addressable digital packets (clusters of data) that are transmitted independently and reassembled at their destination. Because these network protocols allow multiple users' traffic to share communication links, they can use the network's available bandwidth more efficiently than circuit-switched networks. Until the late 1980's, packet-switched networks tended to require pre-established, dedicated connections. That meant that all data packets followed the same path and arrived in the same order – so any damage or bandwidth constraint within the 'pipes' at the time of data transfer meant that data could be delayed or lost. Then came IP networking Throughout the Cold War years, the US Department of Defense had been funding the ARPANET (Advanced Research Projects Agency Network), a high-speed network designed to protect its national military communications networks www.researchcm.com 22
  23. 23. Technology Investment Themes Software Defined Networks September 2013 from the threat posed by nuclear missile attack. Military scientists helped to establish a connectionless packetswitching network protocol under which each packet would be encoded with the source and destination addresses and could take any available route between source and destination. The obvious advantage of this connectionless protocol was that if a section of the communication network was attacked or damaged (even a section the size of Texas), the country's ability to command and control its national military communications network would remain largely unaffected, because the packets would be able to re-route themselves around the problem area to get to their final destination. Using connectionless protocols, internet 'gateways' were able to join up the various data networks across the world and allow them to talk to each other. By the 1990's enough of the world's networks had 'joined' together to form what we now know as the world-wide-web. The internet brought with it a whole range of new applications and services such as email, e-commerce, instant chatting, MP3, video streaming, and internet TV. Voice – once digitised and packetised – can also be carried on IP-based networks as voice over internet protocol (VoIP). During the latter half of the 1990's global internet traffic grew in most countries at rates well in excess of 100% per annum. By 2001, internet traffic in the USA had overtaken voice traffic. According to Cisco, global IP traffic has increased more than fourfold in the last five years and will increase threefold during the next five years. As a result, during the noughties the world's fixed line operators – who carried most of that internet traffic – were forced to upgrade their networks progressively from circuit-switched networks (optimized to carry voice) to IP-based networks (optimized to carry internet data traffic). Even in the mobile world, 4G – which is the first mobile network technology to be all IP-based – is now being rolled out across the globe. www.researchcm.com 23
  24. 24. Technology Investment Themes Software Defined Networks September 2013 IP Networking changed several industries In the telecom equipment sector, IP networking technology destroyed many of the industry’s historically dominant players – like Nortel and Marconi – and created new champions like Cisco. In consumer electronics, IP technologies like Wi-Fi connected devices to each other for free, cutting out telecom operators entirely. In media, IP networking technology was the conduit for the digitisation of music, newspapers, books and advertising, destroying once great media companies – like EMI and The Tribune Company – and creating new media companies like Google. But the biggest impact was in the telecom sector. Telecom networks had to adopt IP networking technology to cope with the explosion in internet traffic. Open IP standards destroyed the walled gardens that many telecom operators had enjoyed before the internet. As a result, since the late 1990s, EBITDA margins for telecom operators – which had hitherto varied wildly from 10% to 60% – began to converge to around 30% worldwide, reducing telecom operators from the high-growth, differentiated companies they were hyped to be in the heydays of the internet boom to mere utilities. IP networking equipment became a cash cow for companies like Cisco and Huawei. Whilst internet protocol is itself an open standard, much of the IP networking hardware – routers, switches, servers and storage systems – contain embedded proprietary software. As a result, telecom networks today are a complex mash of legacy systems that require constant patching, upgrading, configuring and management, making them expensive to run. But the future is Software Defined Networking An emerging technology called software defined networking (SDN) aims to make telecom network architectures simpler, cheaper and more efficient to build and run. SDN moves the intelligence out of networking hardware (e.g. switches and routers) into software, allowing industry outsiders to programme the telecom network to run their own network applications. www.researchcm.com 24
  25. 25. Technology Investment Themes Software Defined Networks September 2013 In much the same way that Microsoft’s Windows sucked the profits out of the PC hardware industry in the 1990s, SDN will suck the profits out of the telecom equipment industry. Whoever controls the software will control the network and all the value in it. The idea behind SDN technology first appeared in a research paper about using software to control network access published by Stanford University graduates in 2006 which stipulated that “No user, switch, or end-host has more information than it absolutely needs.” Then, in 2008, the concept of programming a network was adopted into OpenFlow, an open-source communications protocol that gives access to the forwarding plane of a network switch or router over a telecoms network. By 2011, the term “software-defined networking” had been coined to describe the process of using a software controller to programme data flows in a network. In 2012, the European Telecommunications Standards Institute formed a working group called Network Functions Virtualisation (NFV) to focus on SDN in carrier networks. Just as the server had been virtualised by companies like VMware and Citrix, now it was the turn of the entire telecom network to be virtualised by advanced software, allowing control of the network to be centralised. Using OpenFlow as the basic platform, the big players in the technology sector are now in a race to develop the applications that configure, control, and operate the end-to-end network services that telecom customers want. Whoever controls the software controls the network and all the value in it With SDN, software moves from a peripheral role to a core function of the network. It will transform the telecom equipment industry in the same way that Apple transformed the smartphone industry: by sucking the profits out of it. But this investment theme is far bigger than the smartphone revolution ever was. iOS merely controls iPhones and iPads. Now imagine an operating system that controls an entire global telecom network. Investment themes don’t really get much bigger than this. www.researchcm.com 25
  26. 26. Technology Investment Themes Software Defined Networks September 2013 As the time chart below illustrates, we are early in this technology investment cycle. It started commercially last year and will last probably another decade or more. Networking technology needs to change to cope with the explosion of IP traffic IP networking started in 1974 with TCP/IP but is now coming to an end. Software defined networks are the future. IP Networking Era SDN Era IP traffic (Exabytes/month) 250 200 150 100 50 0 1970 1975 1980 1985 1990 Networking technology timeline TCP/IP LANs WANs Worldwide web Networking product timeline Email Cisco AOL 1995 Netscape 2000 2005 Wi-Fi iPod 2010 2015 2020 SDNs iPhone CLOUD SERVICES Source: Cisco, CM Research www.researchcm.com 26
  27. 27. Technology Investment Themes Software Defined Networks September 2013 Technology Briefing www.researchcm.com 27
  28. 28. Technology Investment Themes Software Defined Networks September 2013 The OSI Model In order to understand the arguments in this report it may be useful to go through the basics of telecommunications network architectures, as laid out in the Open Systems Interconnection Reference Model (OSI model) developed by the International Organization for Standardisation (ISO). The OSI model prescribes the steps used to transfer data over a transmission medium from one networked device to another. The OSI Reference Model summarises the 7 layers within any telecom network architecture Layer name Layer description 7 Moving down through the “layers”, the top layer defines how the network interacts with customers; the middle layers define how to route data traffic; and the bottom layer defines the physical specification of the pieces of equipment that make up the network. Layer Application Interacts with software applications. Browsers and mail clients are on this layer but  user applications like Microsoft Word are not. 6 Presentation Responsible for the delivery and formatting of information to the application layer  (eg encryption). 5 Session 4 Transport Ensures reliable transmission of data segments, as well as the disassembly and  assembly of the data before and after transmission. 3 Network Defines the processes used to route data across the network, including logical  addressing. Routers operate at this level. 2 Data Link Defines the linkages and mechanisms that allow data to be reliably transmitted  across the network. 1 Physical Defines the electrical and physical specifications for the networking medium (eg  cable type, connector type, voltage). Establishes, maintains and manages the connection between computers. Source: International Organisation for Standardisation (ISO) www.researchcm.com 28
  29. 29. Technology Investment Themes Software Defined Networks September 2013 Separation of the control and forwarding planes Switches and routers made by the likes of Cisco typically operate between levels 2 to 4 of the OSI stack. Level 2 (Data Link) is sometimes referred to as the “data plane” and Level 3 (Network) as the “control plane”. The control plane – typically within a router – determines the best network path for inbound data packets. It looks up the destination address of the incoming data packet and retrieves the information necessary to determine the path from the receiving network element on the basis of dynamic reference tables. The data plane – typically within a switch – forwards the data along the network path pre-determined by the control plane. In a traditional telecom network, the control plane and data plane are embedded within proprietary network hardware equipment (e.g. switches and routers made by the likes of Cisco). But in SDN architecture, the control plane is removed from the network hardware and separated from the data plane (which remains within the networking hardware). Instead of relying on proprietary software running on each switch to control its forwarding behaviour, the switches in SDN architecture are controlled from a centralised location using a Network Operating System (NOS). There is a growing movement to make these network operating systems open. Several SDN companies are developing NOSs based on OpenFlow, an open-source communications protocol that provides access to the forwarding plane of a network switch or router over the network. Access to the NOS itself can also be opened up to third parties by releasing the application programming interfaces (APIs) to the application developer community. Thus OpenFlow allows third party apps developers to programme an www.researchcm.com 29
  30. 30. Technology Investment Themes Software Defined Networks September 2013 entire telecom network in the same way that Google Android allows them to programme smartphones. By decoupling the control plane from the forwarding plane and opening up the interfaces, control of the network can become directly programmable by third-party software developers. In a software defined network, the control plane and the data plane are separated... ... allowing third party apps developers to programme the network How is a typical SDN structured? How will SDNs change things? New network applications written by apps developers Third party apps developers can now write network applications because they have access to the control layer via open APIs (application programming interfaces). Control of Network Operating System (NOS) opened up Network control is directly programmable because it is decoupled from forwarding functions. The control plane becomes accessible via a network operating system and is no longer part of a closed, proprietary hardware system. Switches and routers commoditised by open standards Network hardware equipment is reduced to commodity boxes that simply forward packets on the basis of the software programmes written by the apps developers. (Routers no longer decide where packets go, as they do today. That is decided in the application layer now.) Source: Open Networking Foundation, CM Research www.researchcm.com 30
  31. 31. Technology Investment Themes Software Defined Networks September 2013 Today servers are virtualised; tomorrow telecom networks will be virtualised When the telecom network's control and forwarding plane are separated, virtual networks can be created and destroyed at will on top of the physical network. Virtualisation allows computing resources (e.g. hardware platforms, operating systems or storage devices) to be deployed on a utility basis (i.e. only when required). Corporate IT managers often use virtualisation to cut hardware and software costs by sharing servers or storage with others. Today virtual servers are common. Customers use software called a hypervisor – made by the likes of VMware, Citrix or Microsoft – to monitor several virtual servers running different operating systems on a single physical server. Similarly, in future, SDN architectures will allow Network Function Virtualisation (NFV). When telecom operators want to provide new network services, they typically purchase more proprietary vendor equipment from the likes of Cisco and Juniper. This means they have to find more power and space as well as integrate this new hardware with their legacy systems. But if all network equipment were based in open industry standards, then new network services could be virtualised on existing hardware, and controlled centrally via the NOS. NFV could therefore reduce the costs of adding new network services both for operators and for software companies hoping to develop some of those services. In July 2012, VMware purchased Nicira for $1.26bn for its lead in NFV technology. Cisco’s glory days could be over The era of IP networking has to a large extent been defined by Cisco. IP networks work better when there is a single vendor as multiple vendors can create compatibility issues. Cisco – and, more recently, Huawei – prospered because network operators preferred buying all their IP equipment from a single vendor. SDNs imply open networking standards. That makes it easier for IP networking equipment to operate on a plug and play basis, breaking Cisco’s hold on the market. www.researchcm.com 31
  32. 32. Technology Investment Themes Software Defined Networks September 2013 Who’s impacted by SDN? www.researchcm.com 32
  33. 33. Technology Investment Themes Software Defined Networks September 2013 What does SDN mean for telecom equipment makers? SDN technology threatens to replace proprietary networking hardware with open hardware standards and open application programming interfaces (APIs). This will reduce the expensive networking equipment products of today – switches, routers, application delivery hardware – to commodity hardware. Competitive power and profitability will shift to those who make network applications and the network operating software. Cisco has the most to lose. By value, it supplies 59% of the world’s switches, 53% of routers and 52% of data centre equipment. The era of IP networking has been, to a large extent, defined by Cisco. IP networks work better when there is a single vendor; multiple vendors can create compatibility issues. In the SDN age, Cisco will have to become a software developer to maintain its hold on the market. Officially, Cisco is embracing SDN technology and the open hardware standards associated with it. That should turn Cisco into a software company along the lines of IBM. The problem is that during this transition period Cisco could see revenues dip as its cutting edge SDN products cannibalise its legacy hardware equipment. Juniper Networks is the next biggest loser. It commands 15% of the router market. Like Cisco it is officially moving into SDN, and could see revenue and earnings dip in the medium term. Asian networking vendors like D-Link and ZTE may also see margins squeezed as their hardware became more commoditised. Brocade has 14% of the data centre equipment market with particular strengths in network storage. Brocade is investing heavily in SDN, but could also see its lead threatened by open standards. F5 Networks is the global leader in application delivery – that is, making web applications perform optimally – with a 29% market share. Its proprietary application delivery systems can seamlessly navigate the complex web of installed www.researchcm.com 33
  34. 34. Technology Investment Themes Software Defined Networks September 2013 legacy switches and routers out there today. Once open standard hardware comes in, F5 Networks’ kit becomes less important because open interfaces will allow third party application developers to manage their application traffic on the network directly. However, the threat to F5 is some way in the future because it will take several years for legacy equipment to be removed entirely. SDN will potentially cause most damage in the mobile network equipment sector. Unlike the three generations of mobile technologies that preceded it, 4G is an all-IP based standard, making it particularly suited to SDN technology. Nokia, Ericsson and Alcatel-Lucent are all under threat. Their mobile infrastructure hardware faces commoditisation, just as Cisco’s does. All three have shouted the virtues of SDN, but they have not been as active as Cisco in acquiring SDN-related businesses. What does SDN mean for server manufacturers? Servers will soon be reduced to interchangeable components that can be programmed centrally by data centre operators like Rackspace, internet companies like Facebook and small and medium sized corporate IT departments. The server market, just like the data networking equipment market, will no longer profit every time a new bit of server technology becomes available. The innovation gains will go to those who run and supply the software-based network controllers. The value will be in the software upgrade, not the hardware upgrade. As a result, the server market is likely to continue its decline. IBM, HP and Dell are the leading server manufacturers with market shares of 31%, 28% and 16% respectively. IBM has already exited many of its hardware businesses and its high growth infrastructure software business may balance out the decline of its server hardware business. But HP and Dell, striving to copy IBM, could be caught out in the transition as their servers are reduced to “Ethernet chips” just at the time when their core PC market is also in decline. www.researchcm.com 34
  35. 35. Technology Investment Themes Software Defined Networks September 2013 What does SDN mean for network storage companies? Data storage is moving from physical storage on a hard disk drive (e.g. in your computer) to network storage (e.g. in a data centre). In 2012, the HDD storage market was worth $37.7bn and was dominated by Western Digital and Seagate. That market is expected to decline by at least 5% this year. The market for network storage equipment, however, is on the rise. In 2012, the market for network storage equipment increased 19.7% to reach $8.1bn. Whilst growth is likely to continue at double digit rates for the next couple of years on the back of the world’s data explosion, the network storage market itself faces an existential threat from SDN technology. EMC is the leader in network storage with a 23% global market share. IBM, HP, Dell and NetApp are its closest rivals. They all offer proprietary storage solutions based on closed, vertically integrated systems. But new technologies like software defined network storage (SDNS) threaten to commoditise the network storage business in the same way as other parts of the IP networking value chain. What does SDN mean for semiconductor manufacturers? In an SDN environment, speciality switches will be replaced by white-box switches (generic switches built with off-theshelf chips). Chip makers like Intel and Broadcom are getting ready by ensuring their chip architectures form the foundation for the “Ethernet chips” used in SDN white-box switches. Intel’s SDN chip architecture was announced in February this year and is called the Open Network Platform (ONP) Switch Reference Design. Intel Capital has also invested $6.5m in SDN start-up Big Switch Networks’ $45m fund raising in October 2012. www.researchcm.com 35
  36. 36. Technology Investment Themes Software Defined Networks September 2013 What does SDN mean for Internet companies? Companies like Google, Apple, Baidu, Facebook and Netflix all invest heavily in their own networking hardware to ensure their internet services work well. But as SDN technology opens up hardware standards, they will be able to programme the network directly. This will provide them with substantial Capex savings, whilst enhancing the quality of their internet services. What does SDN mean for software companies? The software market generally will be a huge beneficiary of SDN technology both on the infrastructure side and the applications side. The big infrastructure software companies – like Microsoft, IBM, Oracle, Red Hat, Citrix and VMware – will be in a strong position to write the code that virtualises network services, perhaps creating proprietary network operating systems. The big application software companies – like Adobe, Intuit, Salesforce, NetSuite and Workday – will be in a strong position to improve the performance of their cloud-based services by directly programming the network. SDN technology will give the cloud sector a significant boost by making it easier, cheaper and faster for corporations to roll out enterprise applications across their corporate network. As control of the network moves from proprietary hardware to proprietary software, network security becomes entirely a software issue. Governments and corporations will naturally have to spend more on cyber-security software. Companies like Check Point, Fortinet, Trend Micro and Verint Systems will all benefit. Several will be acquired by the technology giants. Indeed, in July 2013, Cisco acquired Sourcefire for $2.7bn. We re-iterate our view (see Cyber Security, CM Research, 23 May 2013) that the cyber-security sector remains the most undervalued sector of global www.researchcm.com 36
  37. 37. Technology Investment Themes Software Defined Networks September 2013 technology and we expect a significant M&A rally as software ecosystems are cobbled together by everyone from Apple and Google to Alibaba and Baidu to IBM and Oracle. What does SDN mean for telecom operators? Virtual servers were made possible by VMware a decade ago and resulted in data centres being able to slash costs by using the same server for several clients, operating systems and applications. In the same way, SDN technology aims to slash operator costs by virtualising telecom networks themselves. Network function virtualisation (NFV) will allow telecom operators to run several network services using the same network hardware. NTT already claims to use SDN technology for some of its cloud services by connecting selected data centres to networking equipment housed on customer premises. Deutsche Telekom and Verizon also support SDN and are founding members of the Open Networking Foundation which promotes SDN technology. In theory, SDN technology will improve profitability for telecom operators who adopt it because the quality of network services will rise whilst Capex and Opex expenditures will fall. In practice, there are two potential problems. First, operators may lose control of their network to third parties like Facebook and Google. Second, regulators may cap the prices of network services, passing all the benefits of SDN investment from the operators to the software and internet companies. After all, this is exactly what regulators did in the aftermath of the last great telecom investment cycle, IP networking. www.researchcm.com 37
  38. 38. Technology Investment Themes Software Defined Networks September 2013 Companies section www.researchcm.com 38
  39. 39. Technology Investment Themes Software Defined Networks September 2013 Cisco  Position: Cisco is the market leader in networking equipment, particularly switches, routers and data centres. Some companies still operate Cisco-only networks.  Risk: SDN, especially OpenFlow, could commoditise Cisco’s entire business, which is based on proprietary IP networking hardware.  Outlook: Cisco has the most to lose from SDN technology. However, it is embracing open networking standards through Cisco One (Open Network Environment). Its challenge is to adopt cutting edge SDN technology without cannibalising its legacy hardware business. It is likely to capitalise on the strong security aspects of the Cisco ecosystem. Cisco has made several acquisitions in the space including Meraki (enterprise Wi-Fi), Sourcefire (cyber-security) and Intucell (SDN). How is Cisco positioned today in the telecom equipment market? Global market shares by sector 2010 2011 2012 70% 60% 50% 40% 30% 20% 10% 0% Source: IDC, Gartner, CM Research www.researchcm.com 39
  40. 40. Technology Investment Themes Software Defined Networks September 2013 Juniper Networks  Position: Juniper is the second largest player after Cisco in the router market. It is rapidly growing its market share in the market for data centre equipment.  Risk: Juniper’s high-value router business could be commoditised by SDN.  Outlook: Juniper is moving aggressively into the SDN market, faster than any other major IP networking equipment maker. It is already SDN ready with a product called Qfabric which splits out the management from the switching. It also recently acquired the start-up Contrail Systems for $176m and shortly thereafter unveiled JunosV Contrail, an open-standards SDN controller. With its early lead it looks poised to handle this disruptive technology very well. How is Juniper positioned today in the telecom equipment market? Global market shares by sector 2010 2011 2012 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% Source: IDC, Gartner, CM Research www.researchcm.com 40
  41. 41. Technology Investment Themes Software Defined Networks September 2013 Alcatel-Lucent  Position: Alcatel-Lucent is the third largest player in the router market, the fourth largest in the switch market and the third largest in IP networking equipment. It is also the fourth largest mobile infrastructure manufacturer with strong operator relationships.  Risk: The biggest risk for Alcatel-Lucent is that it is developing its own in-house communications protocol rather than using the industry standard, OpenFlow.  Outlook: Alcatel-Lucent is facing heavy competition from Huawei in all its markets. However, it could benefit from the protectionist card as more governments review the national security implications of buying foreign made telecom equipment. Its strength in the mobile infrastructure market could make it a leader in SDN for mobile operators. In January 2013, Alcatel-Lucent invested in Nuage Networks, an SDN start-up which uses Alcatel products in its Virtualized Services Platform (VSP). How is Alcatel-Lucent positioned today in the telecom equipment market? Global market shares by sector 2010 2011 2012 14% 12% 10% 8% 6% 4% 2% 0% Source: IDC, Gartner, CM Research www.researchcm.com 41
  42. 42. Technology Investment Themes Software Defined Networks September 2013 NEC  Position: NEC is one of the most aggressive movers into SDN technology. It delivered its ProgrammableFlow Network Fabric solution (which includes OpenFlow switches and controllers) to the market 12 months before Cisco, HP and Juniper. Its recently launched SDN Application Center represents the first “App Store” for SDN.  Risk: As a relative newcomer to networking, NEC may find it harder to market its SDN technology than some of the established networking vendors.  Outlook: With negligible market share in switches, routers and data centre equipment, NEC has the ideal environment for growing its SDN business, with no giant legacy hardware business holding it back. How is NEC positioned today in the telecom equipment market? Global market shares by sector 2010 2011 2012 7% 6% 5% 4% 3% 2% 1% 0% Source: IDC, Gartner, CM Research www.researchcm.com 42
  43. 43. Technology Investment Themes Software Defined Networks September 2013 Hewlett Packard  Position: HP has a large portfolio of data centre and storage networking products. It is the second largest maker of switches after Cisco, the second largest maker of servers after IBM, the second largest player in network storage after EMC and the second largest PC manufacturer after Lenovo.  Risk: HP is going through a management restructuring and is struggling to bring focus to its business. It is currently in that risky transition phase between transforming itself from a hardware manufacturer to a software manufacturer.  Outlook: While Cisco and NEC have beaten HP to market with specialised SDN solutions, no vendor has matched HP’s breadth of SDN offerings, including devices, controllers, applications, management, and specialised support services. HP’s strength in PCs and Servers means it is one of two SDN equipment makers that can integrate computing with the network. IBM is the other. How is Hewlett Packard positioned today in the telecom equipment market? Global market shares by sector 2010 2011 2012 35% 30% 25% 20% 15% 10% 5% 0% Source: IDC, Gartner, CM Research www.researchcm.com 43
  44. 44. Technology Investment Themes Software Defined Networks September 2013 Dell  Position: Dell is a smaller version of HP. Like HP, Dell wants to transition from hardware to software, particularly in network storage software. Dell is the third largest PC maker, the third largest server maker and the fourth largest player in network storage.  Risk: All of Dell’s core businesses are being commoditised. As it shifts from hardware to software, its revenues may fall before they rise.  Outlook: Dell has made an aggressive push into data centre equipment. In the last two years, Dell has acquired Force 10 Networks (data centre networking) for $1bn and Quest Software (software management) for 2.4bn. Like HP, it is using SDN technology as its ticket to move from hardware to software. Dell claims to invest 40% of its R&D budget on software. How is Dell positioned today in the telecom equipment market? Global market shares by sector 2010 2011 2012 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% Source: IDC, Gartner, CM Research www.researchcm.com 44
  45. 45. Technology Investment Themes Software Defined Networks September 2013 Huawei  Position: Huawei is the second largest mobile infrastructure equipment maker after Ericsson and the fourth largest router manufacturer. Unlike any other major telecom equipment maker, it also makes mobile handsets. In theory this would enable it to offer software to operators that control not only the telecom network but also customer handsets.  Risk: The US has blocked Huawei from selling equipment to the main US telecom operators on national security grounds. Several European nations are reviewing Huawei’s status in this light.  Outlook: Since Huawei is unlisted, it can invest for the long term without worrying about missing short term earnings targets. It has the resources to invest heavily in SDN. In April this year it launched SoftCom, an OpenFlow-based SDN initiative. It is already building an SDN-based mobile backhaul solution with China Telecom Guangzhou Institute. Huawei is likely to become a leader in SDN. How is Huawei positioned today in the telecom equipment market? Global market shares by sector 2010 2011 2012 25% 20% 15% 10% 5% 0% Source: IDC, Gartner, CM Research www.researchcm.com 45
  46. 46. Technology Investment Themes Software Defined Networks September 2013 ZTE  Position: ZTE is a smaller version of its Chinese cousin Huawei. Like Huawei, ZTE produces both mobile infrastructure as well as handsets. While its market share in handsets rose in 2012 from 1.7% to 1.9% by value, its share in mobile infrastructure is languishing at around 7%. Its market share in routers is also languishing, falling from almost 1.0% in 2010 to just 0.5% in 2012.  Risk: ZTE lacks a clear strategy of where it is going.  Outlook: For us the outlook for ZTE looks bleak both for its legacy hardware business and for any foray into SDN where it is notable by its absence. How is ZTE positioned today in the telecom equipment market? Global market shares by sector 2010 2011 2012 8% 7% 6% 5% 4% 3% 2% 1% 0% Source: IDC, Gartner, CM Research www.researchcm.com 46
  47. 47. Technology Investment Themes Software Defined Networks September 2013 Nokia  Position: In August 2013, Nokia bought Siemens out of its 50% stake in Nokia Siemens Networks. On 3 September 2013, Nokia announced that it would sell its mobile handsets division for $5bn to Microsoft, leaving it to run its mobile infrastructure business, where it has a 20% global market share.  Risk: Nokia handsets worked so well technically partly because they made mobile infrastructure equipment too.  Outlook: Without a legacy IP networking business, Nokia is extremely well placed to introduce SDNs into mobile networks. Nokia is leading by example. It has adopted SDN technology in its mobile infrastructure business by “virtualising” its Liquid Core network using HP servers, bringing down Capex and Opex spending. How is Nokia positioned today in the telecom equipment market? Global market shares by sector 2010 2011 2012 25% 20% 15% 10% 5% 0% Source: IDC, Gartner, CM Research. Note on 3 September 2013, Nokia announced that it would sell its mobile handsets division for $5bn to Microsoft, leaving it to run its mobile infrastructure business www.researchcm.com 47
  48. 48. Technology Investment Themes Software Defined Networks September 2013 Ericsson  Position: Ericsson is the market leader in mobile infrastructure equipment, especially in the radio access network (RAN). It is also the fifth largest manufacturer of routers.  Risk: If SDN technology enters mobile network infrastructure market too quickly, Ericsson’s hardware business could be taken by surprise.  Outlook: Ericsson has not spoken much about SDN publicly but is thought to be investing heavily in SDN technology. Their envious reputation as the world’s most trusted vendor of mobile infrastructure equipment puts them in a good position to introduce SDN technology gradually to their mobile operator customers. How is Ericsson positioned today in the telecom equipment market? Global market shares by sector 2010 2011 2012 40% 35% 30% 25% 20% 15% 10% 5% 0% Source: IDC, Gartner, CM Research www.researchcm.com 48
  49. 49. Technology Investment Themes Software Defined Networks September 2013 VMware  Position: VMware invented the hypervisor – software that creates and runs virtual computers. This enables several operating systems to share resources on the same hardware. As a result, many data centres sell virtual servers to their customers to maximise efficiency. SDN technology applies that same philosophy to data networks. VMware commands a 57% share of the virtualisation market with Microsoft and Citrix being its main competitors.  Risk: The risk for VMware is that its proprietary virtualisation software is made obsolete by an open-source version. Another risk is that Microsoft, which entered the virtualisation market late, is now investing heavily in it, expanding its market share at the expense of VMware.  Outlook: Having pioneered the virtual operating system, VMware is in a strong position to move into network function virtualisation (NFV), especially after its $1.26bn acquisition of Nicira, the developer of a network virtualisation platform in July 2012. How is VMware positioned today in the telecom equipment market? Global market shares by sector 2010 2011 2012 3% 2% 2% 1% 1% 0% Source: IDC, Gartner, CM Research www.researchcm.com 49
  50. 50. Technology Investment Themes Software Defined Networks September 2013 Citrix  Position: Like VMware, Citrix is a virtualisation company, deriving most of its revenues from data networking software. It is the fourth largest player in the “application delivery" market with a 12.7% market share.  Risk: As with VMware, there is a risk that Citrix’s proprietary virtualisation software is made obsolete by an opensource version.  Outlook: Citrix is the perfect acquisition target for Cisco as virtualisation is a skill set Cisco still needs to master. It has significant scope to move profitably into the SDN technology, specifically in the data centre space. How is Citrix positioned today in the telecom equipment market? Global market shares by sector 2010 2011 2012 14% 12% 10% 8% 6% 4% 2% 0% Source: IDC, Gartner, CM Research www.researchcm.com 50
  51. 51. Technology Investment Themes Software Defined Networks September 2013 Brocade  Position: Brocade is second largest player after Cisco in data centre equipment with a 13.7% market share. Its Virtual Cluster Switching technology is popular in storage area networks (SANs) where speed of data transfer is of the essence.  Risk: The storage network sector is undergoing a disruptive revolution of its own and Brocade’s lead in data centre equipment will be hard to maintain with so many new entrants into the market. Brocade’s revenues could dip before they rise as its SDN solutions lower its price points.  Outlook: Brocade has been an early supporter of OpenFlow and other open systems. It hopes to become a leader in software defined data centre technology. In November 2012, it acquired Vyatta, a network virtualisation software company. How is Brocade positioned today in the telecom equipment market? Global market shares by sector 2010 2011 2012 16% 14% 12% 10% 8% 6% 4% 2% 0% Source: IDC, Gartner, CM Research www.researchcm.com 51
  52. 52. Technology Investment Themes Software Defined Networks September 2013 F5 Networks  Position: F5 Networks is the global leader in application delivery. Its hardware and software optimise the performance of web applications.  Risk: SDN risks commoditising F5 Network’ proprietary ASIC (application specific integrated circuit) hardware.  Outlook: Like Cisco, F5 Networks will need to redesign its hardware-based solutions using SDN software whilst simultaneously managing its legacy equipment sales. How is F5 Networks positioned today in the telecom equipment market? Global market shares by sector 2010 2011 2012 35% 30% 25% 20% 15% 10% 5% 0% Source: IDC, Gartner, CM Research www.researchcm.com 52
  53. 53. Technology Investment Themes Software Defined Networks September 2013 IBM  Position: IBM has a 31% market share of the server market and a 15% share of the network storage market. It is also a top three infrastructure software company, with a 9% market share.  Risk: In its core database sector, IBM faces threats from big data analytics engines. In the server sector, IBM’s Power CPUs risk being undermined by Intel’s Xeon server CPUs. To combat this threat, IBM formed the OpenPower Consortium which will license its Power architecture to third parties with a view to create an openstandards server ecosystem around them. The risk is that Google licences IBM hardware on the cheap and then displaces IBM in infrastructure software.  Outlook: IBM pioneered the strategic move from hardware to software. It sold its PC business to Lenovo back in 2004. It is rumoured to be in talks to sell its server business to Lenovo too. But its global lead in infrastructure and application software puts it in a strong position to benefit from SDN. How is IBM positioned today in the telecom equipment market? Global market shares by sector 2010 2011 2012 35% 30% 25% 20% 15% 10% 5% 0% Source: IDC, Gartner, CM Research www.researchcm.com 53
  54. 54. Technology Investment Themes Software Defined Networks September 2013 Oracle  Position: Oracle is the third largest infrastructure software house by revenues after Microsoft and IBM. It is the fourth largest player in the server market with a 5.2% market share and accounts for 2.4% of the network storage market.  Risk: Like IBM, Oracle is exposed in the database sector to new Big Data appliances that can handle unstructured data. To a lesser extent it is exposed to open standards commoditising its server hardware.  Outlook: Oracle is facing multiple threats from multiple technology sectors. It does however have a wellarticulated strategy for big data and for SDN. In the last 12 months, Oracle has made a number of acquisitions in the SDN space including Acme Packet ($2.1bn) which focuses on session border control and Xsigo (0.8bn) which focuses on data network virtualisation. How is Oracle positioned today in the telecom equipment market? Global market shares by sector 2010 2011 2012 12% 10% 8% 6% 4% 2% 0% Source: IDC, Gartner, CM Research www.researchcm.com 54
  55. 55. Technology Investment Themes Software Defined Networks September 2013 Conclusions  SDNs have the potential to suck value out of telecom equipment hardware purchased by fixed and mobile telecom operators.  It will also be disruptive for the server market and the network storage market.  By contrast, SDN technology will create new opportunities for software companies, cloud services companies and internet companies.  For telecom operators, the beneficial impact is largely dependent on regulators. Telecom equipment SDN’s open hardware standards threaten to commoditise the telecom equipment sector, most of which still promotes closed, proprietary systems. Cisco has the most to lose. In mobile equipment, Ericsson and Nokia are also under threat. Servers SDN technology could reduce high-value servers to generic white boxes. This threatens the big server makers like IBM, HP and Dell. Network storage The proprietary network storage systems of EMC and NetApp could be made obsolete by open software-definedstorage standards. www.researchcm.com 55
  56. 56. Technology Investment Themes Software Defined Networks September 2013 Conclusions (cont.) Software The software sector will be the biggest beneficiary of SDN. Cloud software companies like Facebook, Google, Netflix and Salesforce will be able to programme networks to enhance their web services. Cyber-security companies like Check Point, Verint, Fortinet and Trend Micro will see a ballooning demand for their products. Semiconductors As servers, routers and switches are reduced to interchangeable commodity parts, chip companies like Intel and Broadcom will fight to establish the dominant chip architecture upon which SDN’s open standards will be based. Data centres Barriers to entry will fall in the data centre market. Rackspace, Telecity and Equinix will see margins squeezed as it becomes easier for corporations to run their own data centres. Telecom operators Operators like Verizon, NTT and Deutsche Telekom are bullish about SDN because it improves the quality of network services despite lowering investment budgets. The big question is whether regulators will allow them to keep these gains. www.researchcm.com 56
  57. 57. Technology Investment Themes Software Defined Networks September 2013 Appendix 1: Who’s who in the SDN value chain? Where do the big technology players sit in the SDN value chain? Company Country Mkt Cap US$m 2012 Market Share by Sector Switches Alcatel Lucent Allot Apple Aruba Networks Brocade Comms Cisco Citrix Systems Dell D‐Link EMC Ericsson F5 Networks Fujitsu Google Hewlett‐Packard Hitachi Huawei IBM Informatica Juniper Networks Lenovo Microsoft NEC NetApp Netgear Nokia Oracle Riverbed Tech Samsung Electronics SAP SGI Tellabs VMware ZTE France USA USA USA USA USA USA USA Taiwan USA Sweden USA Japan USA USA Japan China USA USA USA China USA Japan USA USA Finland USA USA Korea Germany USA USA USA China Routers Wireless LAN            7,983 2.8% 12.8%                 423        439,131            1,958            3,708 2.1% 0.5%        130,232 59.0% 52.6%          13,604 1.3%          24,389 1.7%                 363 1.4%          54,227          45,114 1.7%            6,877 3.1%            7,656        293,607 Google makes its own networking equipment          40,752 8.4% 1.6%          32,132 unlisted 2.0% 9.8%        208,317            4,248          10,210 2.4% 15.3%          10,922        272,806            6,176          14,590            1,180          24,808        154,817            2,498        186,708          93,131                 558                 841 0.7%          35,968            9,157 0.5% Application  Delivery Data Center  Equip IP Networks 8.1% Mobile  infrastructure Application  Software Infrastruct  Software Mobile  handsets Network  Storage Servers PCs 11.0% 2.9% 0.2% 0.7% 27.5% 11.0% 5.5% 1.8% 13.7% 13.9% 52.1% 12.7% 2.8% 1.0% 1.7% 0.6% 11.5% 2.4% 22.7% 0.5% 1.2% 0.2% 25.3% 0.2% 0.4% 31.5% 4.6% 0.8% 3.1% 15.7% 11.2% 2.4% 4.0% 2.9% 2.5% 17.8% 27.6% 16.4% 0.9% 7.0% 1.5% 15.1% 30.7% 5.3% 34.0% 29.4% 2.8% 7.1% 2.8% 0.9% 22.0% 1.7% 2.4% 12.9% 0.4% 2.1% 1.1% 12.6% 5.3% 5.0% 15.4% 18.6% 0.6% 0.9% 0.7% 9.4% 2.0% 11.6% 20.0% 8.4% 5.2% 19.0% 9.6% 6.7% 2.4% 5.2% 2.5% 1.3% 4.2% 29.5% 0.8% 2.2% 7.0% 1.9% Source: Company data, IDC, Gartner, CM Research www.researchcm.com 57
  58. 58. Technology Investment Themes Software Defined Networks September 2013 Appendix 2: Some of our other investment themes Social ‐ games, music, video ‐ location shopping ‐ Google Glass ‐ new advertising  models Mobile ‐ wearable  devices ‐ location services ‐ mobile  payments ‐ mobile  ads Cyber security ‐ Telecom  equipment  focus ‐ national security issues ‐ software  defined network ‐ open standards Cloud ‐ everything  everywhere ‐ cyber security  ‐ IT cost reduction ‐ age of software Big data ‐ Re‐imagination  ‐ privacy  issues ‐ wearable  devices ‐ age of software analytics Software defined networks ‐ Cost reduction ‐ service  enhancement ‐ Network  function virtualis TV ‐ Internet TV ‐ Second/third  screens ‐ 16k / flexible  screens ‐ Social networks Copying Apple ‐ Ecosystem  lock‐in ‐ Walled  gardens ‐ Hardware/software  integration Regulation ‐ Net neutrality ‐ Data privacy ‐ Internet regulation ‐ Anti‐competition  cases www.researchcm.com 58
  59. 59. Technology Investment Themes Software Defined Networks September 2013 Important disclosures This document refers to industry trends in general. This document is provided for information purposes only and should not be regarded as an offer, solicitation, invitation, inducement or recommendation relating to the subscription, purchase or sale of any security or other financial instrument. This document does not constitute, and should not be interpreted as, investment advice. About CM Research CM Research is an independent research house based in London. We offer a subscription service covering the global technology, media and telecom (TMT) sectors. Our clients include investors, corporations, consultancies and governments. We analyse emerging TMT trends with a focus on disruptive technologies: how will they unfold; which industries will be impacted; and who will be the ultimate winners and losers. For our institutional investor clients, we convert these trends into global investment themes, highlighting local stocks that might be impacted. Our aim is to help investors formulate a TMT investment strategy that is global, thematic, timely and coherent. For our corporate clients, we convert these trends into global sector outlooks. Our aim is to help them stay one step ahead of the technology trends that are shaping their industry. At a time when many of our competitors have had their reputations mired by conflicts of interest, we fiercely guard our independence. Our research is unbiased and free of any conflicts of interest. CM Research is a member of the European Association of Independent Research Providers (EuroIRP) and is authorised and regulated by the Financial Conduct Authority. www.researchcm.com 59

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