Software Defined Networks Explained

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

Technology Investment Themes


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

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September 2013

What is SDN?

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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.

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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

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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

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September 2013

Pros and cons of SDN

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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.

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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.
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September 2013

Competitive landscape

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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.
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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%

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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

Alcatel‐
Lucent
2.8%

Juniper
15.3%

Tellabs
0.7%

Others
3.7%

Cisco
52.6%

Ericsson
1.7%

Alcatel‐
Lucent
12.8%


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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)

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%


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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

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%


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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

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%


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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
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%


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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

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.
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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,
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%


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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
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
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%


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.
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September 2013

History of Networking

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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
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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.

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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.
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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.
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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

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September 2013

Technology Briefing

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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)

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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
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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

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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.
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September 2013

Who’s impacted by SDN?

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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
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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.
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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.

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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
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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.

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September 2013

Companies section

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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%


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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?
2010

2011

2012

20%
18%
16%
14%
12%
10%
8%
6%
4%
2%
0%


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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?
2010

2011

2012

14%
12%
10%
8%
6%
4%
2%
0%


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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?
2010

2011

2012

7%
6%
5%
4%
3%
2%
1%
0%


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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?
2010

2011

2012

35%
30%
25%
20%
15%
10%
5%
0%


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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?
2010

2011

2012

18%
16%
14%
12%
10%
8%
6%
4%
2%
0%


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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?
2010

2011

2012

25%
20%
15%
10%
5%
0%


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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?
2010

2011

2012

8%
7%
6%
5%
4%
3%
2%
1%
0%


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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?
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

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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?
2010

2011

2012

40%
35%
30%
25%
20%
15%
10%
5%
0%


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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?
2010

2011

2012

3%
2%
2%
1%
1%
0%


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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?
2010

2011

2012

14%
12%
10%
8%
6%
4%
2%
0%


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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?
2010

2011

2012

16%
14%
12%
10%
8%
6%
4%
2%
0%


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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?
2010

2011

2012

35%
30%
25%
20%
15%
10%
5%
0%


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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?
2010

2011

2012

35%
30%
25%
20%
15%
10%
5%
0%


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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?
2010

2011

2012

12%
10%
8%
6%
4%
2%
0%


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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.

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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.

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56



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



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



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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