Cisco Plans to Build a Giant Cloud Network, But Why on OpenStack?

Cisco's decision to build an intercloud for its channel partners and resellers on the OpenStack open source framework is a good idea since it will allow resellers to build out their own cloud networks at minimal cost.

Mar 25, 2014 at 5:30PM

Giant networking equipment manufacturer Cisco (NASDAQ:CSCO) has finally decided to jump on the cloud bandwagon. The company has announced that it is planning to invest $1 billion over the next two years to build a federated ''intercloud'' network infrastructure on the OpenStack framework, together with partners such as Australian telecom carrier Telstra, European cloud company Canopy, Canadian communications services provider Allstream, Indian IT company Wipro, and wholesale communications technology distributor Ingram Micro.

Cisco will deploy and run an intercloud infrastructure on behalf of Telstra, while Telstra will provide both its own and Cisco-specific services. Cisco's other partners will, presumably, build out the giant cloud atop Cisco's hardware. But, the question that begs for an answer is, why did Cisco opt for OpenStack instead of VMware, with which it has already entered a joint venture?

The second question is, why did Cisco decide to get into an already crowded market, with stalwarts such as Amazon (NASDAQ:AMZN) with its Web Services, IBM with SoftLayer, Google with its cloud platform, Microsoft with Azure, and VMware with its legions of partners? How effectively can Cisco compete in this market? Is OpenStack really ready for the mainstream?

Cloud aimed at resellers
Cisco's giant cloud is aimed at both its channel partners and resellers. Through the intercloud, Cisco's channel partners will be able to build their own clouds using software-defined infrastructure. Cisco will sell the necessary infrastructure to these second-tier partners, who can then resell the cloud services to third-parties. The intercloud concept will allow partners to shift their workload from one cloud to the other. This will help them avoid the lock-in that can happen when a customer relies too heavily on one cloud.

The cloud will be particularly suited for resellers who might be considering ramping up their own enterprise-focused cloud services to better compete with Amazon Web Services, or AWS. That's primarily where OpenStack makes better business sense than VMware.

OpenStack is an IaaS, or infrastructure-as-a-service, open-source cloud platform that was contrived in 2010 by RackSpace and NASA with the prime objective of fighting the highly dominant Amazon Web Services. It has Amazon-like features, including EC2 and S3 compatibility that allow businesses to create their own Amazon-like cloud services in private data centers.

VMware, on the other hand, is a proprietary cloud platform capable of supporting large ecosystems. Its major advantage is that all OS vendors support it under ESXI, which can be downloaded freely. But, the problem is ESXI cannot be accessed through APIs, or application programming interfaces, and a reseller would have to purchases licenses, one for each core, to use it. This makes it expensive for this group of customers, which can easily limit its adoption.

That partly explains why Cisco opted for the platform instead of VMware. The other big reason is, perhaps, because the company's joint venture with VMware, VCE, and EMC is reportedly on the rocks. 

You can, therefore, say that Cisco's cloud is aimed at a certain niche market to compete with AWS, but not directly with other well-established cloud services such as SoftLayer or Azure. There are other reasons, too, why Cisco is intent on developing its own huge cloud network.

Getting ready for the Internet of Things
On more than one occasion, management has said that it's serious about its vision to become the early leader in the still-nascent Internet of Things, or IoT. Cisco chief executive John Chambers recently outlined his company's Internet of Things vision, wherein he talked about the huge $14.4 trillion opportunity for IoT by 2020. The company unveiled an IoT router last September, which was a turnaround from its latest trend of jettisoning consumer goods such as set-top boxes.

Through its intercloud, Cisco aims to spur the construction of mega clouds that will deal with the huge workload the IoT will bring with it.

Is OpenStack ready for the mainstream?
There are major concerns about whether OpenStack is ready for the enterprise market. Perhaps the best place to look for answers is in real-life case studies.

Best Buy spent $20,000 to spin off its single-managed virtual machine in 2011. It instead rebuilt its e-commerce site using OpenStack to serve up its web pages. The site now integrates 40 different development teams' work, with amazing results. Before OpenStack, it took webpages between 7 seconds-30 seconds to load; now, they take just 2.5 seconds. Other companies that successfully use OpenStack are eBay and Paypal.

The chief rant by companies using OpenStack is the difficulty migrating to the platform from other cloud platforms, mainly because of its complex installation code. But, developers can get useful OpenStack training from as low as $285-$2,400, which is reasonable enough for most companies.

Bottom line
Cisco's decision to build a huge intercloud on the OpenStack platform seems like a good idea. The company hopes to spur construction of multiple cloud platforms that can support the IoT. Cisco will, in the process, create more business for itself by finding a market for its non-commodity hardware that will be used to build out the vast cloud infrastructure.

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Joseph Gacinga has no position in any stocks mentioned. The Motley Fool recommends Amazon.com, Cisco Systems, and Google. The Motley Fool owns shares of Amazon.com, Google, International Business Machines, and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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