Cisco and NetApp Play Hardball with VMware: Will FlexPod Suffer?

Cisco and NetApp have refused to support VMware's SDN technology, NSX, on the FlexPod reference architecture. How will this affect future FlexPod sales?

Jul 29, 2014 at 2:00PM

Cisco (NASDAQ:CSCO) and NetApp (NASDAQ:NTAP) took a hardline stance regarding their FlexPod reference architecture when they revealed in June that they have no intention of supporting VMware's (NYSE:VMW) SDN technology, NSX, on FlexPod. Cisco's ACI and VMware's NSX are competing technologies that are widely regarded as the leading SDN technologies in the still-nascent SDN market.

Cisco entered into a joint venture with NetApp in 2010 to manufacture and sell FlexPod integrated infrastructure solutions. The FlexPod architecture is made up of Cisco's UCS plus Nexus and NetApp's FAS, and is used in networking components, servers, and storage products. FlexPod technology has been coming along nicely, and Cisco revealed in June that joint FlexPod shipments between it and NetApp had hit $3 billion since its inception, with a current annual run rate of $2 billion.

Does this move by Cisco and NetApp compromise the future of FlexPod solutions?

Evolving SDN market
Cisco's and NetApp's decision to not support VMware's NSX on the FlexPod reference architecture can either make or break FlexPod, depending on the direction the SDN market takes. The current size of the SDN market is around $3.4 billion, according to SDN Central. However, the organization predicts that the market will grow at a fast 80% annual clip through 2018 to reach $35.6 billion. That's bigger than the Cisco's current share of the enterprise router and switch market. Cisco commands close to 75% of the $3.5 billion enterprise router market, and about 68% of the $21 billion enterprise switch market.

It's difficult to tell with any high degree of certainty whether Cisco's ACI or VMware's SDN technology will gain traction faster in the market. Both technologies have their pros and cons.

Cisco's hardware-centric SDN approach solves many visibility problems that would face an NSX deployment. On the downside, ACI is expensive to deploy. ACI seems best suited for large organizations and data centers. Many businesses are likely to find ACI's 1,000+ 10Gbps interface ports way above their needs.

NSX, on the other hand, can be easily adapted into existing vSphere deployments with no need for costly upgrades. This makes it ideal for smaller organizations where cost is likely to be a big factor. VMware's dominance in the server virtualization market is also a big plus for the company in the SDN wars.

VMware commands about 56% of the virtualized operating platform, although its share has been steadily falling. The vSphere hypervisor is typically considered the best-developed solution compared to competing hypervisors such as Microsoft's Hyper-V or RedHat's KVM. These competitors are catching on fast, however. Hyper-V is much cheaper than vSphere, and the performance gap between it and vSphere has narrowed considerably. Meanwhile, RedHat bundles KVM with RHEV subscriptions. Citrix's hypervisor, XenServer, is free.

When it comes to enterprise networking, however, Cisco has an upper hand over VMWare. Cisco sells proprietary products, and this helps the company to create a sticky user base. Organizations using Cisco's networking technologies will probably find it easier to stick with the company since switching to a rival company such as VMware would involve a huge scale of transition. These organizations might prefer to stick with Cisco's SDN technology.

Will FlexPod suffer?
In the short term, Cisco/NetApp FlexPod products are not likely to suffer since the SDN market is still quite small. If VMware's NSX becomes popular and a lot of Cisco customers deploy it in their networking strategies, Cisco and NetApp might have to reconsider their hardline stance and start supporting NSX on the FlexPod reference architecture.

Assuming that Cisco has a 50% stake in its FlexPod joint venture with NetApp, the company might realize revenue of $1 billion in FlexPod shipments in the current fiscal year. FlexPod shipments have been growing at a CAGR of 81%. Assuming that the segment grows at a CAGR of 60% through 2017, Cisco's FlexPod revenue will have hit about $4 billion. NetApp will have a similar FlexPod revenue, too.

However, it's possible that the Cisco/NetApp entente favors NetApp much more than it does Cisco since the company has a much smaller revenue base of $6.3 billion. An extra $4 billion or so added to its topline in just four years will no doubt be much appreciated by its investors.

Joseph Gacinga has no position in any stocks mentioned. The Motley Fool recommends Cisco Systems and VMware. The Motley Fool owns shares of VMware. 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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