A report from The Information on Friday sent shares of networking hardware companies like Cisco Systems (NASDAQ:CSCO), Juniper Networks, and Arista Networks tumbling. Amazon.com (NASDAQ:AMZN), the e-commerce and cloud computing giant, is reportedly toying with the idea of selling cheap white-box networking switches to enterprise customers.
A gateway to AWS
Amazon is already using white-box switches inside its data centers, according to The Information's sources. Other large internet companies have taken that path as well, including Facebook and Alphabet's Google. Google has gone even further, designing its own custom chips for artificial intelligence.
But selling custom hardware to third-parties is a new frontier. Some customers are already reportedly testing Amazon's switches, with a launch planned within the next 18 months. Amazon's strategy will be focused on price, with plans to undercut the switches from Cisco by 70% to 80%.
Amazon's switches will be unbranded and run open-source software. They'll have built-in connections to Amazon Web Services (AWS), enabling customers to more easily operate in a hybrid-cloud configuration, where on-premise hardware is mixed with public cloud computing. That could help make the process of moving to the cloud simpler and less painful for large enterprises.
Given the reported pricing, Amazon probably won't make much money from selling the hardware itself. Instead, the switches could drive more business to AWS, which is by far the most profitable part of Amazon.
Speaking to The Information, a Cisco spokeswoman downplayed the report: "Only Cisco offers an end-to-end intent-based networking portfolio that delivers assurance, industry-leading security, policy-based automation, and segmentation. We look forward to continue leading the industry on innovation and helping our customers simplify and manage their networks."
Should Cisco be worried?
One thing to remember: Cheap white-box networking hardware is not new. Cheap alternatives to Cisco's pricey hardware are also not new. If price were the only factor, Cisco wouldn't dominate the market for networking switches. But it does, with a market share of 53.4% in the first quarter, according to IDC.
Other cloud computing companies have every incentive to work with networking hardware companies to fight back against the threat from Amazon. Cisco and Google are already collaborating, working on developing software that will connect data centers with Cisco hardware to Google's cloud services. Cisco is also a partner for Azure Stack, Microsoft's hybrid cloud solution.
Amazon certainly shouldn't be underestimated, but selling enterprise hardware for use in on-premise data centers is a very different business than renting public cloud computing resources. Swapping out hardware from Cisco or other providers isn't trivial -- there are meaningful switching costs. And AWS certainly isn't the only game in town when it comes to hybrid cloud. Whether companies would want to lock themselves into AWS with Amazon's switching hardware is an open question.
Amazon may ultimately abandon this effort, instead sticking with using the hardware in its own data centers. Even with low prices, winning market share will be a slog. Cisco has revamped its business model in recent years, moving to a subscription model with its latest Catalyst 9000 line of switches. Those products have proven popular, and the fact that they're bundled with subscription software may make it even more difficult for customers to move away from Cisco. Cisco has increasingly become a seller of networking solutions, and that makes its products and services even stickier.
Cisco has been under attack from cheap commodity hardware for years. The company's dominance has so far held up. Just like Amazon shouldn't be underestimated, neither should Cisco.