Every time Amazon (NASDAQ:AMZN) ventures into a new business, the targeted industry should worry about the risks of competing against such a disruptive player. For instance, traditional retailers have been struggling against Amazon's e-commerce dominance. And the giant retailer has become a leading public cloud computing company with Amazon Web Services (AWS).
Legacy traditional computer network vendors such as Cisco Systems (NASDAQ:CSCO) may be concerned by Amazon's latest move. Last week, the Linux Foundation announced the DENT project, which is aiming at "the creation of network operating system for disaggregated network switches in campus and remote enterprise locations," and Amazon is one of the six premier members of this initiative. But this apparently disruptive technology may actually have a limited impact.
A bit of computer networking history
Before cloud computing emerged a few years ago, computer networking had been following the same model over a couple of decades. Network vendors had been selling monolithic, proprietary solutions that integrated network devices with the software to run these boxes. This was great for customers that wanted a network that just works and that would not distract them from their core business.
Giant cloud providers such as Amazon with AWS and Microsoft with Azure required more scale and flexibility at low cost, though. As a result, solutions that disaggregated software from network devices emerged. For instance, Microsoft developed its network operating system SONiC that can run on any compatible network device. The advantage of this technology is cloud titans can run their tailor-made software on top of any hardware that better fits their needs.
And this technology has been having a significant impact on the networking industry. For instance, Arista Networks grew its revenue from $361 million in 2013 to $2.45 billion over the last 12 months thanks to its network solutions that address cloud titans' requirements.
In contrast, Cisco was late to adapt. Its market share in the high-speed data center network segment dropped from 74.4% in 2013 to 46.6% during the first half of this year. And Cisco announced only last week the disaggregation of its software from its hardware for its new data center networking solution.
What DENT is about?
The idea of the DENT project is to apply to smaller and remote networks the same disruptive technology that consisted of separating software and hardware in the cloud data center networks. As an illustration, the project's first use case targets the retail industry, which involves many small locations.
A threat to Cisco and the networking industry?
Cisco doesn't disclose its revenue from its enterprise and campus business, but the company's largest segment, "infrastructure platforms" (which includes network devices), represented 57.3% of its revenue during the most recent quarter. Besides, a study indicates Cisco controlled 59% of the enterprise and campus markets in 2018.
Thus, with its disruptive technology on the campus and enterprise network, the DENT project represents a real threat to Cisco, but its impact may stay limited.
First, disaggregating network software and hardware makes sense for giant cloud providers since their scale allows them to develop their tailor-made technology in an economical way. But smaller companies don't necessarily want to deal with integrating networking software and hardware. They may still just want an integrated and trouble-free solution that connects their remote locations to their networks. The same concept exists with computer operating systems: Linux is available for free and can run on any personal computer, but many companies prefer to pay for Microsoft's operating system because it won't distract them from their core business.
Second, the DENT project is initially targeting the retail industry. However, some retailers may be reluctant to choose a solution provided by their biggest competitor (Amazon) as we saw when they preferred Microsoft's cloud for their data centers.
Third, companies may worry about potential future integration of DENT with AWS, making their whole network -- remote locations and data centers -- dependent on Amazon's infrastructure and software.
Finally, even if this disruptive technology expands, Cisco can now quickly adapt since it developed a similar disaggregated solution for data centers.
Thus, investors should not expect any meaningful impact from the DENT project for either Amazon or Cisco. This project may actually signal Amazon is preparing to expand its physical footprint with a tailor-made networking solution that would lower its costs to deploy its remote locations.
And even if the DENT project gains traction, Cisco remains an attractive tech stock. The company will quickly adapt because it recently embraced the concept of disaggregating software and hardware in the data center segment.