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SDN Means Business: How to Profit from It: Cisco Systems, Inc. (CSCO), VMware, Inc. (VMW), Juniper Networks, Inc. (JNPR)

Juniper Networks, Inc. (NYSE:JNPR)

Juniper Networks’ Executive Vice President Bob Muglia said that the nascent SDN market is morphing into three camps — OpenFlow / open source, Cisco and VMware.

Muglia said Juniper Networks, Inc. (NYSE:JNPR) is looking to coalesce the industry around a third “standard” in SDN controllers, one that would be an open source alternative to those offered, or to be offered, from Cisco and VMware. Given their dominant positions in their respective markets, Muglia expects Cisco and VMware to be leading players in SDN.

Juniper is supporting an OpenFlow / open source controller from start-up Big Switch Networks. Juniper’s involvement in Big Switch highlights the company’s commitment to partnerships to support and advance open SDN protocols. This will continue to be a key part of Juniper Networks, Inc. (NYSE:JNPR)’s SDN strategy. Additionally, the company demonstrated Floodlight controller interoperability on their systems with Big Switch.

Profiting from SDN: VMware is Best Positioned for Investors

VMware announced the acquisition of Nicira, a key player in the emerging software-defined networking or network-virtualization market. Nicira manufactures an intelligent abstraction layer that manages and controls physical networking resources and capacity. This may have significant short-term negative implications for Cisco and Juniper.  The $1.26 billion purchase price VMware is paying represents roughly 100 times trailing and 40 times forward 12-month revenue for Nicira, highlighting how highly regarded Nicira’s vision and technology have become in a rather short period of time.

Cisco’s gross margin could be at risk. Cisco derives roughly $14 billion annually from the sale of switches, and likely garners blended gross margins in the 60’s on this revenue. Over time SDN has the potential to significantly impact both the addressable market size as well as the profitability of Cisco’s enterprise and data-center switching business. The risk to gross margins stems from the idea that the vendor- and switch-specific software Cisco sells will become less important over time as SDN proliferates. It is particularly worrisome for Cisco that VMware is buying Nicira.

Juniper also has significant risk. Juniper is selling enterprise and data-center switches at roughly a $500 million-per-year run rate. Enterprise-switching share gains, from a relatively low base, continue to be the most reliable growth driver at the company. Given Juniper’s focus on high-performance data-center products, a higher percentage of Juniper’s switching revenue (compared to Cisco’s) could be at risk from early data-center-focused SDN deployments. Juniper’s new data-center switch fabric, Q-Fabric, is a proprietary SDN solution. Nicira, on the other hand, has been the primary driving force behind open SDN standards like OpenFlow and OpenStack.

Conclusion

With OpenFlow / SDN, users can increase the pace of innovation through software, instead of hardware, which will expedite technology exchange with partners and technology transfer from universities. This is the beginning of the software era of networking, and long-term investors could benefit immensely from this revolution.

The article SDN Means Business: How to Profit from It originally appeared on Fool.com and is written by Anindya Batabyal.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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