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The Best Way To Invest In This $50 Billion Tech Trend

2014: The Breakout Year
Companies are going to proceed slowly, considering the tectonic shift in network management that SDN entails. So it’s unlikely to have a big effect on the industry for several years. In the year ahead, look for companies to begin their SDN trials, figuring out how the process works on a small scale before placing large orders in 2015 and 2016.

Yet the mere fact that this will become a dominant topic in IT circles in 2014 makes this a timely investment opportunity. By the time SDN is all over the financial media, share prices will have already started to respond to the eventual winners and losers.

UBS held a conference on SDN in the spring, and after hearing industry comments, concluded that “the value proposition of SDN around capex/operational expenditure savings and increased automation and agility is real to customers and we expect this architectural shift to play out over time.”

Whither Cisco?
Considering that Cisco Systems is the overwhelmingly dominant player in network hardware, many tech strategists figured the company had the most to lose from the switch to SDN.

Yet in recent months that view has flipped: Thanks to a string of acquisitions and internal investments, Cisco is now seen as a clear beneficiary, with a comprehensive set of SDN offerings that outpaces its smaller rivals. A key part of Cisco’s SDN strategy entails long-term software and service contracts, which is a key pillar of Cisco’s long-term business model shift, as I noted recently.

Analysts at Goldman Sachs, which has Cisco on its “conviction buy” list, concur: “With Cisco enabling software programmability to its vast $180 billion installed base, we believe it has an opportunity to transition from a ‘box’ company to a platform company.”

Analysts at UBS AG (ADR) (NYSE:UBS) agree that Cisco is in the driver’s seat in this niche, but caution: “Cisco can’t be complacent as the world evolves from hardware-defined to software-defined, likely requiring business model changes (software monetization vs. hardware) and an increasing role for software and services in Cisco’s portfolio.”

Other winners: Broadcom Corporation (NASDAQ:BRCM), which is building a set of communications chips that facilitate SDN, and VMware, Inc. (NYSE:VMW), thanks to its $1.3 billion purchase of SDN pioneer Nicira in 2012.

Yet for every SDN winner, a rival will lose market share. Goldman’s analysts are concerned that rivals Juniper, F5 and Brocade lack the scale to show technology leadership, and the SDN transition may cause them to lose some legacy customers.

Brocade and Juniper Networks have already made acquisitions in the SDN niche, and if F5 Networks want to quickly become relevant, it may look to acquire PLUMGrid or Jeda Networks. BigSwitch or OpenDaylightProject, all of which are privately held but garnering considerable industry buzz.

Risks to Consider: By the time the SDN revolution gets underway in a year or two, many players will have already completed their acquisition strategies, and incumbent telecom equipment and networking firms may already have lost the battle before it began.

Action to Take –> It’s hard to overstate how massive this shift will be. SDN threatens to turn hardware components into commodities, leading to rapid price declines for traditional networking switch vendors. In coming months, you’ll be hearing a lot more about SDN, and it behooves you to track the moves of Cisco and others as they jockey for position in what will become a $50 billion market.

This article was originally written by David Sterman and posted on StreetAuthority.

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