Dear Valued Visitor,

We have noticed that you are using an ad blocker software.

Although advertisements on the web pages may degrade your experience, our business certainly depends on them and we can only keep providing you high-quality research based articles as long as we can display ads on our pages.

To view this article, you can disable your ad blocker and refresh this page or simply login.

We only allow registered users to use ad blockers. You can sign up for free by clicking here or you can login if you are already a member.

VMware, Inc. (VMW), Microsoft Corporation (MSFT), Cisco Systems, Inc. (CSCO) – Software Defined Networking: The Next Cloud Revolution

VMware, Inc. (NYSE:VMW)Did you miss out on the cloud computing boom? Maybe you thought it was hype in the beginning, then dismissed it. Well, technology is cyclical, and there’s an emerging movement for enterprises to adopt something called software defined networking (SDN). Like cloud computing did, it’s going to get a lot of attention over the next few years.

What is software defined networking? Well, it’s being able to control hardware — like routers and switches — with software. Instead of using an array of dashboards and proprietary firmware options on networking equipment, software developers are able to control the flow of data with their code. Interesting, right?

Software Defined Networking vs. Cloud Computing

The first signs that SDN would become big came when VMware, Inc. (NYSE:VMW) purchased Nicira for $1.05 billion. This puts SDN right in VMware, Inc. (NYSE:VMW)’s wheelhouse since Nicira was the first company to implement a full-on SDN environment. They did this by virtualizing network hardware, making it fully controlled by software. Being able to control a network with software is a developer’s dream.

Enterprise customers don’t like paying for pricey licenses. Like any business, they prefer paying for performance. VMware, Inc. (NYSE:VMW) offers them value because they know about how to build complex cloud infrastructures, “private clouds” inside of a company. They now also have Nicira to guide the next evolutionary step into SDN.

This puts VMware, Inc. (NYSE:VMW) squarely in control of SDN’s destiny. The company’s Services division is quickly outgrowing its Licenses division. Services grew 30% in 2012, to $2.5 billion while licenses only grew 13%.This is an important step towards a service-based approach for VMware, Inc. (NYSE:VMW).

Services vs. licenses

Enterprise providers are starting to shy away from just offering licenses. This is ultimately going to change the industry. We’re already seeing it with Microsoft Corporation (NASDAQ:MSFT) and the cloud, and we’ll continue to see it with SDN. Investment tip: when you’re looking at the health of a company, seek out its services revenue. Is that number growing faster than licenses? Then you are on to something.

With Microsoft Corporation (NASDAQ:MSFT), it derives a lot of licensing revenue from its Server and Tools division. From 2011 to 2012, revenue was up 17% there. In its Business Division, where it offers the majority of its services, the increase was only 8%.

Microsoft Corporation (NASDAQ:MSFT) has a harder time pursuing growth because of its size, bringing in $73 billion in revenue last year. One would expect it to be pushing services, not licenses as the future. It appears to be betting on licensing. This is in order to help it prop up struggling units of its business like Online Services (lost $8 billion in 2012) and the Entertainment and Devices Division (71% reduction in income in 2012).

Back to SDN

Microsoft Corporation (NASDAQ:MSFT) hasn’t even begun to touch SDN. That’s unfortunate, because there are plenty of smaller upstarts that will be able to come in and take a princely share of this market. Take Insieme Networks, which brings cash and talent to the table. How? Because they are a “spin-in” of Cisco Systems, Inc. (NASDAQ:CSCO), an independent entity with $100 million in cash and a depth of experience from the networking experts at Cisco Systems, Inc. (NASDAQ:CSCO).

DOWNLOAD FREE REPORT: Warren Buffett's Best Stock Picks

Let Warren Buffett, George Soros, Steve Cohen, and Daniel Loeb WORK FOR YOU.

If you want to beat the low cost index funds by 19 percentage points per year, look no further than our monthly newsletter.In this free report you can find an in-depth analysis of the performance of Warren Buffett's entire historical stock picks. We uncovered Warren Buffett's Best Stock Picks and a way to for Buffett to improve his returns by more than 4 percentage points per year.

Bonus Biotech Stock Pick: You can also find a detailed bonus biotech stock pick that we expect to return more than 50% within 12 months.
Subscribe me to Insider Monkey's Free Daily Newsletter
This is a FREE report from Insider Monkey. Credit Card is NOT required.