Lippis Report 196: VMware Bets Heavy on Virtual Overlay Networking with $1.26 B Nicira Acquisition

If it wasn’t clear before July 23rd that the Software-Defined Networking (SDN) controller market resides within a cloud stack, then it’s clear now, thanks to VMware’s $1.26 billion acquisition of Nicira Networks. VMware is building a cloud stack that’s first to recognize the importance of virtualized networking and places a very high value on it. The multiple to Nicira’s revenue is, let’s say, very high. Microsoft, IBM, Citrix, Red Hat and the open stack community have just taken notice and are in the process of evaluating Big Switch Networks, Arista Networks, Embrane, Pluribus, Plexxi, et al. In this Lippis Report Research Note, we explore this exciting turning point in the open networking marketplace.

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VMware always had a big hand to play in SDN and recently took SDN to a new level with its Software-Defined Datacenter initiative. VMware was either going to compete with Nicira or acquire it as their development paths were so aligned. Clearly, VMware acquired Nicira, and when the deal closes in the fall, VMware will have the most extensive and deployed cloud stack in the industry.

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One can argue that vSwitch, a VMware innovation, started the SDN and network virtualization journey. Its distributed virtual switches (vDS) enabled pooling of network ports across clusters via aggregation of vSwitches. To extend or overlay layer 2 virtual networks over layer 3 boundaries, it jointly developed VXLAN with Cisco, Arista Networks, RedHat, Citrix, Intel, et al, and is now a draft IETF RFC. VXLAN extends large layer 2 VM domains well beyond the 4K VLAN limit to 16 million logically isolated virtual subnets. VXLAN is touted as a key standard that avoids proprietary overlay networks plus allowing VM domains to span virtual and physical networks. In addition, VMware’s vCloud Director enables alignment of elastic compute and networking diameters. Via vShield, VMware has added virtual firewalls, load balancing, VPN, IPAM, hybrid cloud extensions, and the ability to logically insert partner services, like IDS/IPS and WOC or WAN Optimization controllers. 

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And on July 23rd, VMware announced that it would acquire Nicira Networks, adding its Network Virtualization Platform (NVP) to its Software-Defined Datacenter product portfolio. As Nicira’s NVP is built upon Open Stack components, VMware will now be in a position to offer virtual networking services to both VMware and Open Stack installed bases, if it chooses. Nicira allows VMware to offer virtualized networking services to large cloud computing providers that mostly use Open Stack. There are very interesting opportunities now for VMware to enable enterprises and cloud computing providers tools to build hybrid private/public cloud computing connections now that VMware can extend virtual networking between both markets.

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On a technical note, it’s highly likely that Nicira will support VXLAN, either in addition to or instead of its STT tunneling protocols enabling VMware to deploy Nicira’s virtualized networking into its massive enterprise installed base. With this growing cloud stack, VMware is in an excellent position to create an ecosystem around a set of APIs to application developers exposing virtual network topologies and other stateful information.

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Networking to Gain Top Software Engineering Talent Again

Besides the value VMware may gain from Nicira, there are a few other observations to make. First and foremost networking is cool again. For years, established networking firms and start-ups competed with internet and social networking firms for new engineering talent. Nicira’s $1.26B valuation represents the first SDN firm to be acquired at a significant value, which will gain the attention of new engineers surveying the high tech job market. If history is any guide, then Nicira’s valuation will look small compared to the next round of acquisitions, as there is only one remaining independent controller company (Big Switch Networks) and a technology that many large IT firms now need. These networking firms are mostly software companies allowing them to now recruit top software engineering talent.

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Another observation is that network influence or control is shifting to the virtualization domain and the rise of Overlay Networks. There are two tectonic shifts that potentially threaten networking as we know it and networking professionals. The first one is the migration to technologies that recognize the relevance in the hypervisor switch of L2/L3 designs. The second shift is L4-L7 services that are cost optimized and compatible with VMs. Let me explain.

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With OpenFlow, Open vSwitch and Quantum providing the base network virtualization tools for KVM, Virtual Box and Xen while VMware providing its own tools mentioned above, a shift in network control or balance of power is occurring into the virtualization domain. When networks are virtualized, they can stay in the virtualized domain, traverse physical layer 2/3 networks or some combination of both.

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At the heart of virtual networks is how they traverse physical switches and routers. There are layer 2 tunnels and layer 2 over layer 3 tunnels such as VXLAN and NVGRE. There is OpenFlow in “native” mode, which is OpenFlow supported by all of the switches and routers in a network, and OpenFlow in “overlay” mode where only the hypervisor switches are OpenFlow enabled, and the OpenFlow network is overlaid on the physical L2/L3 design using tunnels. Nicira’s controller does overlay mode using its custom STT tunneling technology and as mentioned above, will more than likely now support VXLAN. Big Switch Network’s yet-to-be-released controller will use plain vanilla OpenFlow so that it supports overlay and native as well as hybrids of the two.

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Both firms envision networking being provisioning and controlled from the virtualization domain where virtual networks are created, managed and layer 4-7 services administered. As this model comes to fruition, then physical networking becomes less strategic as network services move to the virtualization domain. Firms with large virtualized data centers like this model, since they have stranded CPU resources, thanks to memory limitations in virtualized servers. Layer 4-7 network servers are CPU intensive but use little memory, a perfect fit to move these services in to the virtualized domain; a sunk cost that is already being managed. In essence, they view it as getting Layer 4-7 services for free.

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Cisco and VMware Relationship Gets Complicated

So how does the combination of Nicira and VMware impact the industry? First, Cisco is a VMware investor and partner so the acquisition of Nicira places VMware in a competitive position against Cisco in the SDN/overlay network virtualization space. It’s interesting that VMware is investing more than Cisco in the SDN space, factoring in Cisco’s recent Cisco ONE initiative and Insieme investment. It seems like the relationship may have become complicated. Cisco ONE utilizes the multi-hypervisor Nexus 1000V virtual switch to create virtual network overlays through programmatic interfaces to its virtual supervisor module (VSM) or controller that enables automation-centric provisioning. Cisco will be offering Cisco ONE overlay while VMware offers Nicira’s NVP.

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Big Switch Networks, Big Opportunity

Big Switch Networks is perhaps the biggest benefactor of VMware’s acquisition of Nicira as it sets the valuation precedent of Nicira’s closest competitor. Big Switch Networks purportedly plans to launch its commercial controller this year. Expect Big Switch Networks to get a lot of attention from Microsoft, Citrix, Red Hat, IBM, HP, Dell, and potentially even, Cisco.

IBM Needs a Controller

IBM is like Cisco in that they both own vSwitches for VMware which enables them to control their future by innovating within and on top of this critical piece of technology that is key to SDN and virtual networking. IBM has the Distributed Virtual Switch 5000V (DVS 5000V) controller and Data Path Module for VMware create and manage virtual networks that are distributed over many ESX hypervisors. In addition, IBM is invested in its Layer 3 Distributed Overlay Virtual Ethernet or DOVE networks to enable large scale virtual network overlays.  

For SDN controllers, IBM System Networking has partnered with NEC and Big Switch Networks. In IBM’s SDN stack, applications build DOVE networks, which interconnect workload groups through a set of middle-boxes (i.e., L4-7 services). A DOVE Network provides the network connectivity associated with a “Virtual Systems pattern” that can be deployed multiple times with minimal manual configuration.

The one piece of the SDN puzzle that IBM does not own is the controller. It seems to strategic for IBM not to own.

Arista Networks, the Switzerland of SDN

Arista Networks has taken the approach to support many controllers, be it VMware, OpenStack, CloudStack, etc. In short, there are many cloud stacks emerging, and Arista seeks to be the cloud network for all of them. Arista’s EOS or Extendable Operating System has SDN capabilities for programmability at control management and data plane with open APIs to OpenStack, CloudStack, VMware, etc. Arista is a key VMware partner that has resulted in key initiatives such as its VXTracer product and co-innovator in the VXLAN standard. Expect interoperability with Nicira and VMware controllers and Arista EOS.

Embrane—Right Place, Right Time?

Embrane is in the same position as Big Switch Networks, but for a different reason. As overlay virtual networks take off, cloud providers and corporations will look to add layer 4-7 virtualized services to them. Embrane’s heleos distributed software platform is one, if not the best, platform to deliver layer 4-7 services to virtual networks. This functionality is not currently in cloud stacks other than VMware. Expect Embrane to get a lot of attention from Microsoft, Citrix, Red Hat, IBM, HP, Dell and others.

Pluribus and Plexxi Too Early to Tell

Pluribus and Plexxi are still in stealth start-up mode, but they too will receive a warm welcome as the SDN market heats up.

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