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Cisco to Lose Out on Network Infrastructure Sales to Facebook, Google

June 27, 2014 | About:

San Jose, California-headquartered information technology firm Cisco (NASDAQ:CSCO) announced this week it intends to acquire privately-held Tail-f systems – a developer of multi-vendor network service orchestration solutions for traditional as well as virtualised networks. Tail-f’s products allow service providers and enterprise IT businesses to implement applications, network services, and solutions across networking devices.

Stockholm, Sweden-based Tail-f will be acquired for $275 million in cash and retention-based incentives, with Cisco taking full ownership of the firm. The deal is expected to be completed in Q4 of fiscal year 2014.

Cisco aims to accelerate its cloud virtualisation strategy of delivering software that boosts the value of its customers’ applications and services. With increasing amounts of network traffic volumes and extensive data infrastructure making service provider networks more expensive and complex, Cisco expects its growing portfolio of cloud solutions will simplify and automate the provisioning and management of physical as well as virtual networks.

"With a rapidly increasing number of people, devices, and sensors connecting across the Internet of Everything (IoE), service providers require new capabilities to deliver value-added, cloud-based services and applications," said Hilton Romanski, senior vice president of Cisco Corporate Development. "Our goal is to help to eliminate the bottleneck caused by operational complexity within the network. The acquisition of Tail-f's network services configuration and orchestration technology will extend Cisco's innovation in network function virtualization, helping service providers reduce operating costs and the time it takes to deploy new services, making agile service provisioning a reality."

Facebook’s alternate offering

Cisco’s announcement of its Tail-f acquisition was met only the next day by Facebook’s (NASDAQ:FB) announcement of its own top-of-rack data centre switch, code-named Wedge, and corresponding Linux-based operating system currently code-named FBOSS.

The social-networking giant is aiming to drastically streamline the network, reducing complexity and turning it into a series of much simpler mix-and-match boxes that do not need obscure programming languages to operate.

Jay Parikh, VP of infrastructure engineering at Facebook, told the GigaOM Structure conference that the tech giant’s goal was to remove the need for networking engineers, instead creating hardware that can be easily and dynamically switched in and out, depending on the needs of the software that is running.

Facebook’s move is likely to have caused a few raised heartbeats at Cisco and other network equipment vendors, with the risk of their largest customers turning their back on the firm’s commoditised hardware, ReThink reported.

The company’s offering will allow organisations to build their own switches using the off-the-shelf or white-box that Facebook is offering, rather than buying proprietary switches such as Cisco offers. Facebook, Google (NASDAQ:GOOG), and Amazon each argue that the white-box approach will be less expensive and more flexible. Facebook’s announcement post said it had saved $1.2 billion by developing its own designs for its servers.

Cisco has responded by saying that Facebook’s new Wedge is not a threat to its business and that its open-source switching strategy will be “loaded” with hidden costs and “only attractive to a small group of users”, according to CRN.

The company said that Facebook’s strategy will only make sense for the largest organisations, such as those with “mega-scale data centres” along with an existing wealth of IT resources. Unfortunately for Cisco, this already rules out Facebook, Amazon, and Google as customers, although a wealth of other medium and large IT organisations will still be available for targeting.

"The white-box view in the enterprise and commercial [markets]…doesn't work quite as well," said Ish Limkakeng, vice president at Insieme, Cisco's software-defined networking spin-in. "When you have a large [mega-scale data centre] or are building a huge-scale data centre, you are willing to make the investment in looking at white-box, and you have a lot of technical staff where you can do this evaluation and take on the idea of doing the systems integration yourself. When you look at that from a typical enterprise standpoint, they don’t want to do that."

Limkakeng added that he doesn’t foresee widespread adoption of the white-box or open-source switches throughout the commercial markets, due to average enterprises lacking the same size footprint of the larger tech firms.

Google has also begun development on its own switch solution, though its designs are currently being kept secret. No doubt, when the company does release its grand designs for the market, it will pose a significant threat to Facebook’s own offerings.

The bottom line

Ultimately, Cisco is going to lose a significant amount of business from the open-source availability of Facebook’s offering; and some of the largest tech firms at that. It will still be able to build a strong following in the medium and large-sized enterprise IT markets, however, where it is likely to excel in a fast-growing market – JP Morgan said this week that the white-box switching market grew 18.6% YoY in Q1 of 2014. Cisco remains a buy due to its potential growth in the sector.

About the author:

Muhammad Bazil is a financial journalist and editor for a variety of websites, public policy organizations, and book publishers. He has written hundreds of published articles and blog posts on topics including budgeting, credit management, real estate and investing. His articles have been featured on the homepage of Yahoo!, MSN and numerous local news websites.

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