Virtualization is Scary for Cisco

There’s been a lot of speculation as to why Cisco decided it had to enter the server market space and why they completely ignored bare metal or “non-virtualized” applications (which according to Yankee Group represent 80% of all enterprise data center applications). To many, the move made no sense because the margins associated with compute gear would severely dilute those of the lucrative switching business. Others believed that they entered the server business as a reaction to a war HP started when it entered the switching business with Pro-Curve. Well, I suppose that could be true if the real world were more like “Survivor”, but it’s not. Companies of Cisco’s caliber seek paths to market dominance at every opportunity. However, when they discover that fate is challenging their domination, they tend to make big moves - reacting with a grand new vision in an attempt to “change the course of a mighty river”.

Such is, I believe, the motivation behind their seemingly half baked, rushed to market before it was ready, unified computing story. Cisco recognizes virtualization as a major market threat and is willing to invest extraordinary time and resource in order to wrestle control away from fate. By their own account, Cisco had 500 engineers assigned to Nexus (UCS) and spent $250MM in cash on it over a 2 year period. That figure doesn’t include the cost of purchasing Nuovo (up to $678MM), whose technology is at the heart of UCS. Note that Ed Bugnion, one of the founders of Nuovo, was a co-founder of VMware, and of course Cisco actually owns a piece of VMware, so they know where that company is headed. Also note that whatever innovation there is in the UCS system, including their proprietary VN-Link technology, is designed to shift control of virtual networking back into Cisco’s physical network infrastructure and management systems. Well isn’t that convenient.

So what’s the concern over virtualization and why is Cisco willing to pay nearly $1B over it? It’s simple. Current and emerging virtualization technologies from VMware, Citrix, Oracle and Microsoft have shined a new light onto a different, more effective and better way to manage data center resources than Cisco has championed for the past 20 years, and the success of virtualization technologies is shifting control of the data center network away from Cisco. In the past, vendors who provided and managed switching and routing within a data center of any size had ultimate control. Now, more and more each quarter, as virtualization technologies evolve, control over WHAT rides across the network, HOW it rides across the network and WHEN it rides across the network is shifting away from the silo’d physically wired world into the domain of the virtual world without walls. Unless Cisco can control virtualization and make it part and parcel of the Cisco Powered Network, their bread and butter revenue is going to go away faster and faster every year - along with the fat margins.

This is the light that Cisco sees at the end of the tunnel, a light that they must transform from a freight train’s headlamp into the light of opportunity.