Is Reportedly High Interest in ACI Enough For Cisco To “Lead SDN?”

Networking giant’s focus on Application Centric Infrastructure signals acknowledgement that SDN is the future of data center neworks

Yevgeniy Sverdlik

May 19, 2014

3 Min Read
Is Reportedly High Interest in ACI Enough For Cisco To “Lead SDN?”
Former Cisco CEO John Chambers (Photo: Cisco)

Application Centric Infrastructure was front and center in Cisco’s latest earnings announcement and its top executives’ call with analysts last week, which signals an acknowledgement from the world’s biggest data center switch vendor that software-defined networking is the direction the industry is now moving in.

The data center networking market is going through a big transition, and so is Cisco, whose massive Cisco live! conference kicked off in San Francisco this week. Numerous SDN vendors have emerged, challenging Cisco’s dominance by promising sophisticated networking technology where the switching hardware is simple and cheap but managed intelligently by software that sits outside of the physical network.

Cheap commodity networking hardware is a problem for Cisco, because its traditional value has been in sophisticated proprietary software and hardware that are inseparable, which has enabled it to sell its products at extremely high margins.

“We’re going to lead SDN”

At last year's Cisco live!, which took place in Orlando, Florida, the networking giant announced its answer to the SDN movement – its Application Centric Infrastructure technology. Instead of the common SDN approach of using virtual network overlays, which communicate specific configuration commands to hardware using the open SDN protocol called OpenFlow, Cisco’s ACI approach is to communicate high-level application requirements to intelligent network hardware, which self-configures accordingly.

Whether ACI wins the battle with OpenFlow-based SDN technologies remains to be seen. Cisco CEO John Chambers is optimistic. “We’re going to lead SDN,” he said on last week’s earnings call. But Cisco is not cutting itself out of the OpenFlow market. Its latest Nexus 9000 switches – the first line of ACI-enabled switches – also support OpenFlow, so when ACI finally becomes available later this year, Cisco customers will have a choice between the two.

Chambers claimed there was a lot of interest in ACI among CIOs he had spoken to and boasted that about 50 customers were already trying it out in their data centers. He said it was only a matter of time before those trials turned into sales: “I think you’ll just see us knock’em off one after the other.”

Cisco’s three problems

Data center switching, and the high-end switch-and-router market overall, is one of three problems Cisco has today. The other two are slumping sales in the emerging markets and lack of momentum with service providers. Those were the three problem areas Chambers identified on the earnings call for the third quarter of the company’s fiscal year 2014.

While there are signs of things picking up in the service-provider and high-end-switching segments, the company expects sales in countries like China, India, Russia, Brazil and Mexico to continue declining due to macroeconomic challenges in those countries. “We expect these challenges to continue,” Chambers said.

Cisco is the world’s biggest vendor of networking equipment and trends that affect it are indicative of trends affecting the market overall. In 2013, the company had more than 60 percent market share in the Ethernet switching and routing market alone, which includes its data center switching products, according to IDC.

Its closest rival in this space is HP, but HP’s market share in Ethernet switches and routers pales in comparison to Cisco’s. HP made about $550 million in sales in this space in the fourth quarter of 2013, for example, compared to Cisco’s $3.65 billion in sales that quarter.

Cisco’s recent weakness in high-end switching and routing was felt primarily in sales into its mobility and access-layer segments. These segments dragged down the third fiscal quarter’s switching revenue in general. “Overall switching revenue declined by 6 percent,” Chambers said.

He added that he was “pleased” with data center switching momentum, however, but said it would take several more quarters before overall switching returns to growth. “We will continue to take it one quarter at a time as you would expect,” he said.

Cisco reported $11.5 billion in revenue for the third quarter of fiscal 2014 -- down 5.5 percent year over year. Its net income was $2.2 billion -- down 12 percent. The company reported $0.42 in earnings per share for the quarter -- down 8.7 percent.

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