While the tech world was stunned by Cisco's surprise $3.7 billion purchase of AppDynamics this week right before AppDynamics was to go public, that's only part of the recent drama around Cisco.
Another part was how Cisco was kicked in the teeth in its bread-and-butter network hardware market, as indicated by a damning report on sales of its flagship networking software product and news from its rivals VMware and Facebook.
It centers on a technology that is upending the network industry, of which Cisco is the biggest player. The technology is known as software-defined networking. SDN takes much of the fancy features out of networking hardware products and puts them in software, which makes a network easier to manage. A company still needs network hardware but can use less of it and less expensive versions.
Cisco definitely has game in the SDN world. A few years ago Cisco sent its four-star engineers out into a Cisco-funded startup called Insieme to build a product. It then paid $863 million to buy their startup.
In June those star engineers publicly quit Cisco.
Before they quit, they built Cisco's flagship product, the Nexus 9000 switch with optional SDN software called Application Centric Infrastructure.
The Nexus 9000 doesn't have to use ACI. In another mode, it can simply run as a traditional, very fast switch. And it has definitely been selling well in part because in early 2016 Cisco dropped prices for it.
When Cisco released quarterly earnings in November, the company said the family of products in the business unit that includes ACI grew 33% over the year-ago quarter and had gotten on an annualized revenue run rate of $3 billion. (This unit includes its Nexus 3000 and Nexus 9000 family of switches as well as the ACI software, Cisco tells us.) However, the price cuts are taking their toll. Overall switching revenue was down 7% from the year-ago quarter.
Reuters' Stephen Nellis reported this week that ACI software itself may not be doing particularly well. Nellis said he saw documents that showed Cisco had $888 million in contracts for its Nexus 9000 switches but only $89 million for ACI. That means only about 10% of companies that bought the switch also bought the optional software, he reported. Cisco declined to comment on these figures.
As we previously reported, while customers like the Nexus 9000 switch itself, ACI has a reputation in the industry for being difficult to install and use.
And Business Insider has seen documents from early January indicating that Cisco's own internal networking team may be having trouble using ACI for Cisco's networks, with at least one person believing that Cisco should ditch the software and just use the Nexus 9000 switch without the software.
A Cisco representative says ACI is "strategic" and "critical" and mentions that Cisco is using its own analysis product, Tetration, to provide the data, telling us:
"Regarding Cisco IT issues, nothing could be further from the truth. ACI has proved to be a highly strategic and critical technology for Cisco's IT department. We have also deployed Cisco Tetration Analytics, which has their time and cost on application and policy automation by 70%."VMware moving in
VMware CEO Pat Gelsinger. VMware
But wait, there's more. Execs at VMware, one of Cisco's biggest rivals in SDN, gleefully told analysts on Thursday that their SDN product, called NSX, had been crushing it.
NSX is on track to do $1 billion over the next year if sales continue at their current rate, VMware CEO Pat Gelsinger said on the quarterly conference call. He said the product had more than 2,400 customers, double from the same period a year ago, and landed its first $10 million deal.
By any measure, that's a long way off from dethroning Cisco, which earned $3.7 billion in revenue from its switching products in its most recent quarter alone. But NSX's growth shows that software-based networks are catching on even as Cisco's reputation in this area is lagging.Facebook an even bigger threat
Plus, this week there was more news from the company putting the entire network industry to shame: Facebook.
Facebook CEO Mark Zuckerberg. Win McNamee/Getty Images
Facebook has been inventing all kinds of never-been-done-before network technology, both hardware and software, for internal use.
It then gives its designs and software away free, as open-source projects, through its Open Compute Project. OCP has earned cult-like status among hardware engineers worldwide, and now at least one other huge internet company, LinkedIn, is following suit with its own network-building project.
Earlier this week Facebook announced it had a bunch of new vendors that would build commercial versions of its newest hardware switches or make software products to support it — all in direct competition with Cisco.
These companies include Big Switch Networks, an early startup in SDN; Barefoot Networks a network hardware startup by famed SDN pioneer and Stanford professor Nick McKeown; Ubuntu, a major Linux player; SnapRoute, a startup by Apple's former network team; and Cumulus Networks, a startup founded by a former Cisco engineer JR Rivers.
Rivers tells us that more companies are starting to look at the Facebook model of open-source network hardware instead of automatically turning to Cisco or Cisco's traditional rivals Juniper and Arista.
"We're definitely seeing our software and open networking hardware gaining share in traditional enterprises," he says. "Among our 500+ customers are nearly a third of the Fortune 50. In those deals and others we are going head to head with the giants in the industry — Cisco, Juniper, Arista."