SDN Doesn't Mean Cheaper Networking

The most common prediction about SDN is that networking will get cheaper. In fact, IT will spend the same as it always has on networking, but the money will be allocated in different ways. Meanwhile, market pressures will force traditional vendors such as Cisco to adopt new revenue models.

Let's start with network hardware. I predict network hardware will get cheaper because it must be replaced and upgraded more often in the years ahead.

Today, a network device has a lifespan of at least five years; in many cases, it may be up to 10 years before it is considered for replacement. However, technology developments will speed up hardware refreshes; the next generation of networking is likely to be replaced every three years as the drive into 10-GbE ports will soon be followed by 40-GbE and 100-GbE interfaces.

We'll also see new silicon with lower power consumption, support for overlay networking and increased forwarding performance compel faster product churn.

It's reasonable to expect unit prices to fall as customers rapidly cycle out network assets in the same way that server assets are removed to gain new features or functions. However, while unit prices drop, overall network spending will remain the same because of the need to replace hardware more often.

[Network overlays virtualize the network for SDN. Get details in "Network Overlays: An Introduction."]

Another way hardware costs could be lowered is by changing vendor practices around expensive optical and copper interface modules. A significant percentage (often more than 50% ) of the standing cost of network devices is largely due to these modules, which deliver little customer value. The future of networking is services, not connectivity.

It's not necessary for "vendor supported" SFP modules to cost in excess of $300 per unit--even less so to enforce this in software. If the standard is badly written that there are reliability or production problems, then vendors should kick the IEEE into action to produce better standards that are resistant to low-quality manufacturing and prevent unreliable manufacturers from making poor copies.

It is beyond the scope of this article to explain the foolish choices made by the IEEE during the standards process that have resulted in extortionate pricing for what could be low-cost items.

SDN could get cheaper if there was a concerted effort from vendors and customers to drive new standards with reasonable technology choices for cheaper interface modules. Shipping SFP modules adds zero value to customer features or functions and customers resent paying for them.

Off-Brands Won't Flourish

Some make the argument that unbranded hardware will erode the market for premium-priced equipment. I don't think so. There's a lot of inexpensive networking equipment available today from vendors like Netgear and D-Link, including low-cost chassis switches. Yet the majority of customer continue to buy branded hardware for quality and assurance reasons.

Why would SDN change this purchasing practice ? The underlying reasons for purchasing branded or known hardware--customers want a trusted brand and partner in their data centers--aren't changed by SDN.

Niche use cases from mega-scale data centers simply aren't relevant to enterprises or service providers. Google and Facebook purchase low-cost network equipment direct from the manufacturer, but they also perform extensive testing to prove the hardware is viable and fit for purpose.

There is identifiable risk that low-cost products may have higher failure rates, poor quality software or other serious operational issues. While the mega-scale companies have software platforms designed to handle failure easily, enterprises are not experienced in handling these kinds of risks.

Cheaper, Simpler Software

The price of the network OS on the device is also likely to fall in the years ahead. Today, customers purchase a license for an integrated NOS that runs on the specific device. These NOSes often have thousands of features, functions and services that ultimately deliver network services.

However, a key value of current SDN platforms such as VMware NSX is that network services will be provided in a hypervisor or in a virtual machine.

Two factors should lead to lower prices. First, a software license today comes with the device that is intended to be used for at least five years. This timeline is factored into the customer value proposition (that is, the purchase price). As customers rotate hardware faster, the software license has less value over the life of the device, which will lead to price pressures on suppliers.

Second, market competition for cheaper NOSes is being introduced by startups. For instance, Cumulus Networks and Big Switch Networks have introduced NOSes that operate independent of the network hardware. ODM suppliers are already shipping small numbers of network switches that support these open NOS environments.

These startups license their software on a recurrent revenue model, and any purchase has a serious impact on the short-term revenue of incumbent vendors. This should drive lower prices on existing equipment.

As stated earlier, rapid device rotation is likely to occur, so software costs must go down to match perceived and/or delivered product value. Product rotation is needed to support greater bandwidth, faster forwarding performance and increased density.

Next Page: SDN Platforms Add UpWhile hardware and software prices of devices will go down, enterprises still have to pay for SDN controllers and applications. The use of controller software and applications are an additional cost to the network hardware.

Vendors who look at the SDN platform as a way to extract additional revenue from customers have got it wrong. IT budgets are not increasing. Network budgets are not increasing. Vendors selling SDN platforms must or will be forced to understand that the network budget is not going to grow to include SDN, no matter what features or functions are added. Thus, vendors will be forced to lower costs elsewhere to balance out the money being spent on SDN platforms.

This problem is further exacerbated by the perceived lack of innovation by networking vendors for the last decade. Whether that statement is true or not, the majority of customers perceive the network as a problem that needs to go away because it's not revenue generating.

SDN Licensing and Vendor Revenue

SDN platforms will be priced on a consumption model to align with public and private cloud pricing models. This is a significant change for both enterprises and vendors.

Today, networking is capital intensive. Vendors get product revenue BEFORE the customer generates value from the assets. Vendors will need to accept a significant loss in short term revenue before SDN licensing begins to sustain longer-term purchasing.

Vendors also have to spend a lot of money to establish a new product in the marketplace, and may expect to charge generously for new products. But the SDN market is crowded with at least a dozen vendors competing for sales. All vendors will commit significant resources to sales and marketing in the year ahead.

On the customer side, customers might pay less for SDN in the early stages because capital investments are dramatically reduced, but over time the recurrent licensing revenues will approach current market revenues. This reduction might even offset the project and institutional costs needed to fund the migration projects.

Big Changes Ahead

Software-defined networking is a major market transition for established vendors. SDN platforms mean delayed product revenue transitions from capex to opex, and it likely will be several years before software licensing revenue replaces capital revenues. When combined with increased sales costs to defend market position through the transition, SDN represents serious risk to shareholder value. Vendors should be nervous and customers should be confident.

At the same time, SDN cannot be ignored or taken out of play. Even Cisco's relatively late arrival to the SDN market after years of denying SDN as a customer requirement is a clear sign of this transition.

Join Greg Ferro at Interop New York for his must-see workshop "Building Your Network for the Next 10 Years." Register today!]