Two start-ups focused on a niche data center technology called "network virtualization" were recently acquired by two major cloud software vendors. On July 23, VMware -- of which EMC owns roughly 80% -- acquired start-up Nicira for $1.26 billion in cash and one week later Oracle acquired start-up Xsigo Systems for an unspecified amount of money and stock.
Network virtualization is set to shake up data center technology like server virtualization. Server virtualization is what made VMware a household name in the data centers that make up the backbone of the cloud. Oracle got its server virtualization product through its Sun Microsystems acquisition and with it complements the deployment of its enterprise software packages in the cloud.
Network virtualization is seen as a breakthrough because it decouples network software from proprietary hardware provided by major networking companies like Cisco and Juniper. It allows anyone to add any kind of functionality to the network using commodity hardware. Server virtualization paved the road for commodity hardware in data centers and the loss of interest in "big iron" servers due to their higher cost and complexity. The network virtualization approach is similar, to displace proprietary networking hardware to achieve more network flexibility and cost reduction in the setup of virtual networks and routing.
Venture capitalist Ben Horowitz has said the strengths of VMware and Nicira will create "the most important infrastructure company across servers, networks and storage for the next 10 years". And the enthusiasm is well deserved. With a single Nicira product called the network virtualization platform, Nicira already had five major customers prior to its acquisition that included AT&T, eBay, NTT, Rackspace and Fidelity Investments.
Xsigo with more time in the market had a larger array of products than Nicira's network virtualization product.Xsigo has over 50 customers across its product line that also include I/O virtualization products. Still, the enthusiasm for Xsigo's network virtualization is of special interest to Oracle. John Fowler, Oracle executive vice president of systems has stated "Xsigo's software-defined network products help customers increase asset utilization and application performance while reducing costs by delivering compute, storage and network resources that can be dynamically reallocated on demand".
For the major networking companies that stand to be displaced by network virtualization, some have embraced similar initiatives. In April 2012 Cisco announced an $850 Million spin-in company called Insieme whose focus is also on advanced networking. Cisco calls its technology software defined networking (S.D.N). In a Cisco memo entitled "S.D.N.: Evolving the Network as a Platform" it states that S.D.N. "promises to make the network more agile, scalable, and cost-effective" which is in-line with network virtualization's features.
The biggest winners with network virtualization are those managing their own data centers or offering cloud services, as it drives down network costs and increases network flexibility. As an end user of cloud services, you may see some trickle down effect as costs savings are passed on to end users. But the most interesting dynamic is surely to take place across cloud software vendors. Partnerships and solutions that were once only provided by major networking companies are surely to be questioned now that network virtualization has come of age with more flexible and cost effective options.