CSCO: Soft Network an Opportunity, Not Threat, Says Deutsche

Deutsche Bank networking analyst Brian Modoff today reiterates a Buy rating on shares of Cisco Systems (CSCO), and a $22 price target, writing that risks to the company from so-called “software-defined networking,” or SDN, are exaggerated.

Modoff, referring to a recent interview with Nicira, the startup bought in August by VMWare (VMW) for $1.05 billion, writes that there is no immediate threat to traditional routing and switching equipment, despite lots of claims of such.

The article he was referring to would appear to be this one, by TechTarget‘s Shamus McGillicuddy, from December 13th.

Nicira’s comments suggest to him that the so-called OpenFlow standard for SDN is not yet ready to use “commodity” switching equipment:

That a Software Defined Networking (SDN) solution (using OpenFlow for controlling network
switches) is better suited, in the near-term, for Traffic Engineering, and that OpenFlow is not currently ready for controlling hardware switches in datacenters. Our IT conversations suggest that OpenFlow requires Layer 2 switches to have up to an “order of magnitude” higher complexity, versus current-generation switching hardware. While current-generation switches can be optimized to deal with network traffic, in a segmented manner, using separate flow tables inside the switch silicon, for Layer 2/3/4 traffic, OpenFlow enabled switches require highly-complex packet processors and flow tables to handle any type of traffic flowing through the network (e.g. IPv4, IPv6, Ethernet, IPSEC, etc).

As a consequence, Modoff thinks Cisco, and competitors such as Juniper Networks (JNPR) and F5 Networks (FFIV), have the opportunity to exploit the SDN trend to give new life to their equipment and thereby expand their market:

Our IT conversations suggest that the near-term opportunity in SDN (for the incumbents:
Cisco, Juniper, etc) is in “Traffic Engineering” and “Network Virtualization” use cases, summed below [...] using SDN controllers for dynamically managing traffic in telco networks � e.g. AT&T or Verizon using SDN enabled routers for low-dollar-cost routes versus shortest-path routes [...] using SDN in a �programmable networking� context � i.e. to set up virtual tunnels between VMs for running large Layer 2 virtual networks in datacenters; and utilizing rich network analytics from switches, routers, Layer 4/7 appliances, etc � to better manage �East/West� (VM to VM) traffic in datacenters [...] Cisco�s ONE PK solution (for example) offers �Northbound APIs� that provide network analytics for IT to manage the growing East/West traffic in datacenters. We note that the near-term and longer-term value-add of incumbent vendors (notably, Cisco; given their +80% share in datacenters; Infonetics), in our view is in offering “Northbound APIs” – to give granular visibility of the network to SDN controllers and to Applications. Current-generation SDN solutions focus mostly on using OpenFlow to control commodity switches in a “Southbound” direction, and lack visibility from the “network” back to the “application” for building a robust SDN enabled infrastructure. Cisco, for example, could utilize a combination of North and Southbound interfaces in their SDN controllers, for building robust programmable Cloud-scale networks [...] We think that SDN, near-term, is a TAM expansion and growth opportunity for the incumbents � Cisco, Juniper, F5. etc.

Cisco shares today rose 27 cents, or 1.4%, to $20.38.