As planned, Cisco today launched its stealth startup, Insieme Networks. It also said it is immediately buying the startup for $863 million.
Cisco announced a string of new products from Insieme and lined up a long list list of heavy hitters in the IT vendor community to be partners. These vowed their software would work well with Cisco's new products. These include IBM, Microsoft, Red Hat, SAP, and Cisco's biggest frenemy VMware.
As we previously reported, Insieme Networks was a strange bird for Cisco. Cisco did it as a "spin-in," a separate company funded exclusively by Cisco (with $135 million, it said). Cisco had the option to buy it for another $700 million-ish and so it did.
Cisco has done spin-ins before, and with these same top engineers that ran Insieme (Prem Jain, Mario Mazzola and Luca Cafiero). But in those cases, Cisco was branching out into new markets like storage or servers.
This time, they created products for the switching/routing market where Cisco currently dominates with about 70% market share, according to Synergy Group. Doing such products as a separate company, instead having Cisco create its own next-generation products in-house, ruffled feathers inside Cisco, sources told us. It sent the message that Cisco's engineers weren't capable, our source said.
Insieme's mission was to give Cisco game in a hot new market called "software defined networking" (SDN), which changes the way companies build networks. It moves the high-end features built into expensive routers and switches and puts them into software that can run on cheaper hardware. Corporations still need to buy routers and switches, but they can buy fewer of them and cheaper ones.
The grandaddy of SDN software is OpenFlow, which was created by a startup called Nicira, bought by VMWare for $1.26 billion in June, 2012. Most SDN vendors, from HP to startups, are building products that work together and use OpenFlow.
The whole concept of SDN is a big threat to Cisco because Cisco makes nearly all of its money selling expensive, high-margin routers and switches. When Cisco looked into doing SDN in-house, its execs concluded it would turn Cisco's "$43 billion business into a $22 billion business," our source said.
So today, after much delay, Cisco finally announced its plan: a confusing array of products named "Application Centric Infrastructure (ACI)."
Cisco ACI includes three parts:
1) A new network switch (the Nexus 9508), the central piece of hardware, available now. Smaller, less expensive versions will be available later in 2014.
2) A product called the "Application Policy Infrastructure Controller"(APIC). This runs the software that controls everything. It is the piece that competes with VMware's Nicira. It will come in 2014.
3) A new operating system that runs the new switch, called NX-OS, also coming in 2014.
But there are some big catches. The hardware switch includes two chips, a custom chip and a standard chip. As we previously reported, the standard chip is likely from chip maker Broadcom and it's the same as what other SDN products are using. If customers choose to use the standard chip, the device plays well with other SDN networking products.
If customers use the custom chip, the switch performs better and includes extra features. But then it doesn't work with other vendor's SDN products.
Customers have to choose: Buy everything from Cisco, perhaps at premium prices, or give up features and performance.
There's another weird catch. These new Cisco products don't work with older Cisco products, multiple analysts have confirmed.
So, customers who want Cisco's SDN, will also have to buy all new Cisco hardware.
Some Cisco customers will be cool with that. They need high performance and regularly replace their network hardware anyway. Cisco also has a massive sales channel of value-added reseller partners, who will all be selling this stuff, and that should help sales.
We'll see if it flies, though. Network engineers are pretty sophisticated customers. Many are excited about the new SDN technology because it saves money and makes it easier to grow and manage their networks in the age of cloud computing.
A year ago, some corporations started the Open Networking Group. This group is telling vendors how they want SDN products built and that they want products to work together. It's run by companies with clout: IT professionals from Bank of America, Fidelity Investments, CitiGroup, and The Gap.
So far, investors are neither worried nor impressed by Insieme. Stock is up, but by less than 1%, trading at about $23.
