Industry Voices—Raynovich: What's Next for SD-WAN M&A?

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The SD-WAN sector is heating up on the M&A front, acccording to analyst Scott Raynovich. (FierceTelecom)

The SD-WAN market has caught many people off guard. Now, it's the next hot networking market, with Futuriom research projecting it will accelerate to billions in revenue over the next few years. This will drive more M&A activity as the SD-WAN market accelerates, as traditional networking companies, service providers, and cloud companies catch up to its potential.  

While a few major acquisitions have already been made -- Cisco and VMware made their respective acquisitions of Viptela and VeloCloud in 2017 -- there are still quite a few companies with momentum that are being scoped for acquisition, as well as large networking companies that haven't fully fleshed out their SD-WAN strategies. Futuriom analysis included in our recent SD-WAN Growth Outlook report concludes that Aryaka Networks, Cato Networks, CloudGenix, FatPipe, and Silver Peak Systems make the most likely acquisition candidates.

Potential acquirers range from anybody including a traditional networking vendor such as Ericsson or Juniper to an enterprise cloud company such as Google or Microsoft. 

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RELATED: Raynovich: SD-WAN market hits the gas pedal

Software eats the enterprise 

Why is SD-WAN so hot? The technology is appealing to enterprises because it gives them a flexible, cloud software-based platform that enables them to leverage Internet broadband and a plethora of access technologies including LTE (and soon 5G and satellite) to build secure, high-performance virtual networks. This approach also has the potential to roll-up and consolidate a number of networking functions that previously required separate platforms, such as routers, switches, VPNs, and MPLS services.

SD-WAN is unique because it's positioned as a software and services product, with the hardware typically being delivered on a commercial off-the-shelf (COTS) box. This drives the hardware toward commoditization, with the real value being delivered in software. Marc Andreessen's "software eats the world" trend has come to networking.

This is going to have a huge impact on the legacy networking market, putting it under great threat, whether its a hardware router (Cisco, Nokia, and Juniper) or a networking appliance such as load balancer or application accelerator (F5 Networks), or a firewall (Fortinet and Palo Alto). Already seeing the writing on the wall, the firewall players have been aggressively repositioning their security offerings as software in the cloud rather than as device-focused. 

Hardware companies are all aware of this shift to software, but their success will depend on how fast they move -- as well as how clean an architecture they use. Just porting your product over to a network functions virtualization (NFV) software bolt-on is not enough.

This process has already started with the major networking players making purchases of SD-WAN platforms. Both Cisco and VMware were likely bidding for the same assets. In fact, both companies were investors in VeloCloud. 

Cisco and VMware's VeloCloud are now likely the two biggest vendors in the SD-WAN space, according to my research. But, others are following quickly on their tails. In the 2019 SD-WAN Growth Outlook, based on bottom-up estimates based on industry sources, Futuriom estimates that Aryaka Networks, Cisco, VMware (VeloCloud), and Silver Peak have the most SD-WAN revenue -- and all are expected to come close to, if not crack, the $100 million annual revenue run rate soon.  

You should not underestimate how important this market will be to traditional networking companies that need to make the shift to sell networking as software an services. While Cisco and VMware have made their moves, VMware's strategy is a bit cleaner because it is a software company with an overlay networking platform (NSX).

Cisco's strategy is still not clear, because its selling SD-WAN as an add-on service on top of routing platforms, which can make the solution expensive is is somewhat counter-productive to the entire concept of SD-WAN. Nokia Networks is positioned well because it owns a standalone software company, Nuage Networks, that has a strong SDN offering and recently integrated its SD-WAN offerings with its data-center networking product, VNS, giving it a virtualized networking play from the data center to the edge. 

A few of the other legacy hardware vendors will need more software and services assets if they really want to play in SD-WAN. Juniper Networks has developed Contrail, a networking software orchestration technology, to fuel its SD-WAN offering, but it still doesn't actively market a complete SD-WAN portfolio. Ericsson doesn't have much of an SD-WAN story at all. 

The need for a full SD-WAN strategy will extend beyond the enterprise networking companies. Service providers are under massive threat because SD-WAN services threaten the multi-billion dollar MPLS and VPN services business. And, even cloud companies could also pursue the SD-WAN market. Because SD-WAN crosses the lines between infrastructure and services -- and some of the SD-WAN companies are positioned as enterprise services companies. One could easily envision Amazon, Google, or Microsoft, which have already built SD-WAN gateway services in their clouds, buying more assets to offer SD-WAN services from the cloud. The service providers would be in real trouble. 

R. Scott Raynovich is the founder and chief analyst of Futuriom. For two decades, he has been covering a wide range of technology as an editor, analyst, and publisher. Most recently, he was VP of research at SDxCentral.com, which acquired his previous technology website, Rayno Report, in 2015. Prior to that, he was the editor in chief of Light Reading, where he worked for nine years. Raynovich has also served as investment editor at Red Herring, where he started the New York bureau and helped build the original Redherring.com website. He has won several industry awards, including an Editor & Publisher award for Best Business Blog, and his analysis has been featured by prominent media outlets including NPR, CNBC, The Wall Street Journal, and the San Jose Mercury News. He can be reached at [email protected]; follow him @rayno.

Industry Voices are opinion columns written by outside contributors—often industry experts or analysts—who are invited to the conversation by FierceTelecom staff. They do not represent the opinions of FierceTelecom.

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