Market Report

SDN Market Sizing

Presented by:

April 2013

SDN Market Sizing Report

Copyright 2013 All Rights Reserved. April 2013

Executive Summary The impact of software-defined networking (SDN) will exceed $25B per annum by 2018, and could grow as high as $35B annually. Even conservative models show SDN-related spend exceeding 30% of total networking in that timeframe, with more aggressive models topping out at 40%. The effects on purchasing will be felt across virtually every customer segment within the networking space. Service Providers, Web 2.0 companies, and the Global 500 will lead the charge, with more than 16% of their annual networking spend being influenced by the nascent technology by 2018. Even the least impacted market segments (small and medium businesses) will contribute as much as $2.5B in annual SDN-related purchases within five years. While SDN will heavily impact existing markets, new market creation should follow a trajectory more similar to server virtualization in the mid 2000s. Driven primarily by network virtualization, the emerging datacenter controller and applications market could grow to $1B annually within six years. The rapid emergence of SDN as an influencer in network purchasing decisions will dramatically impact what has been a largely stagnant network vendor competitive landscape. New SDN use cases could open the market to new entrants for the first time in more than a decade. Combined with the trend towards converged IT organizations, SDN could enable a new type of networking decision maker that has less experience with and weaker ties to incumbent vendors.

Examining the data The foundation for the SDN market-sizing model is the broader networking Total Addressable Market (TAM). This analysis shows an expected networking TAM of approximately $76B in 2013, growing to an estimated $90B by 2018. The overall networking TAM is determined by looking at constituent elements:

• Optical (MSPP/SDH, Optical Switch/OXC/NG Core Switch, WDM including POTP, MWDM, LHDWDM)

• SAN / Fiber Channel (switches and adaptors)

• Service Provider (IP core, IP edge, Carrier Ethernet, Ethernet access devices, mobile packet core)

• Enterprise (routing, Ethernet switching, WLAN)

• Services Layer (IPS, DDOS, Firewall/VPN, WAN Optimization Controllers, Application Delivery Controllers, Sessions Border Controllers)

The base numbers are derived in part from publicly available data on market sizes and estimated market growth. Where there were multiple sources, data was blended using additional market research conducted by Wiretap Ventures. Where no or incomplete available data existed, Wiretap Ventures research filled gaps.

Forecasting the SDN market The objective in forecasting the size of the SDN market is to estimate the amount of network spend that will be directly influenced by the technology. Put simply, any purchase decision where SDN is a meaningful selection criterion (either for immediate or for future deployment) should be included in any market impact analysis. This exercise is not intended to predict the rate of SDN deployments in production environments. It is possible (and over the next two years, likely) that SDN purchasing decisions will lead SDN deployment plans. Customers will consider how solutions procured today will operate in an SDN environment over the life of the equipment. In the case of software, buyers will examine committed roadmaps and software extensibility to assess the likelihood of SDN adoption within the solution. Because the market impact is a measure of purchase decisions and not the mere presence of features, this analysis does not use total Ethernet ports to size the SDN opportunity. Ethernet-port-based modeling relies heavily on using OpenFlow as a proxy for SDN, which ignores the set of technologies, protocols, and products that exist outside of OpenFlow. This SDN forecast is based on

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Network TAM Forecast

Optical SAN Network (L2 / L3) Services Layer (L4 / L7)

SDN Market Sizing Report

Copyright 2013 All Rights Reserved. April 2013

product architectures that are shifting to central control and use programmatic APIs for flow-based control for vendor and 3

rd-party applications.

Beginning with assumptions This SDN market forecast is predicated on three foundational assumptions:

• SDN-related spend is largely substitutive to existing network spend.

• Different product types will be impacted by SDN in different ways.

• Uptake of SDN use cases dictates how much and when spend shifts from traditional to SDN solutions.

It is unlikely that SDN will increase network spend on its own; network spend tends to be tightly correlated with IT spend, which, at a macro level, is more closely tied to GDP than individual technologies. This means that any SDN spend must come at the expense of either non-SDN equipment spend or by swapping operational savings for additional equipment purchase. SDN impact cannot be modeled as a flat percentage that is applied equally to all product types in all market segments. Some products and markets will lend themselves to SDN use cases more than others, and some buyers will be more or less predisposed to adopting new technologies. Ultimately, the specific SDN use cases will dictate when markets move towards SDN, and to what extent they make the transition. Those use cases that have the most potential will drive technology development, which will determine where SDN spend is focused.

Base lining SDN adoption Estimating the rate of SDN adoption begins with establishing a baseline. The trend toward server virtualization is similar in terms of both markets and technology. Additionally, because VMWare created the market and had near 100% market share while doing so, it is reasonably straightforward to use publicly available VMWare revenues as a proxy for overall market adoption. The server virtualization market grew from nothing to nearly $1B annually in just over six years. Using this as a baseline, the SDN market should materialize over roughly the same time period.

The case for an updraft SDN adoption is unlikely to follow exactly the market growth for server virtualization. There are strong technology and market dynamics that could significantly accelerate SDN penetration, including:

• Server virtualization as a case study

• Cloud computing

• IT convergence

• Venture capital

Server virtualization When VMWare launched its server virtualization efforts, nothing similar had been done in that or any adjacent market. Large incumbents in the server space were slow to react, which meant that the onus was on VMWare–and VMWare alone–to develop the market. The technology startup had to develop the solution, educate the market, sell the products, and scale the organization to support increased adoption. The lack of available resources (both financial and human) acted as a drag on the overall process, slowing market adoption as VMWare scaled its business. By most accounts, the incumbent server manufacturers were relegated to observers during the market emergence. Their general lack of support–and in some cases outright opposition to–the new technology certainly acted as a drag on broad customer adoption. Ultimately, server virtualization has taken root and changed how both vendors and customers view the server market. This transition, because it was both stark and recent, serves as a strong case study for the impacts of massive technology shifts. As SDN

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SDN Market Sizing Report

Copyright 2013 All Rights Reserved. April 2013

follows a similar trajectory, it seems unlikely that the major networking incumbents will be similarly complacent, and in fact every major vendor has announced plans to support SDN. Broad incumbent support could accelerate the maturation of the SDN market.

Cloud computing The trend towards cloud computing has been ever present for the past several years. Much of the value in this movement is in orchestrating workloads across both public and private resource pools. This creates an untethering of applications and underlying infrastructure that requires a level of dynamism that simply does not exist in networks today. As cloud initiatives continue to grow, there will be increased pressure on networking to provide a more flexible transport that can adjust in real-time to the needs of users and applications. This should provide ample use cases for SDN technologies, and help accelerate customer demand for SDN.

IT convergence Increasingly, IT silos are being broken down, and infrastructure is being consolidated into a smaller number of organizations. This is part of broad efforts to manage infrastructure more holistically, removing hard organizational edges between teams that ultimately rely on each other. A major part of the SDN draw is the ability to orchestrate the network centrally and offer programmatic interfaces with which applications can provide inputs into the underlying network. This bridging of the network-application divide could be particularly attractive to organizations looking to remove boundaries and rally around the applications that ultimately drive the business.

Venture capital The rise of server virtualization was notable for the lack of companies that emerged during a disruptive technology phase. More typically, the opportunity to disrupt incumbents in sizable markets attracts new entrants. These startups identify new pain points, pursue new ideas, sell into new niche markets, and generally accelerate the move away from legacy solutions. If VC funding is any indication, the SDN arena appears to be more typical than server virtualization.

VC funding in SDN-focused companies has increased from less than $10M in 2009 to nearly $500M in 2013. The astonishing 50X increase in VC funding should accelerate the growth of the SDN market.

The case for a downdraft There are likely to be three primary drags on the emergence of SDN:

• Complexity

• Skill sets

• Incumbent behavior

Complexity Where server virtualization was confined to a single element in the broader IT stack (compute), SDN is much more pervasive. The very nature of the network is to act as connective tissue between compute, storage, and services. Accordingly, the reach of SDN is significantly greater. With greater reach comes greater complexity. The number of devices, protocols, and technologies with which SDN solutions must be compatible certainly increases the technological challenges of migrating, for both vendors and customers.

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SDN Funding ($M) Mar '07 - Mar '13

SDN Market Sizing Report

 

To view the full Market Size Report and Infographic,

visit SDNCentral.com here.

To view the full Market Size Report and Infographic,

visit SDNCentral.com here.