It's SD-WAR! VMware Buys VeloCloud

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By: R. Scott Raynovich

VMware has significantly escalated its battle with Cisco in the software-defined networking (SDN) market this morning with the announcement that it will buy Mountain View, Calif.-based startup VeloCloud for an undisclosed sum.*

The deal for VeloCloud also means that the fast-growing software-defined wide-area networking (SD-WAN) market, profiled in September in an exclusive, extra-special premium Futuriom report**, is running out of M&A chairs, as some of the top names get picked off by larger vendors looking to position themselves in this growing market, which Futuriom expects to hit $1 billion by 2019. 

The acquisition of VeloCloud will enable VMware to extend its software-defined networking (SDN) approach to the WAN, according to VMware executives. The company has plans to more deeply integrate VeloCloud with VMware's NSX, a networking SDN platform with roots in the datacenter. 

VeloCloud says it has 50 service providers and 1,000 enterprises as customers. VeloCloud had about 130 employees in the July timeframe, according to Futuriom sources -- and that employee count is likely still under 200. VMware officials say they expect nearly all of the VeloCloud employees, including executives, to stay at the company, which will operate as a separate business unit of VMware. 

"With VeloCloud, we will build on the success of the industry's leading network virtualization platform -- VMware NSX. What NSX does for data center networking, VeloCloud does to the wide-area network and edge environments -- all in software," wrote Shekar Ayyar, EVP, Strategy and Corporate Development & GM Telco NFV Group, VMware, in a blog post this morning. 

For VMware, the urgency to further develop an SD-WAN story was likely accelerated by Cisco's purchase of Viptela, announced last May and closed in August. Cisco's purchase of Viptela for a robust $610 million sent tongues wagging in the industry. The first question that many industry experts asked was: "Is it worth that much?" The second question was, "What will VMware do?"

SD-WAN war with Cisco?  

The purchase of VeloCloud by VMware will have an interesting effect on two parts of the market. First of all, it will accelerate the competition directly between Cisco and VMware, as they both go after both enterprises and service providers with a platform to deploy SD-WAN services. Secondly, it will give VMware deeper connections into the service provider market, which should make Cisco more uneasy.

Cisco and VMware already have an uneasy partnership. VMware's NSX software is often paired with Cisco hardware to deliver a full SDN solution -- though neither company likes to talk too much about this. 

VeloCloud does give VMware a compelling story to battle Cisco in one of its new Achilles' heels: the WAN. The legacy WAN was about connecting branch offices and datacenters with proprietary routing hardware and software. The new SD-WAN is about using software technologies to connect standardized hardware switches, built on merchant silicon, with a software overlay that can be programmed to deliver a variety of value-added services such as virtual private networks (VPNs), WAN optimization, and applications optimization in the cloud. For Cisco, whose revenue stream is leaning heavily toward selling proprietary hardware, this story can't be good -- even though it now owns Viptela. 

VeloCloud had already been a VMware partner and VMware executives said this deal will lead to deeper integration. VMware executives today said on an industry conference call that it hopes to use VeloCloud to take NSX connectivity from out of the datacenter and extend it to the edges. 

At what price?

What does this mean for the SD-WAN market? It means that M&A activity is now hot and heavy, and for other startups that want to be acquired, the time is now. Others in the mix include Cloudgenix, FatPipe, TELoIP, and Versa, though Versa has positioned more as a network functions virtualization (NVF) platform. Aryaka Networks is also an SD-WAN provider, though it differs from many startups by owning its own network. Aryaka executives have said they don't want to be acquired, and the company is planning an IPO.

With Viptela and VeloCloud now out of the picture, some of the technology-focused vendors that are not profitable will have to raise more money and retool for the long-haul as IPOs, or find other buyers. But both the buyers and the seller combinations are narrowing, with the two largest SDN players, Cisco and VMware, tied up with SD-WAN startups.

VeloCloud had raised $84 million, and Cisco was an investor in its Series C round. VMware executives declined to disclose deal financials, but because VMware trades as a public tracking stock, the details will likely be disclosed at some time in the future. It's unlikely the purchase price is as large as Viptela's $610 million; otherwise, VeloCloud executives and investors would have demanded that number be put in the press release.

* = lame

** = Buy it now before all the startups are acquired!

Cloud is changing the way networking connectivity is delivered. This is driving growth in the SD-WAN market. For more information on the fast-growing SD-WAN market, you can purchase the premium Futuriom research report, "The SD-WAN Growth Report", which includes an overview of the leading vendors as well as a market growth forecast. Enter discount "FUTU" to get a 10% discount!