Though Amazon.com's (AMZN) - Get Amazon.com, Inc. Report reported plans to sell networking hardware are bad news for Cisco Systems (CSCO) - Get Cisco Systems, Inc. Report and its peers, it's much too early to panic.
On Friday afternoon, The Information reported that Amazon Web Services (AWS), which has long been using internally-designed networking gear in its own data centers, is thinking about selling its own data center switches to businesses. The site adds that Amazon expects to launch the switches within 18 months, and could price them at a 70% to 80% discount relative to comparable Cisco hardware.
Not surprisingly, shares of Cisco, which was estimated by research firm IDC to have 53.4% of the ethernet switch market in Q1, didn't take the news well. They fell 4.1% on Friday to $41.78, leaving them at their lowest levels since April. Share-gaining switching rival Arista Networks (ANET) - Get Arista Networks, Inc. Report fell 4.3% to $266.49, and -- though it got less than a fifth of its revenue from switches last year -- Juniper Networks (JNPR) - Get Juniper Networks, Inc. (JNPR) Report fell 2.3% to $27.86.
Like the ones deployed in its data centers, the switches that AWS reportedly plans to sell will be "white-box" devices. White-box switches tend to be powered by off-the-shelf switching chips, and can run a variety of switch operating systems. By contrast, switches from the likes of Cisco, Arista and Juniper tend to run proprietary operating systems and (though this isn't true for Arista) in some cases are powered by proprietary switching ASICs.
The Information states that Jeff Bezos's company is working with existing white-box switch manufacturers such as contract manufacturer Celestica (CLS) - Get Celestica Inc. Report and private Edgecore Networks on its initiative. It also says the switches will come with unspecified open-source software (presumably an OS), as well as "built-in connections to AWS cloud services."
Broadcom (AVGO) - Get Broadcom Inc. Report , which is the top supplier of merchant switching chips and counts AWS as a client, could supply the switching silicon for Amazon's hardware. The switches could also use the ethernet connectivity ASICs Amazon (via its Annapurna Labs chip unit) has designed for its servers.
Regardless of which chips are used, one can count on Amazon's switches to be well-engineered and priced aggressively. And though it might take some time for Amazon to get the hang of selling hardware to enterprises (whether directly or via resellers), the fact that AWS claims a giant enterprise customer base should help the company get its foot in the door.
Still, before Cisco investors rush to sell, it's worth keeping in mind that switching hardware and software only accounted for a little over a third of its product revenue in fiscal 2017 (it ended in July 2017). And while data center switches accounted for a decent portion of this revenue, sales of "campus" switches used within office networks also played a major role.
Moreover, investors in both Cisco and its switching rivals should keep in mind that while white-box switches are quite popular with cloud giants and some telcos, they've made limited headway to date within traditional enterprises. Though they're generally much cheaper than switches from the likes of Cisco and Juniper, the fact that white-box switches come with little or no software attached can make deploying and managing them much more challenging than deploying and managing switches from an established vendor that can provide its own OS, management software, programming interfaces (APIs) and much else.
In addition, enterprises buying switches from an established vendor can turn to that vendor's customer support team, or perhaps the support staff of a trained channel partner, to deal with any potential hardware or software issues. Such things are less of a concern for an Amazon or a Google, which has massive in-house engineering resources it can rely on, than they are for traditional enterprise IT departments, never mind small and mid-sized businesses.
However, it does look as if Amazon plans to bundle an open-source switch OS with its hardware to make things a littleeasier for enterprises. And more importantly, tech trends could lead to greater enterprise adoption of white-box switches in time.
VMware (VMW) - Get VMware, Inc. Class A Report , private Big Switch Networks and a slew of other firms have been pitching enterprises on using software-defined networking (SDN) solutions. With the help of software-based network controllers, SDNs can (among other things) allow networking resources to be provisioned more quickly to apps, let networks run more efficiently and improve security by enabling fine-tuned network policies for individual apps.
Not all SDN solutions require the use of white-box switches. VMware's NSX platform, for example, works with all kinds of switching hardware, and Cisco has rolled out an SDN platform (known as ACI) that's meant to work with its own data center switches. However, Cisco's efforts aside, SDNs generally make it easier to deploy white-box gear, since they shift networking intelligence from individual switches to controller software.
That could help create an opening for Amazon and its white-box partners. Especially in 18 months' time, when SDN adoption should be further along. With the qualifier that a lot of these sales likely involve deploying featuring traditional switches, VMware stated in March that its NSX bookings have reached a $1.4 billion annual run rate.
One big unanswered question: If AWS is serious about getting into enterprise switching, is it also just a matter of time before it starts selling servers and storage based on its internal designs? If Amazon did go in that direction, it could be a headache for server OEMs such as Dell and HP Enterprise (HPE) - Get Hewlett Packard Enterprise Co. (HPE) Report . And if Amazon bundled such hardware with software for creating the kind of hyperconverged infrastructures that exist in its data centers, it would also be putting a company like Nutanix (NTNX) - Get Nutanix, Inc. Class A Report in the crosshairs.
That's all just speculation for now, of course. And since the margins on many Intel-powered (INTC) - Get Intel Corporation (INTC) Report enterprise servers aren't especially high, Amazon would probably have less room to undercut market leaders in this space than it would in switching.
Still, given both Amazon's engineering resources and its ambitiousness, it wouldn't be much more shocking to hear about such a move than to hear that Amazon wants to take on Cisco's switching empire.