One consequence of commoditization is consolidation, and since networking is clearly commoditizing it’s not surprising that we’ve seen a wave of M&A. The most recent M&A rumor is that Brocade is for sale, and that Broadcom is a likely buyer. The obvious question is whether the move would be a good one for both companies. The less obvious one is whether there’s a broader industry meaning here.
Brocade has three rather distinct businesses, the SAN business was their original space, and they expanded into network hardware by buying Foundry and into network software with the acquisition of Vyatta. SAN growth has been limited, and network hardware has been under pressure both in the enterprise and service provider spaces. Hosted routing and network virtualization would clearly be the space where Brocade’s value would have to be established, unless you believe in a miraculous transformation of market conditions.
Network virtualization, and specifically the transformation of networks from appliances to hosted features, has gotten a lot of ink with the SDN and NFV initiatives. Brocade got an early credibility boost in my surveys of strategic influence when they told operators that NFV was really a data center story. Hosting equals data center: clearly true. Anyway, they took the biggest upward jump my survey of operators had ever recorded. Within six months, most of it was gone. Within a year, it was all gone.
There were two issues that were responsible for the rise-and-back phenomena. One was that while software hosting of router instances was inherently attractive to operators (as NFV was for functions overall), it became clear pretty quickly that there was a whole ecosystem of stuff associated with a transformation of this sort. Operators wanted to hear about all of that ecosystem and how to resolve all the issues, and Brocade didn’t talk about it. The other was that in truth, NFV wasn’t about router function hosting as much as “higher-layer” function hosting. That offered Brocade a possible benefit and a risk, and the latter is what they (probably inadvertently or by default) selected.
You don’t need NFV to do router hosting. Most network applications of virtual routers would tend to place them in static locations, so certainly hosted router networks would look more like cloud applications than NFV applications. Brocade could have jumped on this point to get some early traction.
The second point is that if you have a rational vision of SDN, you’d see it as providing agile transport or virtual-wire services to a network that still did traditional routing/switching. Again, this model of network-building would have been able to proceed without NFV standards sanction, and it could support the SDN work already done. Brocade could have jumped on this to get long-term traction.
They didn’t jump, and in the eyes of the network operators they still haven’t. Thus, the rise and fall of strategic influence. But all the potential traction sources are still out there, and this year Brocade bought StackStorm to at least address cloud/virtual networking in a sense.
What then about Broadcom? This is a chip vendor, after all. To become a product vendor, wouldn’t they face a big problem of what’s popularly called “channel conflict?” That’s when either your business plan collides with your partners instead of supporting them, or your partners collide with each other. If Broadcom became a network equipment vendor, would that make other vendors less likely to incorporate Broadcom chips? Well, it’s hard to see how it would help the relationship.
But that doesn’t mean Broadcom couldn’t find a reason to buy Brocade. We are in an age of “semiconductor activism”. Look at Intel, who bought Wind River and who has been extremely active pushing things like NFV. They do that because they believe that the traditional providers of hardware are not maximizing opportunity for chip sales. That means they think hardware vendors are hunkered down and protecting current markets while revolutionary opportunities rot on the vine.
Broadcom buying Vyatta would be a classic mimicry of the Intel/Wind River move translated into the network device/equipment space. Of course, Brocade already bought them. Thus, Broadcom would have to buy Brocade, or someone else who has convincing assets in the network space. Might Broadcom reason that if Brocade saw a big jump in their strategic influence based on technology assets they didn’t follow up with, Broadcom could follow up after the M&A? Might Broadcom see an opportunity to link these software assets more tightly with their chips? Sure might.
A strategy to position Brocade’s assets would be a necessary condition for making an acquisition a success for Broadcom, but would it be a sufficient condition? Unless something was done to recoup the lost influence, it would not be. To make things more complicated, that “something” couldn’t be just picking up the pieces of 2013 positioning. Time marches on. NFV doesn’t have the cache it once had. Where there was a big upswing of interest and potential back in 2013, the whole market is now slowly declining into capex starvation.
Which leaves two possible Broadcom motives. Motive One: It’s my best shot. The Titanic sunk, and there’s a small box floating nearby. It’s clearly not the Carpathia, but it’s better than treading water. Motive Two: I think I can assemble enough of the total value proposition to offer it to the end-buyer, and perhaps inspire some of my chip customers to get into the race as well.
I think the best-shot angle presumes a level of desperation that I can’t see Broadcom having reached. They have a good business and no current threat seems to justify doing a big M&A just to grab a floating box. So, they have to assemble the total value proposition.
That’s a logical conclusion but not an easy one to implement. Frankly, Intel (even with Wind River) hasn’t done what’s needed to drive their own hosting-of-functions opportunity. If they acquire Brocade, Broadcom will have to do better, and perhaps with less in-house expertise on just what has to be done. But the opportunity remains untapped by others, so they’d have a chance.