Democratizing Capacity (or how to interpret Cisco math)
Mid-December, Cisco held its Financial Analysts Conference. Shortly thereafter, I was fielding questions that summed up to "What is this all about? Cisco is cheaper than bare-metal? Really?"; check out slide 4 in this presentation.
Let me begin by clarifying that Cisco is not more affordable. Period. We'll get to that analysis a bit later... the bigger point is that bare-metal networking is more than being affordable; it's about giving customers degrees of freedom, transparency, and choice that they deserve in a mature industry.
In the dark ages of computing (aka 1983), a customer running IBM DB2 had to buy an IBM mainframe (complete with cables, disks, power distribution, memory, and IO) to go with the application. The compute industry has matured to a point where DB2 runs on hardware ranging from mainframes through p-series down into non-IBM x86 platforms hosted on operating systems including z/OS, Unix, Linux, and Windows. Application independent from OS independent from hardware; degrees of freedom and choice.
Circling back to networking, a significant number of products today, including Cisco's Nexus 3000 and Nexus 9000 platforms, are based on industry prevalent networking silicon from companies like Broadcom. Optics and cables branded by networking incumbents are actually built and sold separately by companies like Finisar, Avago, Amphenol, and 10GTek. Operating systems have a major infusion of Linux and other open source packages. This is what I would call a mature industry. However, the market is still structured like the mainframe with companies like Cisco requiring customers to buy hardware, software, optics, cables, and support all from one place - them.
We view the natural state of the networking supply chain to be one by which customers are able to purchase their networking hardware as "close to the source" as they'd like, starting at original manufacturers all the way through well known Enterprise IT providers. Regardless of the hardware source, customers are able to deploy the networking software of their choice (CumulusLinux for instance :-). There are zero technical barriers to this model, and we do it around compute every day. This allows customers to make a safe capital investment in infrastructure without being locked into any one vendor; suppliers get to earn their spot every cycle.
The attributes of transparency, choice, and degrees of freedom, not price, are driving all of the mega-scale customers to bare-metal networking solutions, whether they do it in house or leverage companies like Cumulus Networks. Make no mistake, ALL mega-scales have revolted and are somewhere on the path towards independence.
Now, let's get back to pricing.... get your calculators and break out the aspirin, this is going to get detailed!
Let me walk you through why I believe the cited Deutsche Bank report seems to be accidentally mixing apples, oranges, and motor oil. It's not the fault of the analyst who wrote it, but rather a reflection of the opacity in data center networking equipment pricing.
The Cisco hardware platform cited is the Cisco Nexus 3064 (N3K-C3064PQ-10GX), and the report indicates an outlier customer price of $4,000. Other data points suggest that price is very far from average. A "normal" customer needs the Enterprise LAN software license (N3K-LAN1K9) and signs up for 8x5 SmartNet support (CON-SNT-64PQ10GX). A little time in the saddle tells us that nobody actually pays list for Cisco gear, and it also tells us that the average end-user discounts are ~55% for platforms and licenses and ~20% for SmartNet. The table below includes list prices from the Cisco Global Price List from Sept 2013, average large customer prices based on discounts, and the Deutsche Bank outlier price; you'll note that ~9:1 span. A Google shopping search gives us a sense of the "one-at-a-go" pricing.
|platform||license||support||3 year tco|
Mature markets have much more transparent and predictable pricing... they democratize capacity. Pick any x86 server from a vendor and study the price span from list to outlier. To drive that philosophy home, we've publicly posted our price list on our web site, and we encourage our hardware partners to exhibit the same transparency, letting customers develop expectations for both hardware and software. The Edge Core AS5610-52X switch is equivalent to the Nexus 3064 cited in the report and has a list price of $4,200 and CumulusLinux (SS-DCS-10G-STD-1YR) lists for $699/year.
Now, let's look at outlier pricing. Clearly, large customer discounts come into play, but never at a 9:1 ratio. I can't speak to our hardware partners, but our software pricing provides these customers with a modest discount to the per-switch price and allows them to benefit from an annual cap; allowing their per-switch price to decrease based on increasing deployment. We recently completed an outlier customer quote for 10,000 switch instances/year where their annual software price got to $150/switch/year. The table below shows list and outlier pricing for Nexus 3064 equivalent solutions.
|platform||license/support||3 year tco|
|bare metal msrp||$4,200||$699||$6,297|
|bare metal outlier||$2,500||$150||$2,950|
Transparency is empowering.
In my opinion, Cisco's use of the Deutsche Bank data in their analyst's conference is intentionally misleading. Are they telling us that $4,000 is now the customer price of a fully loaded and supported Nexus 3064? I can't buy a used, damaged one for that price on eBay; I just looked.