A long time ago the compute world disaggregated into standard x86 servers, operating systems, and applications.
Today, there is a diverse ecosystem with numerous operating systems (Linux, Windows, BSD) running on a wide choice of computing platforms. Whereas, networking customers today are relegated to buy bundled hardware and software branded by a single vendor. The networking market is going through a paradigm shift led by web 2.0 / cloud operators. Similar to industry standard servers, networking is now available as bare metal hardware in a variety of standard configurations like those provided by original equipment manufacturers OEMs such as Cisco, Arista, or Juniper based on industry standard silicon (from Broadcom, Intel, or Mellanox). A key benefit of disaggregation is the simplification of the supply chain and the death of the multiplier effect incurred with the transformation of goods and services. The modern networking supply chain is experiencing a similar transformation.
Traditional IT infrastructure employs a supply chain to achieve scalable operations, logistics, and services. See figure 1. The traditional networking supply chain is the predominant fulfillment model for the complete networking solution; network switch, operating system, transceivers/cables and support. A global independent networking supply chain thrives supporting OEMs, independent software vendors ISVs, and end users alike.
At the foundation, contract manufacturers provide procurement, manufacturing and logistics services. For instance, Celestica and Foxconn provide large scale, cost effective manufacturing services of networking hardware typically to OEM customers. Similarly, Finisar and JDSU optics and cables are typically rebranded by OEMs. OEMs such as Cisco, Arista and Juniper are sales and marketing engines often leveraging the supply chain for relatively standard reference designs, logistics, and professional services. Distributors provide local stocking enabling predictable lead times while facilitating a vast reseller community. Resellers come in different shapes and sizes from low cost fulfillment engines to full service system integrators. Each phase of the supply chain provides incremental utility.
A supply chain adds value in the transformation of goods and services (as described above) and the market rewards the provider commensurately. Figure 2 highlights a traditional networking hardware supply chain. Each transformation stage is represented with the cumulative cost and the industry standard gross margin. Based on a nominal $100 contract manufacturer cost and the supply chain transformation, the end user acquisition cost results in a 4.5x multiplier.
A key driver is the networking OEM’s segmented pricing strategy, where average sales prices for a given product can span a large range. See figure 3. The average sales price is based on a cost of goods sold of $100. The result is a 4x average sales price range common in the networking industry, where a few “strategic” customers are afforded the best pricing (left of the vertical line), and the masses make up the difference.
This makes sense when the OEMs are providing fundamental research and delivering added value to their products and customers; however, as markets mature, most of the value is generated earlier in the supply chain.
The New World
The compute industry supply chain has been optimized with industry standard components. IBM, Dell, and HP were first to disrupt the compute industry with standard bare metal servers. Now original design manufacturers ODMs such as Wistron, Inventec, and Quanta are the largest server manufacturers supplying the OEMs and also selling directly to end users. Networking ODMs such as Accton, Celestica, Delta Networks and Quanta have followed suit and are investing in R&D, sales, marketing, channels, and services blurring the lines with traditional OEMs. Modern OEMs such as Dell are not sitting idle disrupting the traditional networking supply chain with a disaggregated hardware and software strategy. Although networking ODMs traditionally provided their products and services to OEMs, today these ODMs offer the same products and services to end users directly or via the same supply chain. Consequently, end user acquisition cost results in a 1.8x multiplier or a 61% savings from a traditional to a modern networking supply chain. See figure 4. Conversely, an OEM would have to acquire networking hardware at $39 to deliver an end user price of $181. Further simplifying the modern networking supply chain, the bare metal switch market has adopted server like transparent and transactional pricing and a narrow average sales price range. Fundamentally, the modern supply chain is enabled with industry standard silicon where mature functions and features have been integrated into a system on a chip.
Networking: The Last Bastion of Mainframe Computing effectively argues for a modern supply chain. The networking hardware supply chain has evolved with multiple sources for merchant silicon and manufacturer/ODM diversity. In essence, a networking switch’s performance, quality, and reliability are now standard. In turn, switch ODMs are focusing on their brand, services, and fulfillment capabilities. With a maturing open networking hardware supply chain, the networking industry is going through a revolution accelerated with a choice of networking operating systems and modern applications such as network virtualization, automation, configuration management and real time monitoring.
1. Networking: The Last Bastion of Mainframe Computing; James Hamilton, December 19, 2009