VMware's VeloCloud Acquisition: What's Ahead for SD-WAN

**Editor’s Note: Please click here for a recap of the biggest channel-impacting merger and acquisition news from August.**

VMware’s acquisition of VeloCloud Networks fits its strategy to compete with Cisco and could mark a watershed moment for SD-WAN.

The recently announced deal brings VeloCloud into the VMware fold as an enhancement to VMware’s NSX network virtualization platform. VMware also says VeloCloud will help it chart a “software-defined” future with increased security, automation and visibility. Technology analyst Kurt Marko says VMware wants VeloCloud to help move the NSX virtual networking stack “beyond the data center to the branch office and other remote enterprise locations.”

Kurt Marko

“It’s a solid strategy; however, fully integrating VeloCloud’s technology into a cohesive NSX suite will take time, with unifying the management consoles and security policies seeming to be the likely short-term goal,” Marko said. “Longer term, the VeloCloud acquisition underscores VMware’s commitment to seriously contending for enterprise network budgets as organizations continue on the path to fully virtualized, aka software-defined, infrastructure.”

VeloCloud has existed since 2012 and has been one of the most publicized SD-WAN vendors over the past year. The company has struck numerous deals with service providers, thanks to its unique set of capabilities. VeloCloud’s platform aggregates traffic into a cloud-based hub rather than driving it from the edge, notes David Hughes, CEO of rival Silver Peak Systems.

“That gave them an affinity for service providers, and particularly for service providers that were offering broadband voice over internet,” Hughes said.

New York-based MetTel partners with VeloCloud and says it increased its SD-WAN deployments by triple digits in the last year.

“No one can deny any longer that we’re moving to a software-defined, virtual enterprise environment,” said Ed Fox, MetTel’s vice president of network services. “Combined with the power of VMware NSX, the dream of a networking solution that is flexible, robust and secure is coming to life.”

C3’s Matthew Toth

Matthew Toth, founder of C3, says VMware was attracted to the service-provider angle for its many benefits.

“One of the reasons why VMware bought VeloCloud is, it buys them relationships,” Toth said. “This buys them not only relationship with big telcos, but along with those relationships with telcos come those VAR relationships, and that’s them kind of getting into a market that they’re not in. With that acquisition they buy technology; they buy a small customer list — but honestly, a negligible customer list. They buy relationships with telcos and they buy relationships with new VARs.”

Jason Gintert of VeloCloud partner WAN Dynamics praised the opportunity partners will have with VMware. For WAN Dynamics, which is a member of VeloCloud’s VAR program, the company can use more data-center resources for its professional-services portfolio.

“We are anxiously anticipating integrations with VMware products like NSX to allow for centralization of uniform network policy across the data center, cloud and wide area network. Long term, we also see a huge opportunity for …

… VMware in the emerging ‘edge computing’ space to leverage general purpose hardware network appliances on the customer premises using network function virtualization (NFV) as a platform,” Gintert said. “Of the potential companies we could contemplate picking up VeloCloud, VMware is up there as one of the most exciting for our business and the services we deliver for our clients.”

VMware’s SD-WAN deal creates another area where it directly competes with Cisco. Toth and other analysts agree that the purchase shares similarities with Cisco’s acquisition of Viptela. Toth says Viptela’s router-based system fit well with Cisco, whose IWAN offering was insufficient for SD-WAN. Viptela, just like VeloCloud, is a “pure-play” SD-WAN vendor based in California and founded in 2012. Marko notes that Cisco contributed to a $27 million investment in VeloCloud in 2016.

Ripple Effect?

SD-WAN competitors had no choice but to take notice of the VMware-VeloCloud deal. Many analysts, like Marko, expect more M&A in the SD-WAN market. Toth agrees that many companies in the industry see acquisition as an attractive endgame.

“I truly do believe that a lot of these guys started this company with the idea that hopefully they could get bought by a company like Cisco for between $100 million and $1 billion,” Toth said.

But that’s not the mindset of every SD-WAN company.

Silver Peak’s David Hughes

“I do think there are others though that have been doing this a long time. You look at Talari [Networks], for example, which has been doing this for 10 years. You don’t necessarily look to them and think to yourself, ‘Oh, they’re looking for a strategy,'” Toth said. “I think there’s so much room for growth in that marketplace that there is enough room for the pure plays. On top of that, I actually believe that innovation is going to be hampered by the organizations that are doing the acquiring.”

Silver Peak, which has been around for 14 years, says it is pursuing an independent strategy. Hughes says he and his team are happy to see a larger company absorb their competitor, but that is a luxury Silver Peak can enjoy after growing its customer base for more than a decade.

“We are excited by this because it basically leaves us as the leading independent player in the space,” Hughes said. “On the other hand, for some smaller companies, I think it’s one less acquirer for them. I think as we move into the next phase of the market, if you haven’t already got scale, if you haven’t already got hundreds of customers and a growing business, it’s going to be really challenging.”

Moving Forward

Hughes predicts six to 12 months of …

… internal and external uncertainty for VMware and VeloCloud, as they adjust their road map and reconfigure their target market. Toth says he’s interested to see if VeloCloud functions more as a standalone offering or gets folded into everything else. The latter option would mirror the experience of Viptela, which is undergoing deep integration with Cisco. Toth expects innovation to slow for Viptela as Cisco integrates it into the feature set of an IOS router.

“Cisco could also treat Viptela like it did Meraki, where it’s kind of its own platform, but that’s not expected. It’s expected to kind of get shoved into the rest of the stuff,” Toth said. “Looking at VeloCloud and VMware, what I’ll be very interested in is, what is the level of integration that they’re going to look at with other Dell and VMware products?”

VeloCloud CEO Sanjay Uppal wrote to customers and partners that his company and VMware will work as separate companies in the several months leading up to the close of the deal. VeloCloud will eventually become a unit in VMware’s Networking and Security business.

“We believe that by teaming up with VMware – a company also known for continually reimagining infrastructure as software – we will not only continue our mission of reinventing networking but we will do so on a much broader scale,” Uppal said. “As you know, about a year ago, VMware became a part of Dell, so we also gain the hardware, distribution and supply-chain expertise of Dell and EMC with this merger. VeloCloud has a huge opportunity to make a many-times-greater difference to the customers who use us and the partners and service providers that deliver those network services.”