Arik Hesseldahl

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VMware Acquires Once-Secretive Start-Up Nicira for $1.26 Billion

VMware, the software company best known for its virtualization technology that forms the backbones of so-called cloud computing today, said it will pay $1.26 billion for Nicira, a networking start-up that has sought to do to networks what VMware has done to computers.

The news comes on the same day that VMware was to report quarterly earnings. And while I don’t usually cover VMware’s earnings, I may as well mention the results: The company reported revenue for the quarter ended June rose to $1.12 billion, while earnings on a per-share basis were 68 cents. Analysts had been expecting sales of $1.12 billion and earnings of 66 cents.

Nicira had been running in stealth mode for quite awhile; I got to reveal its plans to the world last February.

The deal amounts to a nice payoff for Nicira’s investors including Andreessen Horowitz, Lightspeed Venture Partners and NEA, as well as VMware founder Diane Greene and venture capitalist Andy Rachleff.

Basically, Nicira’s approach — it’s pronounced “nice era” — was to virtualize networks in the same way that VMware has virtualized computers and servers. If virtualization doesn’t ring a bell, here’s a quick explanation: As computers have gotten more powerful, thanks mainly to the progress of Moore’s law and ever-more-powerful chips — a single computer can, with the aid of software like that created by VMware, act like it’s 10 or 20 or 40 different computers, all at once. Each “virtual machine” appears to the user to have all the properties of a physical computer. The point is to ensure that a single machine is used in the most efficient and cost-effective way possible. Customers who use cloud services can quickly “spin up” new virtual machines as needed to meet new demands, usually within minutes.

By and large, networking hasn’t kept up with the progress of servers. The pipes going in and out of data centers have gotten faster, yes, but they haven’t gotten much smarter. While cloud servers are flexible, precise and easy to manage, networks are, by comparison, sort of dumb. Meeting new demand means adding new capacity, and that usually means adding new hardware to the mix, and that can take weeks, if not longer.

Nicira has developed an NVP, or network virtualization platform, that has been described as the sort of thing that comes along perhaps once every quarter-century. That’s a bold claim, but the argument on which the company is making it holds water. On a day-to-day basis, where you deploy an application in a data center is as much a function of how much networking capacity you have available as it is one of computing capacity.

The Nicira NVP, as CEO Stephen Mullaney told me, “decouples” a virtual network from the physical network hardware. “All of the intelligence, all of the control, all of the services now get done in the virtual space,” he told me in February. The result: What was once a dumb pipe carrying bits into two different virtual machines running on the same physical one can now be programmed to act in vastly different manners, according to flexible, programmable rules. In much the same way a single computer gets turned into a dozen, a single network can be subdivided and act like a dozen individual networks. Or the reverse: Several networks can be cobbled together to act like one. And a virtual network can be created on the fly in minutes, just like a virtual machine.

Nicira’s early customers include AT&T, eBay, Fidelity Investments, Rackspace and the Japanese telecom giant NTT.

Ben Horowitz, who led Andreessen Horowitz’s investment in Nicira last year, wrote on his blog that, “Since Nicira only recently shipped its first production ready systems, this acquisition may stun observers. However, those who fully understand the depth of Nicira’s technology and the implications of the combination of Nicira and VMware will recognize the brilliance of VMware’s move. … In one bold step, VMware moves from a footnote in the networking market to the clear technology leader in Software Defined Networking and more specifically—and importantly—Cloud Networking.”

Here’s VMware’s announcement of the deal:

VMware to Acquire Nicira

Acquisition Expands VMware’s Networking Portfolio to Revolutionize Networking for the Cloud and Provide a Full Suite of Capabilities for Any Cloud Environment

PALO ALTO, CA–(Marketwire -07/23/12)- VMware, Inc. (VMW), the global leader in virtualization and cloud infrastructure, today announced it has signed a definitive agreement to acquire Nicira, Inc., a pioneer in software-defined networking (SDN) and a leader in network virtualization for open source initiatives.

“VMware has led the server virtualization revolution, and we have the opportunity to do the same in datacenter and cloud networking,” said Paul Maritz, chief executive officer, VMware. “The acquisition of Nicira adds to our portfolio of networking assets and positions VMware to be the industry leader in software-defined networking.”

VMware will acquire Nicira for approximately $1.05 billion in cash plus approximately $210 million of assumed unvested equity awards. The acquisition is subject to regulatory approvals and other customary closing conditions. The parties expect the acquisition to close during the second half of 2012. The acquisition has been approved by the boards of directors of both VMware and Nicira and the stockholders of Nicira.

The Software-Defined Datacenter – The Foundation of Cloud Computing

Cloud computing is about agile, elastic, efficient, and reliable services, and it is achieved through sophisticated software that abstracts hardware resources, pools it into aggregate capacity, enabling automation to safely and efficiently dole it out as needed for applications. Tenants or customers utilizing the software-defined datacenter can have their own virtual datacenter with an isolated collection of all the compute, storage, networking, and security resources that they are used to. Furthermore, this virtual datacenter can grow and shrink to efficiently utilize physical resources. This is what the software-defined datacenter is all about, and it is the architecture for the cloud.

Managing networks and network services to support cloud architectures is complex, time consuming and limits the achievement of full application mobility across clouds. Nicira is at the forefront of software-defined networking, which enables the dynamic creation of virtual network infrastructure and services that are completely decoupled and independent from the physical network hardware. Many industry leaders, including AT&T, DreamHost, eBay, Fidelity Investments, NTT and Rackspace are using the Nicira Network Virtualization Platform (NVP) to accelerate service delivery from weeks to minutes and dramatically reduce complexity and cost.

“Nicira helps customers dramatically improve business velocity and efficiency by transforming how networking works in the Cloud era,” said Steve Mullaney, chief executive officer, Nicira. “I’m thrilled to be joining forces with VMware to help build the software-defined datacenter.”

“The value we bring to customers lies in our open approach and the richness of capabilities in network virtualization,” said Martin Casado, co-founder and chief technology officer, Nicira. “The combination of Nicira and VMware brings together two pioneering teams, and gives customers the industry leading SDN solution for any cloud environment, on any hypervisor in the enterprise and with Service Providers.”

VMware plans to continue to support the open principles and technologies that have made Nicira solutions successful, including the Open vSwitch to connect physical networks and multiple hypervisors and the open extensibility framework to implement business-level policies from any cloud management system. This will allow enterprises and service providers to create the most flexible network topologies that seamlessly span any cloud environment. VMware is committed to maintaining Nicira’s openness and bringing additional value and choices to heterogeneous environments and the OpenStack, CloudStack and other cloud related communities.

This acquisition expands VMware’s networking portfolio, which includes the VMware vSphere virtual switching, VMware vCloud Director™ networking, vShield™ Network and Security software defined services, and the VXLAN protocol to provide a full suite of software-defined networking capabilities and a comprehensive solution lineup for virtualizing the network — from virtual switching to virtualized layer 3-7 services. This will allow customers to create a pool of network capacity on top of any network infrastructure from which they can easily support tens of thousands of isolated virtual networks with the simplicity and operational ease of creating and managing virtual machines

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