Open source to bust up Cisco Borg collective?

Gravy train leaves the station

Not that it's been cheap trying to realize this marketing slogan. Vyatta has raised $35m since 2006 from mostly strategic investors: JPMorgan, Arrowpath (a venture capital firm) and Citrix. The company expects to raise its final round in 2011.

Vyatta needs the money. For the first two years of its existence, the company had roughly $0.00 in sales. Instead of generating cash, the company spent piles of the stuff improving its product and evangelizing the value of open networking. But enterprises weren't buying.

But then the company's evangelization efforts paid off. Downloads of the product - now nearly one million total - have increased to a respectable 30,000 per month. Putting this into perspective, the entire midrange router industry ships 150,000 units per month.

Yes, those units are paid for, unlike most of Vyatta's, but the company's downloads have finally started turning into paychecks: since 2008 sales have more than doubled each year, and should grow by 200 per cent in 2011.

All of which is fine, but Vyatta can hardly take credit for all of its recent success. Any good business involves a great deal of luck to become successful, and Vyatta has had luck in abundance.

The most fortuitous trend for the company was virtualization, which has been driving complete IT re-architectures, undermining Cisco's dominant position. Both virtualization and its kissing cousin cloud computing promise radically better economics and flexibility, generally delivered through a cost-effective x86 hardware foundation and both require the workload to run as a software-only virtual machine.

x86. Software-only. Sounds like Vyatta.

For years Vyatta pitched companies to run its software on their old servers, but few did, and essentially no one paid for them. But then virtualization came along and made Vyatta's software platform look very appealing.

Why? At the branch office, a Vyatta VM eliminates an entire Cisco hardware device. In the datacenter Vyatta VMs can be booted at the click of a button instead of having to acquire, rack, cable and install a separate network box.

This can be seen in the company's download numbers, which have not only accelerated in the past two years but have shifted increasingly toward Vyatta's VMs, which were initially a trickle. This bodes well for the startup, as Gartner and other analysts are now tracking networking virtual machines, and one analyst, Infonetics, projects the market for virtual security appliances will explode to $2.4bn in three years. Vyatta has been shifting its model to a usage-based subscription model for networking services, and sales growth suggests the company has finally found its sweet spot.

Cisco, for its part, is unlikely to be able to mount a direct response. Cisco's model is based upon selling expensive, proprietary hardware that generates a 70 per cent gross margin. And while Vyatta probably only challenges $3bn to $4bn of Cisco's gross margin, that's a significant chunk, one that Cisco won't give up without a fight.

Like Red Hat all over again

But how can it fight? Cisco has been expanding into a wide array of businesses that may prevent its network security routers from being hollowed out by Vyatta's open source, virtualization-heavy approach. But it's going to feel the sting, and it's not at all clear that it will be able to mount much more of a defense than Sun Microsystems was able to stage against Red Hat.

All of which is not to say that Vyatta's success is a foregone conclusion. It has significantly increased sales, but it's still a gnat to Cisco. Virtualization has been very kind to Vyatta after years of seeming lost in the wilderness, but others are entering the market and may out-execute the open-source upstart.

But these are risks Vyatta must be very happy to take. Before it had to deal with market indifference. It no longer has this problem. Not at all. ®

Matt Asay is senior vice president of business development at Strobe, a startup that offers an open source framework for building mobile apps. He was formerly chief operating officer of Ubuntu commercial operation Canonical. With more than a decade spent in open source, Asay served as Alfreso's general manager for the Americas and vice president of business development, and he helped put Novell on its open-source track. Asay is an emeritus board member of the Open Source Initiative (OSI). His column, Open...and Shut, appears twice a week on The Register.