SD-WAN sector report: Growing with no end in sight

With the WAN in transition, incumbents make their move through acquisitions, while startups continue to innovate at the edge. Insider Pro looks at why SD-WAN is so hot.

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As the physical boundaries of the enterprise continue to sprawl, driven by M&A activities, globalization, mobility and more, old hardware-heavy WANs are failing to keep up with end-user needs.

At the same time, as enterprise applications migrate out of private LANs into private, public and hybrid clouds, enterprise WAN initiatives have been forced to evolve alongside those changes, shifting from slow-to-deploy, expensive leased lines, MPLS, VPNs and the WAN optimization hardware often needed to make those solutions work to cloud services and software-defined infrastructures.

SD-WAN moves to the mainstream

Those pressures have driven the SD-WAN market, in a few short years, from a niche service intended to replace pricey, hard-to-maintain WANs that serve branch offices to a mainstream networking technology that has begun bleeding into other software-defined (SD) spaces. 

With origins in such varied but closely related networking sectors as routing, route selection, channel bonding, cloud networking and virtualization, SD-WAN technology has matured into a cash-cow sector that analysts believe will expand to become a multibillion-dollar market in the very near term.  

The sky-high upside of the market has triggered a number of big acquisitions, as hardware incumbents seek to shift into SD markets. Big players such as Cisco, VMware and Nokia have acquired their way into leadership positions and are at the forefront of a consolidation wave.

However, early mover startups, such as Aryaka and Silver Peak, have maintained their independence and continue to enjoy leading roles as the market expands. Meanwhile, a newer crop of startups is pushing at the virtual edges of the nascent SD-enterprise, developing such innovations as SD-core infrastructure and policy-based intelligent aggregation and routing.

In the near term, the enterprise WAN is likely to remain a technology in transition. Bandwidth-hungry, real-time applications and newer networking technologies like 5G and virtual Customer Premise Equipment (vCPE) will accelerate the push towards a software-defined WAN future, but with so much chaos – and opportunity – in the market, the wave of consolidation probably won’t calm the waters, but should instead attract even more players into the space.

[ Related: The rise of SD-WAN: what does it mean for your company? ]

Market opportunity: Is the SD-WAN market on a sustainable hockey-stick growth path?  

Analysts agree that the SD-WAN market is a gold-rush opportunity. But just how rich is this particular networking vein? Market intelligence firm International Data Corporation (IDC) expects the SD-WAN infrastructure market to hit $5.25 billion in 2023.

Based on reported revenues from 2017 and 2018, as well as the forecast for 2019, IDC predicts a 30.8 percent CAGR from 2018 to 2023. The current SD-WAN infrastructure market is highly competitive with sales increasing 64.9 percent in 2018 to $1.37 billion.

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“SD-WAN continues to be one of the fastest-growing segments of the network infrastructure market, driven by a variety of factors. First, traditional enterprise WANs are increasingly not meeting the needs of today’s modern digital businesses, especially as it relates to supporting SaaS apps and multi- and hybrid-cloud usage. Second, enterprises are interested in easier management of multiple connection types across their WAN to improve application performance and end-user experience,” said Rohit Mehra, vice president of network infrastructure for IDC.

“Combined with the rapid embrace of SD-WAN by leading communications service providers globally, these trends continue to drive deployments of SD-WAN, providing enterprises with dynamic management of hybrid WAN connections and the ability to guarantee high levels of quality-of-service on a per-application basis,” Mehra added.

Research firm Gartner also sees a steep growth curve ahead, predicting that the managed SD-WAN market alone will grow at a CAGR of 84.7 percent between 2017 and 2022. According to Gartner, virtualization will be practically mandatory for WAN edge infrastructure refreshes. By the end of 2023 “more than 90 percent of WAN edge infrastructure refresh initiatives will be based on vCPE platforms or SD-WAN software/appliances vs. traditional routers (up from less than 40% today),” Gartner analysts predict in their 2018 Magic Quadrant for WAN Edge Infrastructure (gated).


How incumbents are investing in SD-WAN

Networking incumbents are investing in the SD-WAN market primarily through acquisitions. Several startups have already been taken off the table, snatched up by incumbents seeking to modernize their networking portfolios.

Through the accumulation of startups, IDC reported in its recent “SD-WAN Infrastructure Forecast” that incumbent networking vendors have been able to leverage their installed bases in routing and WAN optimization to vault to the head of the market with their SD-WAN acquisitions.

Cisco has made a couple of big moves, acquiring Viptela for $610 million and Wi-Fi switching, security, and mobile device management provider Meraki for $1.2 billion. Meraki’s features are being integrated with Cisco’s SD-WAN appliances, and Cisco also announced an integration partnership with SD-WAN startup Teridion to deliver cloud-based SD-WAN services that feature what Teridion calls “Curated Routing,” a combination of WAN acceleration and route optimization.

Not to be left out of the party, VMware bought VeloCloud for an estimated $449 million, a move which propelled VMware to the No. 2 spot, in terms of revenue, in the SD-WAN infrastructure market, according to IDC.

Riverbed, which was a leader in the old box-based WAN optimization space, acquired Ocedo (price undisclosed) to help it manage its transition to a SD future. Nokia also has an SD-WAN play now through its $16.6-billion acquisition of Alcatel-Lucent. In the Alcatel-Lucent acquisition, Nokia also gained SDN subsidiary Nuage.

Carriers and telcos protect their flanks through reseller agreements and channel partnerships

Since expensive MPLS services are dead center in the crosshairs of SD-WAN vendors, it makes sense for large telcos to get in on the buying spree to protect against any loss of legacy business. Yet, a consolidation push from telcos hasn’t materialized thus far, most likely because carriers are understandably reluctant to actively eat into their own high-margin services like MPLS. One exception is NTT, which purchased Virtela for $525 million.

Other telcos are taking a more cautious approach, content to resell SD-WAN services from the likes of VMWare/VeloCloud and Silver Peak, as they slowly migrate away from legacy architectures.

AT&T, for instance, has been reselling VMware/VeloCloud’s service, buying time as it builds out its own SDx portfolio. Comcast Business similarly partnered with startup Versa to provide the SD-WAN component of Comcast’s larger SDN platform.

Verizon launched its SD-WAN service back in 2016 using Viptela but has since moved over to a VMware/VeloCloud-based service after Cisco acquired Viptela in 2017. Core Internet and cloud networking provider GTT Communications, meanwhile, launched its SD-WAN service back in 2017 with VMware/VeloCloud and has added onto that foundation since.

Who are the leading SD-WAN vendors?

The boundaries of the SD-WAN market are not neat and fixed. With so many legacy technologies (routing, WAN optimization, and even security) feeding into the space, market projections involve both art and science. However, a consensus has emerged among analysts that a few key players are pulling away from the pack. These leaders are a combination of networking/hardware incumbents and SD-WAN first-movers that have gained enough traction with customers to begin erecting barriers to entry for any newer startups that may try to poach market share.

“The SD-WAN infrastructure market continues to be highly competitive with sales increasing 64.9 percent in 2018 to $1.37 billion,” IDC has found. “Incumbent networking vendors have leveraged their technological strengths and installed bases in routing and WAN optimization sales to lead the market, while numerous startups remain active.” 

According to IDC, the current SD-WAN market leaders are:

  • Cisco (Viptela)
  • VMware (VeloCloud)
  • Silver Peak (founded in 2004; still private)
  • Nokia (Nuage/Alcatel-Lucent acquisition)

IDC finds that Cisco has been able to leverage its extensive routing portfolio (which is used in a number of SD-WAN deployments), as well as its Meraki portfolio and its SD-WAN management platform that it acquired from Viptela to lead in market share. Similarly, VMware vaulted into the number-two spot through its VeloCloud acquisition, while Nokia came in fourth through its acquisition of Alcatel/Nuage.

When you roll in managed services, the landscape shifts a bit. In the U.S., the adoption of managed SD-WAN services lags behind other regions. “Gartner analyst Lisa Pierce points out an interesting dichotomy: Most companies outside the U.S. use managed services for their WAN needs, while the majority of U.S. companies, especially the larger ones, have historically taken the DIY route. But that is changing,” Neal Weinberg reported for Network World.

Related: 5 reasons to choose a managed SD-WAN and 5 reasons to think twice

DIY should be a temporary phenomenon that fades out soon. Expect downward price pressures, the increasing robustness of SDx feature sets, and the lack of skilled IT professionals to continue to drive the migration away from DIY SD-WAN to managed services.

Research firm IHS Markit also sees a growing managed services sector in the market. According to IHS Markit, the current SD-WAN market leaders are:

  • VMware
  • Cisco
  • Aryaka (founded in 2009; still private)
  • Silver Peak

Gartner assesses the market slightly differently. According to its latest “WAN Edge Infrastructure Magic Quadrant,” VMware, Cisco, and Silver Peak are the only “leaders,” while Fortinet, Citrix, Aryaka, and Riverbed are stacked closely as the nearest “challengers.”

Gartner also lists Huawei in the “challengers” quadrant. This is technically accurate, but the next time it updates this Magic Quadrant, Gartner should beef up its “cautions” on Huawei to include the risk of state-sponsored espionage and IP theft.   

SD-WAN startups and bleeding-edge opportunities

A couple of SD-WAN pioneers, Aryaka and Silver Peak, exist in that gray space between hot-new startup and an IPO. Both Aryaka and Silver Peak have hinted at forthcoming IPOs, but each is still private.

In the meantime, the roster of SD-WAN startups continues to grow as investors pursue a variety of SDN and SD data center opportunities.

Here are some of the most notable SD-WAN startups, listed with a big win of theirs from the past year:

Related: 10 hot SD-WAN startups to watch

The next SD-Wave: Hybrid and patchwork WANs bridge legacy architectures to the SD-cloud

As enterprises begin to migrate away from legacy architectures to cloud services and SDN, SD-WAN vendors have begun to layer on new features, such as security services and intelligent, policy-based routing, while also capitalizing on vendor switching headaches by rolling out hybrid and patchwork SD-WANs that help ease the transition from a hardware-dependent reality to a new SDx one.

Below is a sampling of the hybrid and patchwork SD-WAN solutions that will drive the next wave of WAN innovation:

Aryaka, one of the first-movers in the SD-WAN space (full disclosure: I served as Aryaka’s head of marketing strategy a few years ago), recently launched its HybridWAN service, which builds on Aryaka’s SD-WAN service to offer enterprises a combination of Layer-2 core connectivity and broadband connectivity. The Aryaka core option offers guaranteed performance for business-critical traffic, while the Internet option provides low-cost transport for non-priority traffic. Aryaka launched the service with an on-the-record customer, Teradyne.

Riverbed, which was a leader in the precursor WAN optimization space, bounced back from its hostile takeover by Elliott Management, which originally threatened to sell off the firm’s assets, to sidestep into the SD-WAN sector through its acquisition of Ocedo (price undisclosed). Now, Riverbed’s hybrid WAN offering combines WAN optimization, MPLS and broadband internet.   

GTT Communications is a relatively anonymous internet heavy hitter, since it excels quietly in the core. Since it launched its SD-WAN service back in 2017 using VMware/VeloCloud, GTT has broadened its SD-WAN capabilities through its $2.3-billion acquisition of Interoute, an EU-based fiber network and cloud networking provider. Interoute had previously launched its own SD-WAN service using Silver Peak.

Now, GTT is rolling out a “universal Customer Premise Equipment (uCPE)” device built on Dell hardware. The uCPE will give users the ability to run multiple virtual network functions (VNFs) on a single box.

GTT’s SD-WAN patchwork now combines uCPE hardware from Dell, SD-WAN VNF from VMware/VeloCloud and security VNFs from Palo Alto Networks and Fortinet. The security services run as virtual machines (VMs) in the Dell uCPE.

Cisco’s SD-WAN portfolio is. . . well, all over the map. Cisco had its own internal SD-WAN development efforts underway, before acquiring Viptela and Meraki. In the Magic Quadrant linked above, Gartner reports that its clients find Cisco’s patchwork SD-WAN suite confusing with “multiple code bases and management models with limited integration.”

Cisco recently added to its patchwork portfolio by entering into a new partnership with promising startup Teridion to deliver managed SD-WAN services. Cisco is deeply integrating Teridion’s SD-WAN technology with Cisco Meraki MX Security and SD-WAN appliances.

Confusing or not, you know the old saying, “You never get fired for buying Cisco.”

Apparently, a number of enterprise buyers are either worried about job security, or they feel that the learning curve associated with moving to a new vendor is harder to navigate than Cisco’s roadside-diner-sized menu of SD-WAN options.

Whatever the case, Cisco has managed to stitch together the No. 1 position in the market. IDC’s research finds that Cisco has claimed 46.4 percent of the market, well ahead of No. 2 VMware/VeloCloud, which captured 8.8 percent of the market.