SDN Business Models: Which Will Succeed?

As I see more and more companies enter the software-defined network (SDN) market, my hardware-centric mind struggles to understand the business models of many of these software offerings. After talking to industry experts I have come up with four basic models:

1. Embedded Model. This model is hardware based. System vendors will likely throw in the controller and open APIs for free and price the hardware accordingly; the hardware covers the cost of the software development. This technically obscures the software solution within the hardware price. Benefits of this business approach is that the hardware stays in the network a long time, and additional add-on software features and/or applications and upgrades can be sold at increasing profits. This model will be used by key networking infrastructure vendors as well as SDN start-ups that have hardware-based solutions wrapped together with the controller and applications. This model is likely to be the most successful in the long run, because end users are leaning toward a full software and hardware package versus piecing the components together themselves.

2. Cloud-Based or Application Hosting Model. This model is per virtual machine (VM) and is time based, similar to the Amazon usage-based billing system. Use a number of VMs within a certain period, and the price scales with the usage. There is no tie to specific hardware. It may sound like a low-cost entry approach, but this is likely to be one of the most expensive models because the complexity to evaluate the year-end cost is quite difficult. Additionally, it is likely too expensive for the typical enterprise to embrace given large-scale virtualization deployments are in the very early stages. 

3. Subscription Based. The subscription-based model simplifies things a bit for the customer and enables either a quarterly or annual fee to be attached to the controller and applications purchased. The controller can be separate from the applications or bundled, enabling multiple offerings that are a single price. Upgrades can be priced by quarter or year, which enables up-selling of new applications in a very straightforward format.  

4. Capitalized Model. The capitalized model is where the customer purchases the controller (and/or applications) for a one-time price and capitalizes it over time. This is where you find out where the purchasing power is in the organization. Often the networking team will submit a VM or subscription-based proposal, and the CFO will insist on a one-time price instead.

Several of these business models, in theory, are compelling, but have become extremely complex for the end user to evaluate, specifically, determining what the end cost of the network will be. End users are telling us that the simpler the business model, the more likely the sale, given the CFO influence. Thus, the capitalized model, in many cases, is actually the most popular right now, despite what the market is telling you.

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Eve Griliches

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