Earlier this morning, The New York Times wrote about an internal memo in which Cisco Systems (s CSCO) outlined its plans for software defined networking. More importantly, it also shared the news that it has invested $100 million in Insieme, a company started by Mario Mazzola, Prem Jain, and Luca Cafiero.

In addition, Cisco can buy the start-up for upto $750 million. Insieme, which has been aggressively trying to woo engineers from its rivals, is hoping to build new kinds of switching gear to compete with current market leaders such as Arista Networks and emerging players.

Cisco has made an investment of $100 million in Insieme, an early-stage company focused on research and development in the datacenter market. It was founded by Mario Mazzola, Luca Cafiero, and Prem Jain in February 2012. Cisco also has the right to purchase the remaining interests of Insieme, with a potential payout range of up to $750 million that will be based primarily on the sales and profitability of Insieme products through Cisco. [Full Internal Cisco Memo below]

Cisco has used this concept of spin-ins before and often they involved the same three founders — Mazzola, Jain, and Cafiero. However, when I read this memo, I see a company making a tactical admission that it has become so big, so bureaucratic and so broken that it cannot count on internal teams to build any ground breaking products. The SDN memo, at least from my perspective, sends the wrong message to Cisco’s engineering corps: you are worth more outside than you are inside Cisco.

Cisco which has made a fortune from selling routers and switches should be thinking about developing next generation platforms. The fact it can’t shows that as a company it has become addicted to the old way of doing things.

Cisco boasts that nearly 70 percent of the Internet runs on its gear. Except Google and Facebook don’t use Cisco. And neither do many of the emerging web scale companies. Cisco, of course dismissed Juniper Networks (s JNPR) and later the Chinese threat. Anyway that is a story for another day.

SDN: Evolving the Network as a Platform

2012-Apr-17

Market trends such as cloud, mobility and video and the proliferation of data highlight the vital role the network plays today. The network is no longer a cost center; it is central to revenue generation and strategy execution. This has led to an increased need for customers to have greater control over the network (and IT infrastructure, in general) paving the way for emerging trends such as software defined networking (SDN), which promises to make the network more agile, scalable, and cost-effective.

While there is debate over whether this evolution is occurring today or coming in the near future, one thing is certain: Cisco intends to lead this change.

“Cisco believes SDN is part of our vision of the intelligent network that is more open, programmable, and application aware—a vision in which the network is transformed into a more effective business enabler, says Padmasree Warrior, CTO and co-leader Engineering.

Because SDN is still in its embryonic stage, a consensus has yet to be reached on its exact definition. Some equate SDN with OpenFlow or decoupling of control and data planes. Cisco’s view transcends this definition.

“If you ask five customers what SDN means to them, you may get five different answers. Customer motivations and expectations are different based on their business problem or deployment scenario,” Warrior says.

Unlike any other company, Cisco is unique in its experience, expertise, and breadth to help customers evolve their networks in a phased manner, offering both innovation and investment protection.

Playing to Cisco Strengths, Priorities

While SDN concepts like network virtualization may sound new, Cisco has played a leadership role in this market for many years leveraging its build, buy, partner strategy. For example, Cisco’s Nexus 1000V series switches—which provide sophisticated NX-OS networking capabilities in virtualized environment down to the virtual machine level—are built upon a controller/agent architecture, a fundamental building block of SDN solutions. With more than 5,000 customers today, Cisco has been shipping this technology for a long time.

“SDN plays into at least two of Cisco’s top five priorities—core routing/switching and data center/virtualization/cloud,” says Warrior.

Cisco has the opportunity to shape and define the SDN market because it is still perceived as an emerging technology, Warrior says. In fact, Cisco innovation will be much deeper than just SDN.

Cisco is operating from established positions of strength, which include the scale of its operating systems, superior ASICS, unique embedded intelligence, experienced engineering expertise, and an expansive installed base—most of which has no interest in completely replacing what it has already invested in so heavily.

“When you look at the breadth of our customer base—from universities to large enterprises to Service Providers —you quickly see that there is no one-size-fits-all solution in terms of implementing SDN,” says Warrior. “So it’s a matter of ‘turning on’ this functionality in a use-case led manner that allows customers to tailor their infrastructure to business priorities, while maintaining as much investment protection as possible.”

“Many of our peers are just starting to recognize the strategic value of the network that Cisco has always articulated—and the majority of them are still at the starting line,” says Warrior. “We understand this is a marathon—not a sprint—and Cisco has the most comprehensive set of capabilities to address the emerging requirements under the SDN umbrella, better than any other company.”

Investing in SDN Through Build, Buy, Partner Strategy

Cisco’s innovation strategy continues to leverage a build, buy, partner approach. Our network programmability efforts align with this strategy.

Cisco has made an investment of $100 million in Insieme, an early-stage company focused on research and development in the datacenter market. It was founded by Mario Mazzola, Luca Cafiero, and Prem Jain in February 2012. Cisco also has the right to purchase the remaining interests of Insieme, with a potential payout range of up to $750 million that will be based primarily on the sales and profitability of Insieme products through Cisco.

Insieme’s product development efforts are complementary to that of Cisco’s current and planned internal investments. Insieme and other internal programs will be components of Cisco’s broader programmability framework. These types of investments have strongly benefitted Cisco in the past, and we will continue to look for similar ways to complement our internal development capabilities.

More details regarding Cisco’s investment in Insieme will be disclosed in Cisco’s upcoming 10Q filing in May.

Defining the Strategy

Warrior says Cisco’s SDN strategy is part of our on-going investment to ensure that the networks we deploy are the most agile, open, and programmable. This includes everything from silicon to software, as well as supporting industry-developed protocols such as OpenFlow and OpenStack.

Collaboration will be key. Cisco’s SDN strategy is led by Engineering with involvement from experts from various teams such as Network Operating Systems Technology Group (NOSTG), Data Center Group, Service Provider Architecture Group, Global Marketing and Corporate Communications (GMCC), Sales, as well as support teams from Finance and Legal. As it is tied to several of the company’s key foundational priorities, progress will be reviewed and monitored by the Operating Committee in regular quarterly business reviews.

“Our strategy is to continue to offer choices to our customers so that they are not forced to go down a single path,” Warrior says. “We have a multipronged approach that goes beyond current perceptions of SDN, leveraging business-based use cases as building blocks so that we achieve architectural consistency and bring to bear the richness of all our capabilities.”

Warrior adds that Cisco already builds a lot of intelligence into its network silicon and software. Making them open and programmable will further unlock the value, while enabling further application awareness.

“Cisco understands networking better than any other company,” Warrior says, noting that Cisco-built networks that power majority of the Internet today. “Whether we partner, build or buy, Cisco is well positioned to continue to lead with the evolution of SDN.”

Over the next 6-12 months, Cisco is expected to unveil its external approach with new products and solutions, including SDN capabilities that make the network more open and programmable. Stay tuned for more information on Cisco’s strategy in this space.