Facebook Shows Design for Networking Switch Pressuring Cisco

Jun 18, 2014 3:34 pm ET

(Updates with analyst comment in the sixth paragraph.)

June 18 (Bloomberg) -- Facebook Inc. introduced an open design for a networking hardware, moving the technology industry toward cheaper machines and threatening incumbents such as Cisco Systems Inc. and Juniper Networks Inc.

The switch, which routes Internet traffic, was accompanied by software for better handling of Web loads. Facebook found that it became necessary to build its own hardware as the business expands, Jay Parikh, vice president of infrastructure engineering, said.

“We’ve done this for racks, for the compute part of it, for storage and for other parts of infrastructure but there is this other lingering part, the network,” Parikh said at an industry event today. “We were running into just a lot of things that slow us down.”

The open-source switch design is the latest move by the world’s largest social-networking service to upend the technology infrastructure business. Since 2011, Facebook has been working with partners to develop more efficient and low- cost computing systems. The company shares its findings via an initiative called the Open Compute Project, with the designs reducing the money spent on machinery by paring components and software to only what’s needed for specific functions. That’s enabled others to make their own cheaper servers and storage, pressuring industry incumbents that sell those products.

The fallout has been evident. International Business Machines Corp. in January bowed out of the low-end server business by selling it to Lenovo Group Ltd. Hewlett-Packard Co.’s sales of servers and storage systems have been declining since 2011.

Networking Challenges

The trend of moving away from brand-name equipment in the networking space “has been question No. 1 on the minds of many investors any time the data center market comes up for discussion,” said Jeffrey Kvaal, an analyst at Northland Securities Inc. who has the equivalent of a buy rating for Cisco. “This is another bit of evidence to suggest that the trend is gaining further momentum.”

In networking, Cisco and Juniper are already facing challenges. Some of their customers are starting to shift away from buying expensive new routers and switches, opting instead for networks that rely more on software and inexpensive hardware. The new technology is called software-defined networking, and lets users add speed and features while cutting costs.

Partly as a result, growth in the Internet-switch market is slowing. The market is projected to reach $61 billion in 2017, up about 5 percent from this year, according to Michael Howard, co-founder of Infonetics Research Inc.

The Wedge

Facebook’s switch is called Wedge and is embedded with a microserver, so it looks and operates more like a server, the company said. The software is a Linux-based operating system to manage Wedge and keep track of a device’s performance.

“Our goal is to help an industry, not to harm it,” said Matt Corddry, director of hardware engineering at Menlo Park, California-based Facebook. “We’re hopeful that they, through the Open Compute Project, join in to the innovation surrounding networking.”

Cisco, the biggest network-equipment maker, views open- source network switches as being attractive only to “a small, highly resourced subset of the overall I.T. market,” David McCulloch, a spokesman for San Jose, California-based company, wrote in an e-mail. Hidden expenses for labor and additional software licenses raise the cost of operating the devices beyond some Cisco products, McCulloch said.

Hardware Costs

“While the open-source switch approach is definitely not for everyone, I want to be very clear that we know this segment of the market (largest Internet players) very well, and we intend to retain and grow these customers by addressing their needs” for more customizable networking equipment, McCulloch said.

Facebook, like Google Inc. and Amazon Inc., started designing its own hardware to save money and handle an increasing volume Internet traffic. It now owns four data centers filled with custom-made machines.

Chief Executive Officer Mark Zuckerberg has said Facebook saved $1.2 billion by using Open Compute-based equipment instead of products from established manufacturers.

Facebook’s hardware group has so far designed and ordered hundreds of thousands of its own servers, with the company last year spending $1.36 billion on its own data centers, more than double from $606 million in 2011. The company relies on manufacturers such as Quanta Computer Inc. instead of buying from lead server makers such as Hewlett-Packard and Dell Inc.

The company’s ambitions may be broader. Corddry didn’t rule out the possibility of Facebook designing its own chips.

“More broadly, we look for areas where we believe we can make a step-change improvement or change the discussion in a given industry,” he said. “I wouldn’t rule out anything from Facebook.”

--With assistance from Ian King and Jordan Robertson in San Francisco.