Cisco to Support VMware?

Cisco Systems (s csco) will support VMware (s vmw) virtual machines on their networking hardware? There’s buzz around Silicon Valley that there will be a big announcement made at VMworld next week in Las Vegas, and that’s my prediction as to what it will be. The integration of virtual machines and networking, which was signaled last year when Cisco invested heavily in VMware just prior to the virtualization company’s IPO, would have numerous ramifications, not only for the two companies, but the networking industry overall.

If my prediction comes true, it would help Cisco remain relevant in the data center, allowing it to do more than move IP packets between servers. It would also entrench the company into the enterprise, distancing themselves even further from the likes of Juniper Networks (s jnpr) and 3Com, both of whom have struggled against Cisco to gain some toehold in the enterprise infrastructure marketplace.

And this move would allow Cisco to participate in the server and virtualization ecosystem itself. Organizations that have invested heavily in Cisco infrastructure would be able to expand the lifetime of their equipment by running on their networking equipment any software application that runs in the VMware virtual machine — a set of applications that’s growing every day. Enterprises that want a single vendor to supply both their networking infrastructure and their virtual machine environments, meanwhile, could reap benefits from integrated support. As a benefit to Cisco’s internal operations, this integration would allow them to move into higher margin application support, possibly allowing for easier acquisition integration.

The downside for enterprises that use VMware virtual machines on Cisco hardware is that they’d be unable to leverage the Intel x86 server hardware ecosystem to their advantage. Today, without the VMware and Cisco integration, enterprises buy hardware to run their software applications that have benefited from the large economies of scale in the Intel supply chain. Combined with the effect of Moore’s Law, this has resulted in an excellent price-to-performance ratio for enterprise compute platforms. These performance increases in the server hardware rise in tandem with market demand and volume and are not bound to the high-margin expectations of products like Cisco’s.

So when tied to Cisco hardware, which would have lower volumes than the Intel x86 ecosystem, this solution would inevitably result in higher price and less performance. Cisco has always been a hardware company and this move could tie enterprises into their higher-margin products. Indeed, in some instances, Cisco hardware that performs commodity functionality has been sold at over 40 times the price of commodity hardware that performs the exact same function.

While this is not the Cisco Blade Server that I forecast earlier this year, if this prediction does come true, it will undoubtedly cause additional friction between Cisco and the giants of the server industry, namely IBM, HP and Dell. If enterprises can run applications in VMware on Cisco hardware, it could obviate the need for some servers to exist.

Finally, with this step networking would evolve from being the technology that moves bits between servers to participating in the central role at the heart of the enterprise data center. Competitors in both markets — server hardware and networking — should take note and prepare for further waves of change in the enterprise data center.

Allan Leinwand is a venture partner with Panorama Capital and founder of Vyatta. He was also the CTO of Digital Island.