SDN Threatens Profits at Cisco (NASDAQ:CSCO); Facebook (NASDAQ:FB) Under Fire for Tax Evasion

NEW YORK – According to industry insiders there is a battle waging over Software-Defined Networking (SDN) that is a way to build corporate networks without the networking gear built by companies such as Cisco (NASDAQ:CSCO) and Juniper Networks (NYSE:JNPR). The battle pits network equipment manufacturers against a string of companies including Cisco’s partner, VMware (NYSE:NMW), a number of startups, and Facebook (NASDAQ:FB).

The attraction of SDN is simple, companies can maintain or expand their networks using low-cost (when compared to networking gear) software; another advantage is that SDNs are easier to upgrade as companies are not required to change their physical infrastructure.

Wide-scale adoption of SDN architecture threatens to reduce profits for equipment manufactures significantly; Cisco enjoys a greater than 60 percent profit margin network products.   Several startups, including Pluribus Networks, include industry insiders who have established relationships with the corporate purchasing managers Pluribus has leveraged those relationships to gain Airbus (PA:AIR) as a client.

Venture capitalists are increasingly moving into the SDN market. According to Kumar Srikantan, former VP and General Manager of Cisco’s Enterprise Networking Group and current CEO of Pluribus Networks, ‘there was so much action going on in terms of software-defined architecture and the market. I was being approached by VCs for months.’ Even Cisco has jumped on the bandwagon by starting their own ‘spin-in’ called Insieme and then purchasing the company for $ 863 million.

Tech giants such as Facebook are also entering the fray.   The company recently launched their SDN solution call ‘The Wedge’; part of the company’s open source hardware project called the Open Computer Center. A move that many analysts believe validates investments in the SDN market. At the moment, Cisco remains positive, according to a company spokesperson ‘we know this segment of the market very well, and we intend to retain and grow.’

Facebook was also in the news as a former senior manager was recently appointed to the British House of Lords. The appointment caught the attention of some as the company has been accused of tax evasion in the United Kingdom. Activists believe that the former manager is unfit for office as they were actively involved in the avoidance. The accusation stems from the company’s practice of selling advertising from Ireland into the UK, as such the advertising revenue is not subject to UK taxes. However, the UK tax collector, HMRC, pointed out that the practice is not tax avoidance but simply how corporate tax works under the EU Single Market. However, the practice does shed light on the steps the corporations are going to reduce their tax risks, a practice that has become more common in cloud service industries.

Shares of Cisco closed on Friday at $ 25.03, while shares of Facebook closed down at $ 73.06.