If you think wide-area network (WAN) optimization is a niche market, don't bring it up around Jerry Kennelly. The co-founder, chairman and CEO of San Francisco-based Riverbed Technology, Kennelly is a fervent believer that WAN optimization is the foundation for the next generation of IT infrastructure and that Riverbed is poised for a dominant role not only in corporate data centers but in the cloud as well.
Since its founding in 2002, Riverbed has become the leader in WAN optimization (according to consultancy Gartner Group, Inc.), and it continues to grow at a rapid clip. The company had 39% year-over-year revenue expansion in its first fiscal quarter ended June 30. In this installment of the IDG Enterprise CEO Interview Series, Kennelly spoke with IDGE Chief Content Officer John Gallant and Network World Senior Editor Tim Greene about battling with Cisco Systems, the expansion of Riverbed's product line and big opportunities in the cloud.
Where does Riverbed go beyond WAN optimization? You are a dominant player, but the danger is that you become a one-trick pony. How do you expand the scope of this business? What we're really doing is layer-seven application acceleration, and that has much deeper implications than simply making a particular land line faster and cheaper than it was. It's something that changes the nature of global IT infrastructure for every major company in the world. Everyone likes a fast line. It was attractive to people because it saves them bandwidth. It's much cheaper to do optimization and compression across the network than to buy bigger links. But then we saw people doing data center consolidation with it, which is moving all the server and IT infrastructure out of branch offices, out of multiple data centers into just one or two.
That trend has driven a lot of our growth in the last three years. Our products make that possible because you can't do data center consolidation unless you can give reasonable performance to the people who no longer have local servers.
We woke up one morning about six months ago to discover - wait a minute - what we're doing is creating private clouds, because what data center consolidation does is the creation of a private cloud. So, in fact, we've actually penetrated the cloud market.
The further implication is that if you have to have our technology to do private clouds, well, guess what, you can't do public clouds without it either. The biggest companies in the world - the biggest service providers, the biggest systems integrators, the biggest Fortune 100 companies - are coming to Riverbed to ask us 'how do we do our cloud infrastructure into the future?'
Cisco started out in the multiprotocol router business and expanded into many other areas, including switching, storage, security and more. Should we expect to see a similar, diverse growth track and expansion plan for Riverbed? Cisco is the layer two and three of networking, but the action now is less at layer two and three and much more layers four through seven. Cisco's the king of two and three and we're the king of four through seven.
We just have a huge future for ourselves. We bring the capability customers could only dream about, that no one thought was ever possible, and here we are delivering it. There is a big product future, revenue future, for us. We're a strategic partner. I talk to CIOs all the time now, and the importance of having knowledge workers connect to their applications effectively, cheaply, globally, seamlessly, 24-7, is critical for them. That's what we do. That gives us an incredible position going into the next decade.
Where could the company go in that layer four through seven realm? Our big concentration now is the edge of computing, the branch offices where a lot of the workers are. But there's an interesting thing happening with data center consolidation and cloud computing . The old paradigm was the corporate headquarters was where the corporate data center was, and all the branch offices were the edge. What's happening now is the corporate data center is being moved to a cloud somewhere else. It's in Wyoming or Arizona. What that means is that the corporate headquarters is now part of the edge. Having the headquarters join the edge increases our market opportunity.
We introduced a product about a year ago called Riverbed Services Platform (a virtual server environment on Riverbed's Steelhead appliances) that allows you to plug in five other software modules of services you would place in your branch office. We're approaching the ability to give people that dream of the one-box in the branch office.
You don't need a separate box to run your Windows server anymore, or really any other server in your branch office. That becomes the beachhead of a very big market. Into that single box you can plug in your security, your media server, your media streaming, your DNS, DHCP, domain controller, your print server, your Microsoft Windows server, anything you want. That becomes a large ancillary and synergistic market. That's the edge.
Then we have a market in the data center, the connection back to the edge. You have to have a Steelhead at either end of the link. So we have great big honkin' Steelheads - one of which we just introduced, the 7050 - that allow for massive scale in the data center for people to connect to the branch offices. Then further, the connection to the backup and recovery data center for storage to be sent over the WAN instead of by tape. Put it all together. We have the edge market, we have the data center market, we have the connection between them, and then we have the backup and recovery market. All available to Riverbed, just from that little start up making stuff go faster across the wide area network. The implications of speed and performance turned out to be much vaster than anyone dreamed back when we appeared on the scene in 2002.
You're doing well making money off data center consolidation, but how much longer do you think that will be a cash cow for you? It's 2 a.m. in a 24-hour day. Most of the estimates for the market are six to eight million branch offices worldwide that are connected by network links. Everyone in the [WAN acceleration] market together has about 250,000 or 300,000 of those in total, so there's a vast amount of market left to come.
It's still a young market. Riverbed is nine years old, but if you look at our life-to-date revenue, which is something like a billion and a half, a billion of that all was achieved in just the last three years, we've been on such steep ramp. The functionality and the economics are so attractive that we think the adoption rate ultimately will be much higher. We're not claiming 100%, but it's reasonable to think of 50 to 60% adoption rate for this over the next 10 years. That throws off a tremendous amount of revenue.
Again, these data center consolidations are a proxy for private cloud computing and then public cloud computing. The genie's out of the bottle on that. It's not going back. The ability to connect at the application layer across networks is going to be a permanent requirement of everyone. We've benefited by the fact that latency never goes away. Einstein was right; you can't exceed the speed of light. As long as people are geographically distant from their compute resources, they'll have to have our technology.
You talked data consolidation as being a proxy for private cloud, which we'd push back a little on. Having a consolidated data center doesn't necessarily mean that data center has the characteristics of a dynamic IT infrastructure. Either way, we get their business, whether they do it in the cloud format or in a very traditional corporate data center format. But yeah, I take your point. I'm not trying to push the cloud by the way.
Let's talk about that private cloud though. What's the next phase of growth for cloud and how does that affect your market? What people want is less and less at the edge because it's expensive to deploy it or you have multiple instances, it's less secure, you have to patch it, you have to back it up, you have to have system admin personnel and resources. It's difficult to keep trained people over long periods of time. Everything that can be pulled back from a branch office and kept at that central data center is what people want to do. People will have a single access point to the network from their data center, then backhaul internally off their branch offices to reduce the security concerns. You'll see more online data available to be backed up across networks instead of through tape backups.
So the ability to do disaster recovery, backup and archiving, never touching a tape, from big data center to backup data center across the WAN link will become more important, and that'll be an important market opportunity for us. Then, the density of these big data centers gives us an opportunity to put our biggest machines to work. Data center consolidation will continue, whether it's the old fashioned way or the new way. It's just what everybody wants to do. It's where the big ROI is.
Will you be able to offer any help with the stresses handheld devices put on corporate networks? We did come out two years ago with a reduced-footprint, software-only version of our product we call Steelhead Mobile that fits on laptops and turns the laptops of travelling knowledge workers into Steelheads, basically, so they can connect back to the Steelhead at the data center.
The impediment with PDAs and handhelds has been that you have to have a certain amount of storage capacity to do these optimizations. That storage capacity is now becoming available cheaply and readily for these devices, so we're looking at the market opportunity. We get a lot of requests from people who would love to see their PDA, their cell phone or mobile device accelerated, particularly when people are trying to view video and get heavy files across the network onto a PDA. We haven't announced anything there but it is an area of possibility both in terms of the way our product works and now the ability to get enough storage on one of these devices to make it feasible. I think that's something that we can look at in 2012, 2013.
Let's talk about Cisco again. How do you compete against a company that has such a wide product range and has really strong customer support? At the end of the day it's about the product. If you have the right product of the right quality and the right market window, and you don't stumble over yourself, you have a chance to have a good win.
The fact that Riverbed exists - it has the major market share in its domain up against someone who has the brand and distribution of Cisco - is just a testament to how much more superior our product must be. Because if it wasn't we'd have been dust a long time ago. But their expertise was never in layer seven. That's not a place they have any history of being in, a history of success in. They went against F5 (Networks) a long time ago and F5 beat them handily there and so have we. Nobody can do everything, be good in every domain area, forever. There are no supermen, and I think competing nine years with Cisco, I can tell you they are not supermen.
What's the biggest potential risk to your business, what's the biggest potential opportunity and how are you managing those two things? I frankly don't feel a huge risk right now. This is the third company I've done from startup, and there's a set of risks you face every time. It's financing risk - can you get the money to build? There's product risk - can you build it? There's market risk - if you build it, will anybody want it? Then there's execution risk. We're past the first three and really down to the last one. Execution risk is dealing with your competition - which we're very good at - not stumbling over your internal operations, and then finally keeping a fresh product line, and keeping an eye on the future horizon and trying to skate to where the puck is going to be rather than where it is now.
What's the likelihood that Riverbed gets acquired? We're a public company and so the possibility always exists. The truth is we've come this far without that. We believe we're very early in a huge opportunity in that our customers - who don't want us to be acquired - our employees - who don't want us to be acquired - our suppliers, our management and our board - none of them are interested in acquisition - are better served both in terms of the quality of the product and for the ultimate value of the stock if we remain an independent company that fulfills its destiny with the size of the market that we're going to take down over the next five years.
We're actually somewhat protected by Wall Street because Wall Street shares the vision of Riverbed and has awarded us a strong earnings multiple on our stock price. It's one of the top multiples. The type of people who would acquire you are the larger, slow growth companies, big technical companies. We're a high-growth, high-multiple company. They're all lower growth, low-multiple companies. It's actually dilutive for them to try to do an acquisition of us. So we have some protection on that front of things. We desire to be a standalone, independent company for a long time, and I think we're best served by that. And we're looking for a big, big win.
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