The next wave in cloud computing is the transformation of the network. We’ve seen the virtualization of compute. Storage has since followed and now we are seeing the full virtualization of the network.

Vyatta is at the leading edge of that transformation with its networking software for the virtualization layer. Today it is announcing a $12 million Series E round lead by HighBAR, the venture fund led by  Bill Joy, Andreas Bechtolsheim and Roy Thiele-Sardiña. Joy and Bechtolsheim co-founded Sun Microsystems. JP Morgan Chase and Citrix also participated. Vyatta has raised $45 million in its five years of existence.

Vyatta essentially comprises a virtual machine. It is deployed in the same way virtual applications get deployed. Vyatta integrates the firewall, virtual private network, intrusion prevention and routing all in the same virtual machine.  Vyatta targets enterprise customers and service providers.

Vyatta takes an open-source approach to networking. Kelly Herrell, CEO, said it allows enterprise customers and service providers to make more maleable networks. Herrell said this means that customers can build data centers according to demand as opposed to overbuilding an infrastructure in case there is a need for an increase.

It’s the ability to build out the network so efficiently that makes Vyatta  a potent competitor to a company like Cisco.

Can Cisco catch Vyatta?  That depends on how radical Cisco executives are willing to change the company’s business model.

Last year Herrell said in a comment thread that Vyatta averaged about 10,000 downloads per month of its software. Additioanlly, Herrell said in an interview yeserday that sales have doubled in the past year and should triple next year.

Herreell:

What’s happening is customers are simply absorbing the networking functionality into a virtualized server.

I think it would be awesome to see Cisco release IOS as a VM; Vyatta would enjoy the opportunity for a direct comparison. But to start off, they’d have to decide WHICH version of IOS to use given that it’s so radically fragmented among various product lines and SKUs…

But the bigger point is that to do that they would have to walk away from 70% gross margin on high-priced hardware… that’s a very difficult business model change for them (or anyone) to accommodate.

The network is next to be virtualized in the cloud.  Vyatta’s funding will go into sales and engineering to help continue adding to its momentum.

The data center is getting revamped. It will take more than a decade to build out a new virtualized infrastructure for service providers and enterprise customers. Vyatta should fit well into that growth trajectory as customers seek out ways to optimize their networks without paying for expensive hardware.