Two of Cisco's biggest competitors quietly kicked it in the teeth this week

While the tech world was stunned by Cisco's surprise $3.7 billion purchase of AppDynamics this week right before AppDynamics had its IPO, that's only part of the drama around Cisco this week.

The other part was how Cisco was quietly kicked in the teeth in its bread-and-butter network hardware market, by a damning report on sales of its flagship networking software product and news from rivals VMware and Facebook.

It centers around a technology that is upending the network industry, of which Cisco is the biggest player, known as software-defined networking (SDN). SDN takes much of the fancy features out of networking hardware products and puts them in software, which makes a network easier to manage. A company still needs network hardware but can use less of them and less expensive versions.

Cisco definitely has game in the SDN world. A few years ago Cisco sent its four star engineers out into a Cisco-funded startup called Insieme to build a product. It then paid $863 million to buy their startup.

In June those star engineers publicly quit Cisco.

Before they quit, they built Cisco's flagship product, the Nexus 9000 switch with optional SDN software called "Application Centric Infrastructure" (ACI).

The Nexus 9000 doesn't have to use ACI. In another mode, it can simply run as a traditional, very fast switch. And it has definitely been selling well in part because in early 2016 Cisco dropped prices for it.

When Cisco released quarterly earnings in November, the company said the family of products that use ACI grew 33% over the year-ago quarter and was now on an annualized revenue run rate of $3 billion. However, the price cuts are taking their toll. Overall switching revenue was down 7% from the year-ago quarter.

Reuters' Stephen Nellis reported this week that ACI software itself might not be doing killer well. Nellis says he saw documents that showed Cisco had $888 million in contracts for its Nexus 9000 switches, but only $89 million for ACI. That means that only roughly 10% of companies who bought the switch also bought the optional software, he reports. Cisco declined to comment on these figures.

As we previously reported, while customers like the Nexus 9000 switch itself, ACI has a reputation in the industry for being difficult to install and use.

And Business Insider has seen documents from early January indicating that Cisco own internal networking team may be having trouble using ACI for Cisco's own networks, with at least one person believing that Cisco should ditch the software and just using the Nexus 9000 switch without the software.

VMware moving in

But wait, there's more. This week execs at one of Cisco's biggest rivals in SDN, VMware, gleefully told analysts on Thursday that its SDN product, called NSX, has been crushing it.

NSX is on track to do $1 billion over the next year if sales continue at their current rate, VMware CEO Pat Gelsinger said on the quarterly conference call. He says the product now has more than 2,400 customers, double from over a year-ago and landed its first $10 million deal, too.

By any measure, that's a long way off from dethroning Cisco, which earned $3.7 billion in revenue from its switching products in its last quarter alone. But NSX's growth shows that software-based networks are catching even as Cisco's reputation in this area is lagging.

Facebook an even bigger threat

Plus, this week there was more news from the company putting the entire network industry to shame: Facebook

Facebook has been inventing all kinds of

never-been-done before network technology, both hardware and software, for its own internal use.

It then gives its designs and software away for free, as open source projects, through its Open Compute Project. OCP has earned cult-like status among hardware engineers worldwide and now at least one other huge internet company, LinkedIn, is following suit with its own network-building project.

Earlier this week Facebook announced it had a bunch of new vendors that will build commercial versions of its newest hardware switches or make software products to support it - all in direct competition with Cisco.

These companies include Big Switch Networks, an early startup in SDN; Barefoot Networks a network hardware startup by famed SDN pioneer and Stanford professor Nick McKeown; Ubuntu, a major Linux player; SnapRoute, a startup by Apple's former network team; and Cumulus Networks, a startup founded by a former Cisco engineer JR Rivers.

Rivers tells us that more companies are starting to look at the Facebook model of open source network hardware instead of automatically turning to Cisco or Cisco's traditional rivals Juniper and Arista.

"We're definitely seeing our software and open networking hardware gaining share in traditional enterprises. Among our 500+ customers are nearly a third of the Fortune 50. In those deals and others we are going head to head with the giants in the industry - Cisco, Juniper, Arista," he says.