When Silicon Valley startup Nicira emerged from stealth mode earlier this year – wielding a new breed of computer network that exists only as software – you got the distinct feeling that VMware spent an awful lot of time kicking itself.

VMware is the king of the virtual server, a machine that exists only as software. The Palo Alto, California, company helps big businesses save both money and space by slotting many virtual machines onto a single physical server, and by some estimates, it controls as much as 80 percent of the market for these software machines. The obvious next step for the outfit is a big move into virtual networks – which simulate networking hardware in much the same way VMware simulates servers – but when Nicira appeared, VMware suddenly found itself years behind the competition.

It's no surprise then that VMware has agreed to pay $1.26 billion in cash and equity to acquire Nicira, less than six months after the startup officially announced its existence. The deal still requires the approval of regulators, but if all goes to plan, it will close sometime in the second half of the year.

Nicira's software is already used by such names as AT&T, eBay, Japanese telecom NTT, financial giant Fidelity, and Rackspace, the Texas-based outfit that offers a cloud service along the lines of Amazon Web Services, and the technology underlying the Nicira network controller has heavily influenced Google and perhaps other big name web outfits. As the world moves to the sort of massive cloud services offered by the likes of Google and Amazon, virtual networks – which make it far easier to build such services – become increasingly more important.

For months now, VMware has been pushing the idea of the "software-defined data center," where storage and networking are virtualized as well as servers, and now, this push makes all the more sense. "This is clearly the architecture for the cloud, and from our perspective, it's a multibillion-dollar opportunity – networking being central to all of it," VMware chief technology officer Steve Herrod tells Wired. "The acquisition of Nicira accelerates this vision, but it also complements a lot of work we've done so far on this overall mission."

Martin Casado, the chief technology officer of Nicira, says much the same thing, arguing that virtual networking is the perfect fit for the new breed of cloud services, which offer companies instant access to virtual computing infrastructure. "You're going to have these big data centers offering pools of computing resources, and those pools of resources are going to have heterogenous technologies underneath," he tells us. "You need an all-encompassing strategy that ties them all together."

Nicira calls itself the world's first network virtualization company. The outfit grew out of Casado's Stanford University Ph.D. thesis. He founded the company alongside Nick McKeown – his Stanford adviser and a former researcher at HP Labs and Cisco – and Scott Shenker – a University of California, Berkeley professor who had worked at the famed Xerox PARC research lab.

In starting the company, the trio sought to create a new breed of network that could be readily programmed in much the same way we program individual computers. Traditionally, when you bought a piece of networking hardware, such as a router or a switch, you couldn't really change the software that shipped with it, and this made it extremely difficult to set up a company network – or make changes once it was up and running.

Working alongside various outside researchers, Nicira built something called OpenFlow, a standard way of remotely managing network switches and routers. "Think of it as a general language or an instruction set that lets me write a control program for the network rather than having to rewrite all of code on each individual router," Shenker told us earlier this year. No less a name than Google soon built the protocol into its own networking hardware, and this is now used to manage traffic between Google's massive data centers. But Nicira took things a step further.

Casado and company built a new type of virtual networking switch that operates in tandem with the virtual servers supplied by the likes of VMware, and using the OpenFlow protocol, it built a network controller that could oversee the use of these virtual switches. In short, it let companies build extremely complex networks that exist only as software.

This made it easier to set up and configure a network, but it also meant that companies weren't dependent on traditional networking giants such as Cisco and Juniper. They could build these virtual networks atop commodity network hardware from any seller they chose. The hardware was reduced to merely forwarding packets to and fro. All the complex logic was moved to software.

Yes, there are other ways of building a virtual network. For years, companies have operated Virtual LANs, or VLANs, but these are extremely limited. But Nicira takes the notion of a virtual network to new heights.

"What Nicira has done is take the intelligence that sits inside switches and routers and moved that up into software so that the switches don’t need to know much," John Engates, the chief technology officer of Rackspace, which has been working with Nicira since 2009, told us earlier this year. "They’ve put the power in the hands of the cloud architect rather than the network architect."

VMware has long said that it could compete with Nicira. But the technology offered by the companies is quite different.

In order to build its virtual network controller, Nicira created a "tunneling protocol" called STT (Stateless Transport Tunneling), which lets users run one network protocol over a network that's built for another. STT lets users transport Ethernet data inside packets that use the Internet Protocol, or IP – the protocol that connects machines on the internet. VMware built its own tunneling protocol, known as VXLAN, but the company had yet to build a Nicira-like controller capable of managing a virtual networking with such fine-grained controls.

Last week, Allwyn Sequeira – the chief technology officier and vice president of security and networking at VMware – held a briefing with a handful of reporters to discuss "software-defined networking," the term that encompasses the sort of software offered by Nicira as well as other software tools that make it easier to configure computer networks. When we asked whether VMware intended to build a network controller akin to Nicira's, he did not answer directly, but he did acknowledge that VMware did not offer anything that exactly comparable to the software.

But after acquiring Nicira, it will. And as VMware welcomes new CEO Pat Gelsinger – who joins from parent company EMC in September – this is just the shot in the arm the company needs. In much the same way the world moved to virtual servers, it will eventually move to the sort of virtual networks offered by Nicira, and VMware just released itself from behind the eight ball, suddenly becoming the undisputed market leader.

Steve Herrod and Martin Casado tell us that Nicira will be integrated into Vmware's existing virtual networking team, and Casado says that the combined company will continue to back both the STT protocol and VXLAN. "We definitely want to support as many protocols as makes sense," he says. "There's a huge ecosystem popping up around VXLAN that we want to take advantage of."

In a nice bit of cosmic symmertry, VMware announced its deal on the same day that Cisco announced a 2 percent cut to its workforce. The age of Cisco is on the wane, giving way to the age of Nicira. And VMware.