Storm clouds on the horizon for vendors

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Every analyst firm is predicting massive increases in sales for hardware and software “stuff” going into so-called “private clouds”:

  • IDC predicts server revenues driven by the private-cloud market will grow from $2.6bn to $5.7bn in 2014;
  • IDC also analysed that total private cloud revenues will grow by 61.6% to $11.8b in 2014;
  • EMC has raised it’s outlook on expected private could revenue (as as HP and Oracle and IBM).

So with all this optimism what gives with Barron’s headline “A Private Party” – Big companies are quickly adopting new computer networks known as “private clouds.” That may mean trouble for major tech suppliers?

Question: If companies are buying more private clouds – that is in layman’s terms buying more of the same stuff to load up their data centres – then how can vendors be on the losing side? (It stands to reason, although it is not common logic, that the losers are the customers. The vendors are going to suck $12 billion out of customers, and that’s just on hardware, and in return the customers essentially get business as usual.)

Great question, and it turns out the answer is that companies are converting to “private cloud” so fast that they are becoming more and more confident to take the next step to the real cloud.

It’s that next step which is the Cloud Shift, and where real business benefits can start to accumulate. “Private cloud” is just gaining better productivity from your owned IT resources by using some of the technologies from the real cloud. It’s more of the same and business as usual for customers, but a gold mine for salespeople selling “stuff” and that was the hope for the next 4 or 5 years.

It’s an easy sell. A CEO hears about cost savings in moving to the cloud and calls up his IT chief. The IT chief, fully armed and briefed by the vendors who want to sell their products, slides into the chair, nods wisely about the potential savings and better use of capital, and then throws out the usual FUD about security etc. The CEO reflects on these risks to his bonus, and then during that pregnant pause the IT chief throws a lifeline into the ring – but we can get all those benefits if we built a cloud ourselves!

Viola! Everyone wins, on the surface at least, and the lastest round of gear is readied to be shipped into the data centre along with the upgrades to air conditioning, energy equipment, physical security, power supplies, and all those other things which add nothing to your competitive offer.

But the reality is that the customer’s business has lost. And the vendors know that they have a limited window to exploit the opportunity to extract money from the customer’s shareholders. What the Barron’s report shows is that this window is closing much faster then we expected (at least in the US).

It’s a good account. The key point being that the shift to “private” clouds, is going so well that big companies may be ready for the next phase of cloud computing years sooner than either Wall Street or Silicon Valley expected”.

In other words, corporate customers gradually will be cutting back on big-ticket items and redirecting smaller amounts of money to computer-services providers.

That’s tectonic news! Not only because sales will drop because of the massive efficiencies of the real cloud providers, but because:

[public cloud providers are] not willing to pay premium prices for branded hardware. A well-known example of this is Google, who bypasses traditional vendors and specifies and procures its servers directly from Asian contract manufacturers. Other large-scale datacenter operators are starting to pursue a similar strategy. Vendors like Dell and HP have responded by offering stripped-down servers designed to customer requirements. The problem for these vendors is that the selling prices and profit margins on these systems is lower than traditional models, as noted by a comment to the article.

That’s one huge aspect, and the other is the fundamental one that massive cloud operators are enormously more efficient at managing and allocating resources than 99.9% of the of the world’s IT shops. The big impact will be on the capital spending portion of the in-house IT spend, which some Wall St analysts are now predicting to decline significantly in a relatively short time frame. That must send a shiver up the spine of the likes of EMC for example.

Barron’s says that for “Cisco, Oracle and HP to get in the game, it will probably require some key acquisitions… As their customers turn to the cloud, these fierce competitors will be fighting over a shrinking enterprise pie, increasingly selling their servers, storage and networking gear to what’s expected to be just a handful of major cloud-service providers”.

From an investor’s viewpoint the real winner might just be Microsoft. Other public cloud providers such as Google and Amazon are trading on high multiples due to the success and growth prospects of their other lines of business. In contrast, Microsoft’s price has been depressed, yet is has the best on-premise to cloud offers in the market and is poised for rapid growth in cloud services.

What’s really going to happen to the others? Well it’s not likely that HP nor Oracle are about to disappear, but it is likely that there will be major industry disruptions and new players emerging to claim their share of the public cloud of the future. The winners will actually be those businesses that best get their head around the Cloud Shift and cease investing in internal infrastructure that is not related to achieving that shift to the cloud.

Tammy Bruce said of Jesse James – last married to Sandra Bullock – “you can take the boy out of the ghetto but not the ghetto out of the boy”.  In a similar vein you can take the computing out of cloud computing but not cloud computing out of the cloud. The Cloud Shift hinges on that realization, and thankfully it’s progressing well.

Do you see an acceleration of the transition through “private cloud” to real cloud?

How do you think the hardware and software product vendors will respond?

Which new entrant into public cloud do you think will cause the biggest industry disruption?

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