Let the Cloud Wars Begin: Who Will Be the Winners?


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Which cloud products and services are gaining traction in the marketplace? Which companies are leading the charge and are poised to dominate their markets? Which cloud trends continue to be hyped with no real uptake in the market? As their mega-events — VMworld and Dreamforce — get underway this week, how are VMware and Salesforce.com positioned in the market today? What’s the outlook for incumbents like HP, Microsoft, Oracle, and SAP? These are some of the questions we set out to answer in the latest Sand Hill Group survey.

During July/August 2011, Sand Hill Group conducted a survey to gauge which cloud vendors and products are gaining traction in the market. The study utilized an online survey to gather executives’ current usage of cloud products and services. Fifty-two software CEOs and senior executives provided valuable insights by responding to the eight-question survey. This survey is a follow-up to Sand Hill’s Leaders in the Cloud 2011 study and the original groundbreaking research, Leaders in the Cloud 2010 study.

On the heels of the most recent turmoil in the stock market, the downgrading of the U.S. credit rating for the first time in history, and the scepter of another recession looming on the horizon, companies have become a lot more cautious about new investments. The mantra is cost reductions and squeezing more value from existing (lowered) budgets. In this environment, cloud leaders that have an established presence will be perceived as less risky.

Here are the six takeaways from the survey with my analysis and commentary.

#1 Public clouds rule in a heterogeneous cloud world

Thirty-four percent of the respondents are using public cloud today. The demographics of this survey are predominantly software companies with revenues less than $500 million, and that could explain why a relatively small percentage (20 percent) of the respondents is using private clouds. Larger enterprises and SaaS companies that have a bigger-scale operation typically lean towards building private clouds to consolidate their datacenter footprints, reduce costs, and improve resource utilization and operational efficiencies.

The most popular use cases for public clouds continue to be development/testing, storage and archiving, disaster recovery, Web-serving workloads, and high-performance computing. The public cloud increasingly is becoming a “cloud innovation sandbox” for companies to innovate with new products, new applications, and new markets. Public clouds are a great low-risk way to get started, test out the prototypes, deploy version 1.0 products, and incrementally scale the operations with the demands of the business.

Nearly a quarter (24 percent) of the respondents said they simultaneously use (or plan to use in the next 12 months) private, public, or external private clouds driven by unique business needs and the capabilities and limitations of each of these clouds.

However, the popular term “hybrid cloud” is a misnomer when it comes to describing these environments because the workloads used on these various clouds are isolated and not very integrated or customized. “Hybrid” implies a combination or integration of internal and external clouds to provide a service that is ultimately transparent to the end users. A vast majority of the companies have very little infrastructure in place when it comes to automated provisioning, orchestration, and security across internal and external clouds, particularly at the infrastructure layer.

#2 Amazon Web Services is the undisputed king of public clouds

In the public cloud services market, AWS is far and away the most-used cloud infrastructure service: 34 percent of the survey respondents use the public AWS service while 22 percent use its Virtual Private Cloud (VPC) services.

AWS continues to set a blinding pace of innovation with feature releases doubling each year coupled with continuous price drops. With its most recent feature releases, AWS addressed many enterprise concerns around such areas as:

No doubt, AWS will continue to relentlessly churn out more enterprise features and is well on its
way to fundamentally disrupt the enterprise IT landscape.

While Amazon is playing the self-service, virtualized, multi-tenant infrastructure cloud game, it’s not the only game in town. Rackspace is playing a different game that plays to its strengths, namely managed cloud-hosting services with “fanatical” support. Twenty-two percent of the respondents are using Rackspace for infrastructure cloud service today. Customers are using Rackspace’s multi-tenant cloud hosting mainly for test-and-development projects, deployment of SaaS applications, public-facing websites, and high-compute projects that need bursts of capacity not available in house.

Rackspace is also the force behind the OpenStack platform. Just one year old, the OpenStack movement closed out its first year with 80 participating companiesand 217 registered developers.

Microsoft and VMware hosting partners rounded out the next two most-used cloud infrastructure services. Although Microsoft and VMware are making good progress in building their hosting provider ecosystems, it turns out Microsoft and VMware are getting more traction in the private cloud space.

#3 VMware is a clear leader in private cloud deployments

Nearly 50 percent of the respondents selected VMware and its vCloud Director as their current choice for private cloud orchestration solutions.

Keep in mind that many companies still think of virtualization as a private cloud initiative. However, having virtualization and the associated tools is an important first step towards private clouds. While only 20 percent of the survey respondents (the majority of which are smaller companies) said they use private clouds, the movement today is clearly towards private clouds, where large enterprise customers are building self-service and agility capabilities to their existing datacenters. The survey results are representative of the larger companies also because VMware represents nearly 80 percent of virtualizable workloads; so the next step to a private cloud is a lot easier for existing customers, large and small.

VMware has made some significant strides with vSphere 5 and vCloud Director 1.5 to enable cloud-scale operations from virtualized resources, making it easier for companies to build their internal cloud operations.

Microsoft is trailing VMware but is also well positioned because of its customers’ investments in existing Windows Server and Hyper-V virtualization technologies. It’s a logical transition for many Microsoft shops to transition into the private cloud using Microsoft’s Windows Server 2008 R2 Hyper-V and the System Center.

It’s not surprising to see Red Hat in the next spot, considering the large number of Red Hat Enterprise Linux servers and virtualization solutions. Red Hat is also responding with its Cloudforms private cloud solutions.

While the technologies are maturing quickly, many companies still lack the internal processes, policies, and governance to fully exploit the benefits of a private cloud.

#4 PaaS market is not ready today, but the future is bright

Back in January, in my article, Five Cloud Trends for 2011 – and Beyond, I suggested that platform as a service has a long way to go:

“While the vendors are battling for PaaS supremacy, enterprise use of PaaS will be in its infancy. Customers are concerned about vendor lock-in, architectural re-design efforts, and the readiness of PaaS platforms to handle enterprise production applications. Furthermore, CIOs are waiting to see which platform will emerge as the dominant one before committing. For an ISV aiming to build, sell, and support a product, the time horizon is long—it might take up to 10 years to build a significant market share and revenue stream.”

Sand Hill’s latest survey results bear this out: a whopping 40 percent of the respondents stated that they don’t plan to use PaaS now or in the next 12 months. Companies already have access to a rich set of platforms on premise including integrated development environments, debugging tools, etc.; so they just don’t see the need for platforms in the cloud today. I have heard the same sentiment in many of my conversations with CIOs and leaders of ISVs considering PaaS.

Salesforce.com’s Force.com is the current PaaS leader, with Google AppEngine a distant third with 18 percent of the votes in our survey. Microsoft Azure is also a distant third with 18 percent of respondents using the services. Despite a relatively mature and full-featured cloud platform, massive-scale datacenters, and Hyper-V virtualization technology, Microsoft appears not to be gaining much market share with its PaaS offerings. I think this is more a factor of market maturity and education. End users continue to be confused about the value of platform as a service. The software industry needs to do a better job defining what it is and what it can be. PaaS is clearly in its very early stages of evolution and is relatively immature.

However, PaaS could become the disruptive force in the industry. Both infrastructure and applications are in danger of becoming commoditized. Therefore, the real value will flow to the platform services. Sand Hill Group’s last survey indicated that PaaS is a strong favorite to dominate in the next three years, with 85 percent of executives indicating that PaaS will generate the highest revenues:

“Once PaaS reaches mainstream adoption, however, it will be a sweet spot for many product and services vendors. Half of enterprise software comprises of custom software developed on software development platforms. PaaS is where almost half of the tools, custom development, and migration revenues will be generated. While the vendors are bullish about PaaS and a few of them will eventually become the main players in that space, it remains to be seen how customers will embrace PaaS for mission-critical production applications.”

#5 Dropbox ahead of Amazon S3 in cloud storage services

Cloud storage isn’t about to replace the storage network in the datacenter anytime soon, at least not for data-intensive, high-performance, low-response time, real-time applications and for mission-critical data.

Not all data access patterns are well suited to the cloud, particularly if there are large distances to cover. In such cases, bandwidth becomes not only a challenge but a financial consideration. One CIO joked: “The fastest way to send a terabyte of data from London to New York is on a jumbo jet.” Amazon even has a service where companies can ship their storage disks for import and export into their cloud. But we will see many use cases where companies and organizations of all sizes will augment their on-premise storage with cloud storage. The popular storage use cases tend to be infrequently accessed data scenarios including archiving, backup, DR, and offsite data protection.

Considering that Amazon’s storage arrays hold half a trillion objects, it’s interesting to note at least in this survey (the sample size may not be representative of the entire market) that Dropbox is ahead of Amazon S3, garnering 36 percent of respondents’ votes.

#6 Four most-adopted SaaS categories

The top four most-adopted SaaS categories and the most-mentioned SaaS vendors from the survey responses are as follows:

  • Salesforce automation (Salesforce, SugarCRM)
  • Marketing automation (Marketo, Eloqua, Hubspot)
  • Conferencing (Webex, GoToMeeting)
  • Enterprise Resource Management (Netsuite)

In Human Capital Management, the most-mentioned vendors were Taleo, SuccessFactors, and Workday; in accounting, it was NetSuite and Intuit Quicken.

The rapid proliferation of SaaS applications in the enterprise is also causing other issues including lack of governance controls, identity management challenges (see also my article, Securing Employee Access in a Mobile Cloud World), and integration headaches.

Who will rule the future software industry in the cloud?

Clearly, customers are gearing up to use cloud services, and the software vendors are innovating and expect to serve those customer needs in the next several years. Companies should take advantage of the cloud to find new avenues of growth to remain viable in the long term.

In a short period of a few years, Amazon, Rackspace, and Salesforce.com have all emerged as leaders taking firm command of the cloud market. Forty percent of the survey respondents believe that these emerging software leaders will rule the future software industry in the cloud.

These emerging leaders clearly have a distinct advantage to solidify their positions and increase their market share in the coming years.

On the other hand, established software leaders and mega-vendors SAP, Oracle, Microsoft, IBM and HP have an uphill task ahead of them. As these companies’ present-oriented core business is critical, their tendency is to favor consistency, stability, and evolutionary innovation to support their current business. In contrast, focusing on innovations that will drive the company’s future requires innovating in a radically different, revolutionary manner. See my article on how can these incumbents can create organizational structures that encourage innovation by leveraging the cloud for competitive advantage and at the same time manage their core business effectively. Their biggest challenge will be balancing the old and the new simultaneously.

Meanwhile, telcos like Verizon (bought Terremark and Cloudswitch), CenturyLink (bought Savvis), and NTT (bought OpSource) have been on an acquisition spree. Mergers and acquisitions are always touch-and-go affairs. Most acquisitions end up in failure due to cultural mismatches and differences in strategic approaches. However, if they manage it well, telcos have a massive advantage over emerging players. I think that enabling mobile applications and the corresponding ecosystem will be a key differentiator for telcos. Delivering clouds that focus on solving problems for mobile application developers increases the value of telco providers and drives more customers onto both their IP and 3G networks.

Once on-net, more revenue-generating opportunities will occur and telcos can deliver “smart pipes,” creating value for both consumers and providers of cloud applications. “Packets are packets” — in transit, it’s very difficult to offer differentiated services (and net neutrality becomes an issue). But if a provider is there when the traffic terminates, it can monetize the infrastructure, platform, app, or content as it likes. Put another way, the U.S. Postal Service won’t bring Netflix revenues until Netflix starts renting movies.

This is a very interesting time for the software industry. It is still early days, but I think the pace is accelerating and enterprise cloud computing is poised to go mainstream in a few years. The other major force in the industry is mobility. If the recent HP and Google announcements and the Apple-Samsung battles are any indication, we are moving into a post-PC era where the endpoints will increasingly be wireless mobile devices that will consume 24/7 anytime, anywhere cloud services.

Let the cloud wars begin!

Kamesh Pemmaraju
With more than 20 years of experience in the tech industry, Kamesh specializes in bringing cutting-edge technology products to market, security and quality consulting and operations. He has held global VP and Director of Engineering and Quality positions at Apani Networks, Solidworks, and Pegasystems. For the past two years, Kamesh has been researching, writing, and speaking about cloud computing.


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