Controversy over Cloud Adoption and Economics

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The Economist came out with an excellent special in its Oct 25 edition entitled ‘A Survey of Corporate IT’.  A series of articles explore the future of cloud computing.

The public’s excitement though around cloud computing overrates what is happening and under-estimates the dramatic impact that internal and external clouds will have in the medium term.

Hopes too high on pace of adoption

Our own research with customers indicates that businesses are slow to adopt the public cloud (outside of SaaS of course).  Top concerns are data protection (security, privacy) and lock-in to one cloud provider (lack of standards).  Early enterprise adopters are those with spiky traffic (e.g., media and entertainment) where the cloud provides low baseline cost with infinite scalability.

Our survey also indicates that enterprises are building private internal ‘clouds’ right now which are enabled through virtualization (see prior post just below).

We have heard repeatedly that joining these with external clouds is a few years out, though we are encourged that it’s on VMWare’s roadmap.

Profound impact on IT industry not well understood

Mark Stahlman of Gartner is quoted in the article that “hardware always wins when new demand for computing is uncovered.”  While we agree that lower cost and complexity will drive new applications for computing, we see significant disruption to the IT industry as we know it once cloud computing gathers pace:

  1. Server and storage vendors will face lower margins and a period of lower growth.  Customers move from ‘just in case’ forward buying to a ‘just in time’ capacity on tap model, which is a roadblock to unit growth.  Moreover, concentration of buying power in the hands of a handful of big clouds is a negative for margins, witness the recent Amazon – EMC deal.  We are not confident that the extra demand which Stahlman sees will compensate for that fairly tangible downside
  2. Cloud technologies in the enterprise, growing out of virtualization and service-oriented management, promise at least an order of magnitude greater administrative productivity.  Today, one IT administrator typically manages 20-30 physical servers.  By contrast, these emerging private clouds can manage far more sophisticated and scalable application services without growing staff.  At the extreme, public clouds like Microsoft’s and Google’s leverage one administrator across several thousand servers.
  3. Cloud computing will not provide material profit upside for the providers of large clouds anytime soon (e.g., Microsoft, Google, Amazon.  Rackspace is the only pure-play in the group.)  Cloud provision will be a commodity business except for niche clouds, e.g., ‘high security’ for regulated industries or government customers where you need to prove or restrict the physical location of the data
  4. While Windows may appear to be consigned to the history books today, Microsoft will attempt to change that with its announcements at the Professional Developer Conference next week.  We expect them to create a new set of tightly integrated online services that resemble Tim O’Reilly’s much talked about Internet Operating System.  It is likely to deliver not only dramatically higher administrative productivity for their internal operations, but dramatically higher developer productivity than any of the competing cloud platforms.  Microsoft shouldn’t be counted out yet.
Here’s a view of one of the seven Economist articles, contrasting our view with those of others on the topic.  I encourage our readers to check out the full special report at newstands or online (subscribers only).
the-economist-a-survey-of-corporate-it-economics-of-the-cloud-article

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