As we close another year full of IT changes, there are more signs that enterprise adoption of public cloud services will…wait for it…soar in 2015. As I write in this column, big enterprise IT vendors used to charging 6- and 7-figures for hardware and 20% or more of that per year for ongoing support could be in for quite a shock. The current cloud enthusiasm could just the collective industry euphoria after the annual AWS re:Invent hype machine, but I doubt it; the cloud has gone mainstream. Enterprise IT’s understanding, acceptance and trust of the cloud reached a milestone this year, making the transition from FUD fixation to steely scrutinization of ROI.
Yet, what’s good for IT may turn out disastrous for big IT; i.e. old tech in Wall Street speak. What started as an annoyance primarily of interest to developers and startups has evolved into a serious disruption to their business models that is already starting to take significant chunks out of their top and bottom lines as companies move applications and even entire data centers to the cloud en masse. But it’s about to get worse. Big, established tech vendors are likely to face growing a tsunami of financial pain as the once hardly noticeable undersea earthquake of cloud acquiescence turns into a tidal wave as customers replace hardware and data centers with cloud instances and services.
I rundown the latest cloud market projections in the column projecting double-digit increases in IT cloud spending. However even the consensus rates of 20-30% annual growth may be too low if enterprises start moving entire data centers to Amazon or Azure. Think that’s not happening? Read on. But first, more about that vendor pain.
HP’s Fourth Quarter: A Study in Cloud Disruption
Look no further than HP’s just-released Q4 earnings to see the cloud’s potential to wreak widespread damage. The company’s enterprise group, which sells servers, storage and network equipment, saw revenue decline 4% year-over-year. But HP’s enterprise software group, which has only a fledgling cloud offering and does most of its business through IT outsourcing contracts, did even worse, dropping 7% year-year. Worse yet for HP, along with fellow travelers like IBM, Oracle and Cisco, even if it manages to grow services revenue through a more robust cloud offering, the gains still won’t replace the profits from lost hardware business since cloud services operate on thin margins. HP’s enterprise systems group operates at almost 15% margins; services, just under 7%. But services are a broad category that includes high-margin activities like consulting and deployment projects and given the high CapEx of hyper scale cloud data centers, it’s possible, if not likely that IaaS margins are even lower. In other words, HP needs to replace every dollar of lost hardware revenue with over two dollars of services to generate the same profit.
The reason the cloud does so much damage to the HP’s of the world isn’t just that hyper scale services like AWS, Azure and Google use hardware so efficiently, it’s that they increasingly bypass the middleman for servers, switches and storage shelves, dealing directly with Asian manufacturers. Cloud services design data centers, networks and virtual infrastructure much differently than enterprise IT; for example, see this Facebook post for details on its latest network design built for massive scale, redundancy and automation and thus ideally suited for cheap, commodity switches and servers. Cloud services see little or no value added by traditional big iron vendors. Why pay a 50% (or more) tax for features, support or gold-plated reliability when you won’t use and don’t need them?
Today’s Fork-Lift Data Center Upgrade: Straight to AWS
A recent conversation with 2nd Watch, a major AWS system integrator revealed that business is booming. 2nd Watch specializes in getting enterprise applications and infrastructure onto AWS, doing things like systems integration, management and monitoring by wielding cloud expertise that most companies could only dream of. The column goes into details about the company’s growth and finances, but what I found most interesting is what Aden calls lift and shift projects, i.e. wholesale migrations of entire data centers, now make up half of the company’s business. He says 2nd Watch has already decommissioned 30 data centers that typically hold between 200 and 600 servers and based on the interest expressed and leads generated at re:Invent, he’s planning to migrate between 15-30,000 servers next year.
What should be particularly scary for incumbent IT vendors is that just as they have made peace with the cloud through hybridization, advocating hybrid cloud designs that link virtualized corporate data centers with public cloud services, a small but growing segment of IT organizations are bypassing the private cloud piece altogether by going straight to AWS. Indeed, as I wrote earlier this fall, NetApp made hybrid cloud the centerpiece of its annual customer event. But NetApp isn’t alone, talk to any large IT vendor — Cisco, EMC, HP, VMware, pick your favorite — and they all say hybrid is the enterprise cloud paradigm of the future. It well may be, as I believe many (most?) companies aren’t in a position, either technologically, organizationally or even emotionally, to move their digital assets lock, stock and barrel to AWS or any other public cloud service. But it’s clearly too soon to anoint hybrid cloud as the de facto standard enterprise IT architecture for the next generation.
I will be watching closely to see if 2015 is the year the floodgates open and enterprises flock to the cloud in unprecedented numbers. Aden certainly thinks so, “This is happening so rapidly, traditional vendors probably don’t understand how it will affect them in 2015.” If he’s right, 2014’s growth problems at HP and company will serve as little more than a preview of the red ink to come.