The Cloud Platform Game

by: Dana Blankenhorn

With Cisco (NASDAQ:CSCO) now predicting that cloud computing workloads will surpass those from enterprise stacks in the next two years, the cloud game is truly afoot.

Until now, that cloud battle has been theoretical, with public clouds from (NASDAQ:AMZN) and Google (NASDAQ:GOOG) dominating the market, and big customers just experimenting with cloud stacks. Now it's getting serious, with HP (NYSE:HPQ) and Dell (NASDAQ:DELL) both betting their futures on a future where companies place some workloads on public clouds and some on their own, private clouds.

The result, a "hybrid cloud," is supposed to have compatibility as its main feature, so the old PC players, along with big ISPs and telcos, are all joining together to push the open source OpenStack infrastructure, as an alternative to what Amazon and Google have to offer, claiming customers can get just that compatibility with open source.

But an infrastructure isn't a solution. For that you need applications, which have to be written, or rewritten, then mounted onto that infrastructure through some platform. A cloud platform, then, needs to support tools an enterprise is familiar with, and it's at the center of the current market turmoil.

Red Hat (NYSE:RHT) is offering OpenShift, which brings its existing Red Hat Enterprise Linux and JBOSS middleware tools to the cloud party in a seamless way. VMware (NYSE:VMW) has been offering Cloud Foundry, a set of tools start-ups like AppFog and ActiveState have been using to supply platforms for HP, Dell and others.

What VMware is calling the "Pivotal Initiative," under former VMware CEO Paul Maritz, is an effort to centralize and productize this move toward production grade cloud tools. There is growing concern about whether Cloud Foundry itself is open or closed, whether Maritz's charter is to cooperate with the start-ups or by opposing them, end them.

Thus, Dell's recent commitment to an "open source" cloud strategy becomes important. Talkin Cloud calls it a move away from VMware. Dell is pushing a reference platform based on its own hardware, notes ServerWatch, so the question becomes, how open is that?

So far, we haven't mentioned Microsoft (NASDAQ:MSFT), which has a cloud called Azure and is the leader in producing the tools enterprises use most. This may be the company's last chance for relevance, its last chance to prove it can deal with open source in a non-antagonistic way. It has to find a way to deal with OpenStack and build on top of it, to build on top of Google and as well as Azure, and it has to convince enterprises of this. If it can do that, it will be a factor. If it can't, we'll know by the end of the year.

How open the cloud will be is the question going forward. Enterprises are going to make big decisions in 2013 about their cloud strategies, decisions that will have a big impact on how the market develops. What they're trying to avoid, more than anything else, is vendor lock-in, which of course, is what all the vendors are actually trying to sell.

My view is that these customers want to see bonafide commitments to end lock-in, not just rhetoric. Since so many are communicating within OpenStack, whose chief committer remains Rackspace (NYSE:RAX), which isn't just a sponsor but also a client, my guess is they're likely to follow the Rackspace lead. That's just my view as an analyst, backed by the fact that RAX and RHT have earnings multiples north of 50, while Dell and HP are fighting to approach 10.

But investors should look closely at the next earnings releases from all these companies to see if some compression in multiples isn't warranted. If RAX or RHT falter at all on the top line, the way may be clear to abandon ship and switch to the enterprise guys. If they continue on their current growth path, buy more.

Disclosure: I am long GOOG, RHT, MSFT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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