Storms Ahead for Cloud Computing Start-Ups, Well-Entrenched Players?

Thin Margins, Change and Differentiation

I moderated a Cisco panel last week at Cisco Live! and it was readily apparent that enterprise cloud still required plenty of work from vendors and enterprise IT. No one was ready to endorse either a centralized or decentralized architecture (a move to the powerful intercloud); perhaps it’s because the network isn’t ready for infrastructure 2.0 demands.

When the cloud is ready for infrastructure 2.0 (or dynamic infrastructure), it will make all the difference.

The Cisco Live panel wasn’t that different from the three other panels I participated in since May. Not only is the enterprise cloud not ready, but it appears likely to experience multiple strategic waves of innovation that could materially change the returns on various architecture investments.

The network is the final frontier for cloud computing as Cisco’s Urquhart blogged last December. It is the point of maximum leverage, the core of the cloud. The faster the network is ready for cloud, the faster adoption of enterprise cloud and the intercloud.

Each panel was a collection of industry experts advising of the state of various cloud models, and various (x-aas) models now being called cloud. IT pros are thusly confused by definitions, requirements and capabilities and concerned about the gotchas (e.g. security/compliance, scalability/flexibility, lock-in, unplanned downtime, expense impacts).

If cloud computing is about to experience a rapid series of disruptions tied to network infrastructure, just how will the new players differentiate, grow and profit in a business of thin margins and unforgiving investment cycles? The challenge takes me back to a painful Webvan memory.

Remember the Webvan

The Internet home delivery sector that pinched many dotcom portfolios comes to mind as we watch the flock of cloud players forming to reinvent enterprise IT in the clouds. The promise was a new approach to the grocery business whereby you could order online and a van would deliver it to your door. Our household loved it. Yet the category, including Webvan, collapsed:

“Among the Internet's last players in the home-delivery sector, Webvan has seen the dot-com shakeout trim the ranks. Companies like ShopLink.com and Streamline.com have folded, and online convenience store Kozmo pulled the plug on its operations Wednesday.”

Greg Sandoval, CNET News, April 17, 2001

The most compelling cloud service provider story thus far is a recent blog by Benchmark’s Bill Gurley. Bill argues that Amazon’s (AMZN) model already leverages low margins and excellent customer support, two critical factors for cloud service success. If Bill is right then Amazon looks more like the traditional grocer than the upstart re-architecting a service business.

Google (GOOG) certainly is better capitalized than Webvan and has a strong core business. Yet is it strong enough to further develop its applications and services, profitably grow its customer base and differentiate itself from Microsoft (MSFT) and perhaps even Cisco (CSCO)?

Gartner’s Whit Andrews, offers sage advice to CNET readers for those who wanted to enter the online grocery business:

"Here's a radical thought: The future of the online grocer market belongs to the grocery stores," Andrews said. "They know the business, they can mix (sales) channels, and they can take their time."

Melanie Farmer and Greg Sandoval, CNET News, July 9, 2001

The rest of the cloud pack survivors will likely come from the pack of successful legacy infrastructure service providers (like Rackspace (RAX) and Savvis (SVVS)) who can make evolutionary investments or from those who serve specialized applications or market niches. Again, they’re the incumbents used to the rigors of tight margins and exemplary service.

More Surprises from Cisco?

Recently Cisco started talking up the idea of its own cloud app offerings. Suddenly the world of servers, computers, applications and infrastructure starts looking more like a rugby scrum than well-segmented complimentary markets.

This new scrum leaves Google cloud and the legendary Microsoft in awkward positions. Microsoft is caught between Google and the rise of netbooks and increasingly powerful alliances between VMware (VMW) and Cisco and IBM and Juniper (JNPR), etc. They have a massive IT footprint that yet appears to be under siege from almost every angle, from vendors and disruptive innovations.

Tech-savvy Google, on the other hand, risks triggering a transformation that benefits nimble, visionary incumbents versus the fresh crop of cloud service provider startups we’re seeing at the flood of new cloud events. Whether or not it can profit and innovate from the ground up (ala Webvan) remains to be seen. Like Microsoft it has incredible talent, resources and footprint. Like Microsoft it may end up competing with almost everyone.

The world of IT is breaking fresh ground these days, mostly due to the three horsemen: virtualization, cloud and netbooks. The times are more dynamic than ever, networks more strategic than ever. A handful of service providers look to be the ones who can prosper, along with a larger handful of infrastructure and software vendors. If the network evolves faster than IT can be re-architected from the outside, then the startups will be experiencing even stormier weather.

Disclosure: Long VMW, RAX, SVVS, AMZN.

I am a senior director at Infoblox.

Comments

[SaaSy in Se...:]

I'm more intrigues by smaller SaaS and cloud computing companies that are the ones innovating at a fast pace. No we can even see SaaS solutions popping up all over in the legal field, the most traditionally slow to adopt new technologies, with players like NetDocuments, Bill4Time, Advologix, and Clio.

The big dogs will continue to shape the industry, while the small players will direct where the industry goes.

Jul 07 11:59 AM

[ArunNewaskar:]

A sentence in the last paragraph in your article intrigued me : "A handful of service providers look to be the ones who can prosper, along with a larger handful of infrastructure and software vendors." Do you think that SAP would be one of the software vendor that you would include in those that would prosper in the new paradigm?

Jul 07 10:21 PM

[Gregory Ness:]

Saasy:

Thanks for your comments. Great point.

Arun:

I haven't been following SAP that closely. AT htis point I think Oracle is more interesting given recent acquisitions and Ellison's decade-old netbook vision.

Thx
Greg

Jul 10 05:41 PM

[Bill4Time:]

Thank you Sassy in Seattle for your comment! Indeed, it can be a challenge working with the legal industry that goes at its own pace with technology. But the key thing is making it easy for legal professionals to embrace it. How I see it, it goes both ways: we keep up with the speed of technology and technology development works to make it more user-friendly.
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Twitter: Bill4Time

Aug 20 07:30 PM