Why Google Compute Engine Is The Right Move

| About: Alphabet Inc. (GOOG)

Two weeks back at Google I/O, Google (NASDAQ:GOOG) announced the release of their infrastructure services offering called Google Compute Engine. This is a pretty interesting move from Google which is late in the infrastructure game compared to Amazon Web Services or, even, Microsoft Azure. The last two weeks were filled with posts from pundits and I didn't add to the cacophony then. But a post by Benjamin Black, who was part of the original AWS team and who co-founded Boundary, makes a very strong case for Google Compute Engine, arguing how it is on par with Amazon's (NASDAQ:AMZN) cloud offering and also making a strong case for Google's move.

The Google Cloud Platform, now synonymous with Google Compute Engine, is the biggest deal in IT since Amazon launched EC2 and will completely alter the cloud market in at least two fundamental ways:

  • We now have a utility market

  • We now have true competition

The first will cause an explosion in adoption, especially by enterprise customers. You want to build a 99.99%+ availability system on top of something that has 99.9% availability? Well, you better have more than one, and now you do. Here comes the hockey stick! The second will result in all the usual competition benefits of more aggressive innovation and better prices for customers.

Though my intention was to highlight this pretty good write-up on Google's IaaS offering, I thought I will also add why I am excited. Ok, why the heck are you excited about an infrastructure offering? Isn't it going backwards?

I have been bullish on PaaS being a future of Cloud Services for sometime now (otherwise I wouldn't have organized a conference focused exclusively on PaaS). But seeing Microsoft (NASDAQ:MSFT) and Google move down the stack from PaaS to IaaS, pundits were busy making arguments predicting doomsday scenarios for PaaS future including this minor FUD. I am still convinced that PaaS is the future of Cloud Services and I will do a post later on the FUD that is going around on the topic. However, I am still excited about Google's infrastructure play. Let me highlight why it is the case below:

  • Even if PaaS is the future of Cloud Services and Google wants to be a PaaS player, any inaction in the infrastructure space will let Amazon and Microsoft have competitive advantage whenever the world moves to PaaS. It is critical for Google's long term future that they put brakes on Amazon's infrastructure market share and Microsoft's attempts to take a slice there. When the world moves to PaaS, the dominant infrastructure services player will have a better chance of competing in the market than Google and, more importantly, the very idea of PaaS will be defined by that dominant player. (Please note that I am using the term PaaS here to denote application development platforms and not platform services in general). In this context, Google's move is important in the long term.

  • The future of application consumption is shifting from the consumption of monolithic applications to more of services. I have been pushing this transition and the need for iterating PaaS to meet these needs for some time now. In fact, if you want to really understand how this services based future might look, check out this opening keynote by Mike Hoskins, CTO of Pervasive Software. Mike did a great job highlighting where we are headed in the next 5-10 years. If you agree with this worldview, you will also agree that Google is well positioned to serve the needs of this data driven world and this move to infrastructure services is essential to compete in such a data driven world. Even Google's own offerings like Android phone, tablets, Google Glasses along with self driving cars and smart cities, will require a platform at scale which only Google can provide. If you take this long view, this infrastructure play can be seen as one of the pieces for this long-term strategy.

  • As a follow-up to the above two points, it should be noted that network latency and performance issues are going to push platforms to be around where data resides and it is absolutely critical for Google to ensure that the services that generate data today are on their infrastructure.

  • Even on the infrastructure side of the things, I have been pushing the idea of federated cloud ecosystem for a long time. Even though such a federated cloud infrastructure market will have many players, it will be dominated by a few big players. I am sure Google definitely wants its slice of this pie.

In short, Google Compute Engine is very much needed for the market and it will go a long way in ensuring that the market remains competitive and end-users are empowered by the resulting rapid innovation.

With Google Compute Engine launch, cloud market enters a new era...

It only took a year and a half but Google Compute Engine is now officially generally available.

Even though the service has been around in some form since the middle of 2012, this is a milestone for a couple of reasons.

One is that I'd expect more marketing from Google that could make more companies aware of the service. Among web businesses, Amazon Web Services is the first provider that comes to mind. But I imagine that soon enough more such companies will become aware of Google's service, ramping up the competitive environment.

We might also get some new competitive analysis of the service now that it's officially available. Some analyst firms only include generally available services in their reports and so have been omitting Google. I'd expect to see Google Compute Engine included in more comparisons of services going forward which will help potential customers make smart decisions.

But most important will be the impact on the overall market. Gartner's Lydia Leong laid it out nicely in a blog post this morning where she wrote: "AWS and Google will hopefully goad each other into one-upmanship, creating a virtuous cycle of introducing things that customers discover they love, thus creating user demand that pushes the market forward."

If that plays out, this is great news for users who are likely to see stepped up innovation and better pricing.

Leong also touches on another interesting issue: the creation of two camps of IaaS services.

On one side will be AWS and Google, with offerings that will be attractive to web startups without legacy gear. That will be partly because the services cater to those types of companies but also because neither AWS nor Google offer the kind of hand holding that enterprises want.

On the other side will be Microsoft's Azure plus the host of traditional vendors like HP (NYSE:HPQ) and IBM that are also now offering IaaS and targeting their long-time enterprise customers.

This division is probably a good thing for the service providers. It means if they choose, they can focus rather than try to be all things to all customers. It's going to be a huge market so there's no reason that the providers can't try to specialize and still do well.

That's also good news for customers, who could see better services that meet their needs, rather than a huge catalog of features, many of which they don't want.

Leong said it well when she wrote: "We're now moving into a second phase of this market, and things only get more interesting from here onwards."

Will Google Rain on Cloud Offerings?

nxVenture Capital's Troy Jensen and Múller Private Wealth Management Solutions David Bryce Múller III co-wrote an Investor's Memo this week regarding the latest entrant in low-cost public cloud offerings:

Google launched its Google Compute Engine, joining Amazon Web Services and Microsoft Azure as "hyperscale," low-cost, low-touch public cloud offerings.

While the nearly identical pricing of these offerings indicates commoditization, there is ample room for differentiated, targeted and high-touch cloud offerings as well. We see Rackspace Hosting (NYSE:RAX), for example, as justifying its slightly higher price on a bundled, higher touch, high-service offering and VMware (NYSE:VMW) focused on creating "hybrid cloud" clouds around existing VMware enterprise infrastructures.

We also expect Microsoft to leverage both its enterprise professional services and of course the entire Microsoft application stack from SQL Server database up through the .NET Development environment as well as enterprise applications.

Within enterprise-software offerings we rate VMWare at Outperform, and while we're Market Perform rated on Microsoft, we're bullish on the outlook for Azure. In the data-center space we rate Rackspace at Outperform. Amazon.com is rated at Strong Buy and Google at Outperform.

Google announced that its infrastructure-as-a-service (IaaS) Google Compute Engine (GCE) offering became generally available (GA). GCE joins a group of "hyperscale" public cloud providers including Amazon Web Services (AWS), Microsoft Windows Azure, and potentially Verizon Communications' (NYSE:VZ) Verizon Cloud in the IaaS market.

GCE's GA offering has several new features including: a) transparent maintenance windows which enable VMs to run while maintenance occurs; b) support for Red Hat (NYSE:RHT), [closely held] SUSE and other Linux distributors; c) auto restarts in the event of hardware failure. In addition, Google is reducing prices on standard instances by 10%, persistent disk storage by 60%, and will not charge for I/O. Current Google Cloud Platform customers include Snapchat, Cooladata and eVite [all closely held].

GCE fits in with a broader range of cloud services including the App Engine platform as service (PAAS), Cloud Storage, Cloud SQL database and other services.

Google's entrance into the IaaS market bolsters our thesis that the hyperscale players will dominate a large segment of the low-cost, self-service public cloud space: AWS, Azure, GCE, and potentially Verizon Cloud. That said we believe there is room for providers to target other segments, including Rackspace targeting higher touch, high service implementations leveraging its infrastructure expertise as well as its native capabilities at the management layer as an originator of the OpenStack project.

The pricing differential can narrow further if higher services level and data transfer are factored in, which are with RackSpace. In addition, users and developers indicate that comparing cloud platforms like Rackspace, AWS and Azure is very difficult from a cost perspective because of the wide differences in requirements for specific applications.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.