Back in the late 90s, my favorite investment theme in the technology space was "internet plumbing." Granted, in retrospect, there was no reason to have any favorites; everything technology went up in the Greenspan sponsored bubble.... be it sock puppet web sites or optical networking stocks. As long as the cab driver said it was a good buy, it had to be a good buy!
We have another mini boom now, but the areas are far more selective: mobile internet and (once again) and internet plumbing (namely "the cloud"), as the demand for space and processing increases. Unfortunately, the U.S. has entered another "Rockefeller" era where oligopolists dominate almost every industry and there are far fewer investment choices than a decade-plus ago as most of the small- to medium-sized companies are snapped up long before they can be an actual threat to the status quo. Cisco (CSCO) buys almost any thing that moves in networking, EMC (EMC) and a small cadre of names do the same in storage, Oracle's (ORCL) Larry Ellison just finished purchase number 132,197 in business software, and so on and so forth. (Oops, in the time it took me to write this entry, Larry just bought company # 132,198.) I won't even get into Intel (INTC) which has a duopoly with a broken down competitor it keeps around simply so no one can accuse it of being a full monopoly.
Thankfully, the anti-trust forces in U.S. government have been defeated the past 10-15 years (ironically, the "socialist" Europeans seem to care more about the issue, just ask Microsoft (MSFT) about it) and competition has been dulled so that the few giants might dominate. In return for this environment of course come the mountains of campaign contributions from said companies (notice the same theme contributing to so many ills in the country).
But I digress!
Below we have a story from the WSJ on said plumbing issue. One of our old investments, Rackspace Hosting (RAX), is mentioned but, frankly, that has been a dog of a performer. [Jul 29, 2009: Colocation Stocks and Industry Overview] As I was saying in a roundabout way above, while there are still some ways to play such themes in "non giant" firms, finding pure plays is much more difficult than the old days when competition was still encouraged in Cramerica. (My comments in parenthesis.)
- Behind the recovery in business spending is a surge in purchases of the computers that form the backbone of the Internet, as companies scramble to meet growing demand for video and other Web-based services. The need to reach customers and employees over the Web is driving furious demand for server systems, the machines that power corporate computer rooms.
- Also, an increasing number of businesses are turning to outsourcing companies, which manage computer rooms for customers and in many cases are sharply stepping up purchases of servers to keep up with rising demand. "We've been buying thousands of computers this year," says Doug Erwin, chief executive of ThePlanet.com Internet Services Inc., a Houston-based company that runs data centers to offer computing services. ThePlanet says it now owns about 50,000 Dell Inc. servers.
- International Business Machines Corp., one of the biggest vendors of servers, said Tuesday that sales of industry-standard servers jumped 30% in the second quarter, after rising 36% in the first quarter. The buying activity became apparent last week, when Intel Corp. said quarterly revenue from its unit selling server chips rose 42% from a year earlier, while shipments driven by Internet-related companies' purchases nearly tripled.
- Growth in Web traffic isn't a new phenomenon, but computer purchasing to keep up with demand is accelerating because of improving economic conditions and technology that makes purchases of new computers pay off more quickly.
- On Thursday, Internet giant Google Inc. (GOOG) reported $476 million in capital spending, including spending on servers and other hardware. That was more than triple the amount it spent a year earlier.
- Unlike Google, many companies are side-stepping the costs of building their own computer rooms, opting to place servers they buy in "co-location" centers that maintain machines and offer Internet connections. Rackspace Hosting Inc., a San Antonio, Texas, company that runs data centers, says it added 9,152 servers in 2009, plus about 3,000 more in the first quarter of this year. Savvis Inc., (SVVS) a competitor based in Town and Country, Mo., says it has purchased more than 80% more servers over the last 12 months.
- "All I see all day is trucks coming up to our loading docks dropping off servers," says George Slessman, chief executive of i/o Data Centers LLC, a Phoenix-based company. He says the number of customers that have installed servers in its computer rooms has risen from 140 at the beginning of 2009 to nearly 400 now.
- The market research firm IDC puts spending on cloud-computing, a term that includes delivering computing capacity over the Internet, at $16.5 billion in 2009, and projects spending in the field will increase 27% a year through 2014—with the number of servers deployed in cloud applications expected to triple to 1.35 million over that period.
- Forrest Norrod, Dell's vice president and general manager of server platforms, says the company has seen "triple-digit increases" in its cloud-related business year over year. "The cloud side is growing faster than the rest" of the server market, Mr. Norrod says.
- There are several reasons. Companies keep stepping up the use of the Web to reach customers and adding features like video streams that require more computing power and faster network connections. Such operations generate huge volumes of data, which have forced companies to buy more-powerful servers to help analyze the information.
- Meanwhile, companies that stocked up on servers over the past decade have struggled to find space, electrical power and labor to keep them running. Technology suppliers like Intel and rival Advanced Micro Devices Inc. have reacted by designing chips that offer lower power consumption as well as greater performance. They argue that switching to new servers with such chips can save enough on power and labor costs to pay for upgrades in a few months.
- ....pricing for some server vendors is on the rise; the average price of Xeon-based servers sold by Hewlett-Packard Co. (HPQ), for example, rose nearly 12% to $3,993 from the second quarter of 2009 to the first quarter of 2010.
- Just how long the server-buying boom will last is unclear, amid economic jitters and the fact that cloud companies tend to buy servers in advance signing up customers. "It's the build-it-and-they-will-come model," says Bryan Doerr, chief technology officer of Savvis. But companies pursuing cloud computing say demand is so strong that they aren't worried about adding too much capacity. "This is a major tectonic movement," says Manuel D. Medina, chief executive of Terremark Worldwide Inc., which says its cloud business has been growing 30% sequentially each quarter. "There's zero chance of a bubble." (Errr, hate to see those sorts of quotes in any story.)
As a great financial infotainer
once said says every day, "there is always a bull market somewhere."
Disclosure: No positions