The Cloud is Not Flat

I am late to updating the geographic view of Gartner’s Cloud Infrastructure as a Service Magic Quadrant. Here is the update for 2017 (see 2016, 2015):

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Commentary:

1\ The Seattle region (aka the Leaders quadrant) is unchanged. This supermassive region may turn into a black hole, warp the space-time continuum, and consume most of the world’s $2.5 trillion in IT spending. A hat tip to Seattle companies CenturyLink and Skytap who presumably by virtue of breathing the local air also make the magic quadrant, albeit in inner Nichelandia.

2\ The biggest change this year is the introduction of the Lesser Seattle region (and only truly old school Seattleites will fully appreciate that label), which captures companies that may physically do their cloud work in Seattle, but are not wholly of Seattle or the cloud.

Previously we have included Google in the Seattle region, but the company’s cloud efforts have undergone a major transition. What had been a largely unsupervised outpost in Seattle that couldn’t help but marinate in all things cloud has become “strategic” and returned to the corporate yoke in Mountain View. This shift in center of gravity and management accretion has resulted in key personnel departures and left Google Cloud as perhaps the company’s number six or seven priority in the fight for corporate attention and resources.

Joining Google as an inaugural member of the Lesser Seattle region is Oracle, who have been busily hiring the most mercenary and/or aggrieved of AWS and Azure employees to staff their latest attempt to do cloud (I regret I have lost count of what attempt number this is). They are at least enthusiastic about it, to quote one delusional Oracle recruiter: “We’re the only company delivering the most compelling services at every layer of the cloud.”

3\ Denizens of Nichelandia

Alibaba’s Alicloud makes its MQ debut sited on the finest property in all of Nichelandia. It will be very interesting to see if they can get customer traction beyond China.

Gartner seems to have decided not to fight the battle this year with IBM about their position on the MQ (IBM last year delayed the MQ release by over two months with massive executive escalations, because at this stage they’re pretty much down to browbeating analysts, exploiting tax loopholes, and hyping perpetual motion machine Watson). Instead, Gartner finessed the issue by optimistically positioning them in eastern Nichelandia based on a product that doesn’t actually exist while highlighting their actual cloud offering is a clown show perhaps less than you might expect from a company that proclaims with Watson-esque bravado that it is “the enterprise cloud leader”:

The current offering is SoftLayer infrastructure, not NGI (Next Generation Infrastructure). Other than an early 2015 introduction of new storage options, SoftLayer’s feature set has not improved significantly since the IBM acquisition in mid-2013; it is SMB-centric, hosting-oriented and missing many cloud IaaS capabilities required by midmarket and enterprise customers. The details of the future NGI-based cloud IaaS offerings have not been announced. IBM has, throughout its history in the cloud IaaS business, repeatedly encountered engineering challenges that have negatively impacted its time to market. It has discontinued a previous attempt at a new cloud IaaS offering, an OpenStack-based infrastructure that was offered via the Bluemix portal in a 2016 beta. Customers must thus absorb the risk of an uncertain roadmap. This uncertainty also impacts partners, and therefore the potential ecosystem.

The IBM Cloud experience is currently disjointed. Some compute capabilities, such as the IBM Bluemix Container Service and OpenWhisk, reside in Bluemix, but Bluemix is hosted in just three SoftLayer data centers, and is thus not local to most SoftLayer infrastructure. Some SoftLayer infrastructure can be provisioned through the Bluemix portal, but this is not currently an integrated IaaS+PaaS offering, because Bluemix and SoftLayer do not share a single self-service portal and catalog with a consistent CLI and API; do not provide customers with a single integrated low-latency network context; and do not offer a unified security context that allows the customer self-service visibility and control across the entire environment.

Finally, even in Nichelandia, self-proclaimed technology powerhouses Los Angeles and New York City are inexplicably unrepresented. Instead they will pay rent to the big cloud providers who will also pluck their tenants’ juiciest morsels as platform vendors inevitably do (and Amazon will probably even pluck less juicy morsels like the putting-stuff-in-a-box-and-shipping-it “technology” companies so popular in these ecosystems).

Follow the CAPEX: Cloud Table Stakes

The capital expenditures (CAPEX) going into the cloud are Sagan-esque, with billions upon billions being spent on sprawling complexes of interconnected datacenters scattered across the planet. The hyper-scale public cloud operators (Amazon Web Services, Google, Microsoft) operate BFGCs (big, uh, freakin’ global computers) at immense industrial scale, with townships of well-ventilated warehouses that collectively hold millions of servers, connected by their own transoceanic cables.

Just to give a feel, here is a Microsoft datacenter complex in the eastern United States:

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It seems pretty impressive until you see the expansion under way, which dwarfs the original complex (in the distance at the top of the following picture) and will result in a facility a mile long:

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Beyond being mind-blowing to people like myself who come from the traditionally asset-light-to-the-point-of-no-assets-beyond-a-couple-laptops software business, the vast sums being spent to move dirt, pour concrete, bend metal, and sling electrons also help us handicap the race for the trillion dollar cloud “jackpot”.

CAPEX is not sufficient to win the cloud, but it is surely necessary. Not only is massive CAPEX outlay a prerequisite to offer cloud services globally at scale, but also a strong indicator of on-going success. Customer adoption and utilization necessitate further CAPEX spending.

And there are significant economies of scale operating at hyper-scale. You get efficiencies of operation, specify your own highly-optimized and cost-reduced servers and network equipment, get exclusivity on the latest CPUs (and probably soon will just design your own) and increasingly run a private global fiber network so you don’t have to pay telco retail (where there is no Moore’s Law). It is an unprecedented level of vertical integration.

And these accumulated CAPEX expenditures, given their sheer scale and the time required to translate balance sheet cash into a global footprint of fully operational and interconnected datacenters, constitute a significant competitive moat. This cumulative investment is a proxy for the size of those moats.

This post examines when the hyper-scale players had their “cloud inflection point”, i.e. when they began to devote CAPEX to their cloud, as well as the magnitudes of their cumulative and on-going CAPEX investment. From this analysis we get a sense of just how big a check new entrants will have to write if they want to play this game seriously.

Unhelpfully for our task, the cloud players don’t break out their cloud-specific CAPEX. It requires some work, speculation and reading tedious financial documents to glimpse the portion dedicated to cloud as opposed to other investments. Every company at this scale makes non-trivial investments on mundane things like office buildings and other facilities. But each also has CAPEX unique to their businesses. Amazon spends big on warehouses and the robots scurrying around inside. Google has (or at least had) investments in self-driving cars, a veritable air force of flying objects (balloons, drones, satellites), retail fiber networks and one still hopes the odd space elevator that all require some degree of CAPEX. All three companies build hardware products for which they may invest in manufacturing tooling which their outsourced manufacturing partners then operate.

Our analysis begins in 2001, as this is the first year for which we have Google CAPEX numbers (a whopping $13 million). We start with the investment section of the cash flow statements in their publicly reported financials. For Amazon and Microsoft we combine the Plant and Equipment line on the cash flow statement with their separately, contentiously and somewhat ambiguously reported capital leases (equipment that is financed and is paid for over time instead of up front, which maps very well to servers that have a limited useful life and are generating revenue over that time, plus we live in a zero interest rate world so why not). While bean counters and finance wonks can argue about the accounting impact of these leases, in real terms they constitute even more CAPEX. Including the capital leases makes the CAPEX numbers significantly higher. In 2016, Amazon did $5.7 billion in capital leases on top of $6.7 billion in CAPEX. We find an extra almost $1.1 billion in CAPEX for Microsoft in 2016 when we check their couch cushions for capital leases. Google does not appear to be using capital leases to fund their infrastructure. The Microsoft numbers have also been mapped from their July to June fiscal year to the calendar year, which the other two companies use as their fiscal year, for a true annual comparison.

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All three companies show roughly similar trajectories, with annual CAPEX spending in 2016 between $10 and $12 billion. There is some variation from trend around the financial crisis, with Google pulling back sharply in 2009, Microsoft in 2010 and Amazon going parabolic out of the crisis.

The magnitude of these expenditures is even more impressive when compared to some of both the biggest companies on the planet and the biggest spenders on CAPEX. It is stunning that Microsoft now outspends Intel on CAPEX.

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When we look at cumulative spend since 2001 through 2016, the curves are also similar. Google has spent $58 billion on CAPEX since their founding, while over the same time period Microsoft has spent over $48 billion, and Amazon almost $45 billion (though it is the most backloaded):

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When we normalize against revenue, things are choppier:

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Google is the biggest relative spender, though fluctuating dramatically from 4% in the aftermath of the financial crisis to as much as 18%, averaging 12% over the entire period.

The Microsoft numbers may be the most interesting as they illustrate the transition from an asset-light software company into one with a global cloud footprint, going from under 4% to 12% of revenue spent on CAPEX today. I’m also told these numbers understate the increase as the cloud build-out began while Microsoft was in the midst of a big office building spree, meaning the typical CAPEX for a pure software business is even lower (hmm, Oracle might be interesting to look at in this regard…).

Next we’ll drill down on each company.

Google

Google pioneered the cloud computing model to support their search and ad business, so their cloud inflection point is basically coincident with the company’s inception. It is only much more recently that they have begun to try to dumb down and expose a tiny fraction of their infrastructure externally as a public cloud.

Given this data cover almost the entire lifespan of the company, it also includes things like office space for over 70,000 employees (with slides a de rigueur if extraordinary facilities expenditure).

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Google’s cloud infrastructure supports search, YouTube and a billion some odd Android devices, amongst other things. Google Search is the biggest application in the world, entailing trillions of annual queries against the many copies of the entire Web they store (which they size at a modest 60 trillion URLs). The ad business relentlessly tracks every click by billions of users. YouTube, which Google bought in 2006, serves up millions of hours of video daily and no doubt has required totally insane CDN and network investments, contributing to its continuing lack of profitability. Google Cloud Platform is basically a rounding error compared to these other applications, but nevertheless gets to leverage the underlying infrastructure.

Google’s extracurricular “Other Bets”, aka Google “X-cess”, also consume CAPEX. Google started to break out the CAPEX associated with “Other Bets” in 2014. Despite the sheer amount of metal involved in many of these activities, the CAPEX involved is actually a smaller percentage of the overall spend than might have been expected (and this is probably bad news for hopes of a grand societal bargain wherein we accept the all-surveilling eye of Google tracking our every move in exchange for a space elevator). However, CAPEX for “Other Bets” has grown rapidly from $501 million in 2014 to $1.39 billion in 2016 (over 13% of total CAPEX). It will be interesting to see what effect jettisoning various satellite and drone programs as well as approaching “put-up-or-shut-up” time for self-driving cars will have on this spend going forward.

It isn’t crazy to think Google may have spent upwards of $50 billion on their infrastructure over the lifetime of the company. No small part of that represents multiple generations of servers and exabytes of disks that have been replaced due to obsolescence and failure, as opposed to purely incremental capacity (so with a three year useful life, Google could have deployed six generations of hardware for some of its capacity). Broadly, Google’s public cloud efforts get to piggyback on these efforts, although they are also making some incremental investments just for Google Cloud Platform. They have had to deviate from their historic and highly centralized “just do it our way” attitude and are investing in smaller datacenters located in more geographies to address data sovereignty demands.

While Google faces a variety of challenges in its public cloud efforts, it is safe to say they are much more likely to involve fickle humans, product-market overshoot, and finding the right software face to put on their infrastructure as opposed to infrastructure itself.

Microsoft

Microsoft’s cloud inflection point is pretty easy to discern. We see two big accelerations in Microsoft’s CAPEX spending. One starts with an perhaps overly optimistic build-out for search in 2005-2009 that got the company cloud expertise and a global infrastructure footprint. The second begins in 2012 and continues to accelerate through 2016, driven presumably by Azure and Office 365. The bulk of that growth is for cloud CAPEX though some may also support the Surface and Xbox hardware businesses. It is notable that Nokia came and went with little or no discernable impact on Microsoft’s CAPEX spend (presumably Nokia had outsourced their manufacturing by that point).

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Microsoft also has a search business. While they have only a fraction of Google’s queries, it still requires ginormous global infrastructure. Microsoft has spent $43 billion in CAPEX since 2006. Taking a stab and saying 80% of that is for cloud infrastructure suggests a cumulative cloud CAPEX investments of on the order of $30 billion (similarly summing total CAPEX above 2% of revenue yields similar number).

Amazon

As with all things Amazon, there is frenetic activity on multiple fronts. CAPEX spending barely registers before 2009 and in that year we see the knee of the proverbial hockey stick, with CAPEX growing 40-fold since. This CAPEX explosion includes AWS infrastructure (and Amazon isn’t leveraging an existing search-scale infrastructure, so this spend is driven by AWS), a massive expansion of e-commerce distribution centers to get ever closer to ever more of the buying public, and an office building frenzy that has turned Seattle into the “crane capital of America”.

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Figuring out how much of this is for AWS is difficult. Amazon, not renowned for its transparency, actually provides a little more breakdown on its CAPEX spend than the other companies, breaking out both capital and build-to-suit leases (hat tip to The Next Platform for charting):

Unfortunately, like Amazon’s infamous charts with no units on the vertical axis, this additional information isn’t particularly useful. We can speculate that buildings (datacenters, distribution centers, office buildings, and/or biospheres) are constructed on build-to-suit leases and the computing stuff that goes into the AWS datacenters is purchased via capital leases. Amazon does say about their capital leases: “the increase reflecting investments in support of continued business growth primarily due to investments in technology infrastructure for AWS, which investments we expect to continue over time.” Amazon has spent about $11.4 billion via capital leases since 2009.

The challenge is teasing apart what has gone into AWS vs. the traditional Amazon e-commerce business (that AWS now subsidizes). We know AWS has seen explosive growth since its debut in 2006, but so too has the the rest of Amazon which has grown revenue by $115 billion (not including AWS) in the same period. And they have grown their distribution footprint at least five-fold in that time:

Amazon's warehouse footprint has grown rapidly in recent years. (Chart Via Institute for Local Self Reliance)

These warehouses are occupied by at least 30,000 Minion-esque Kiva robots. Even if these robots were funded by capital leases, at a cost on the order of $1000 per robot, they’re not likely to be material.

My guess is AWS’ infrastructure spend is on the order of $15 billion between servers and buildings. One area where AWS is behind both Google and Microsoft is owning their own network, which means they are paying a lot more to move bits. Presumably they are planning to rectify this and will add it to their CAPEX spending. We can expect Amazon’s CAPEX investment to continue to grow based on the three vectors above, plus they are opening a new vector as they expand their distribution business with 40 planned air freighters plus long haul and delivery truck fleets (FWIW, FedEx spends $5 billion a year on CAPEX, 10% of revenue). And maybe the Prime Air drones will be more than a PR stunt.

Cloud Table Stakes

This reading-between-the-lines analysis suggests the hyper-scale clouds collective CAPEX spend on their infrastructure could be approaching $100 billion ($50B for Google, $30B for Microsoft, $15B for Amazon). Given the cloud jackpot is a trillion plus dollar annual opportunity, that doesn’t seem crazy at all.

Are there are other estimates or disclosures of CAPEX spend on cloud infrastructure out there? Am I missing anything (e.g. I ignored amortization because I’m interested in the gross spend, not accounting values)?

In a future post, we’ll play follow the CAPEX for two companies that keep telling us they are leaders in the cloud contest: IBM and Oracle. The CAPEX will tell us if they have real clouds or are just clowns…

Tweetstorm Digest: August 4, 2016

Some @charlesfitz reactions to the long-delayed Gartner Infrastructure as a Service Magic Quadrant plus bonus material:

1/ Gartner IaaS Magic Quadrant is finally out – probably the most important assessment of the cloud market.

2/ I yield to no one in making fun of Gartner but they do a really good job on this one.

3\ MQ about what you’d expect – AWS followed by Azure in the Leaders quadrant. Microsoft looks like has closed the execution gap a little.

4\ Google now the only company in the Visionaries quadrant but have lost a little ground on visionary axis.

5\ IBM, CenturyLink and VMware have dropped out of the Visionaries quadrant. Gap between leaders and everyone else getting bigger.

6\ Overall the field drops from 15 last year to 10 (and bet even smaller next year)

7\ Biggest takeaway is MQ is deathblow for IBM and Oracle and their claims to be significant cloud vendors, much less somehow leaders.

8\ Oracle not listed at all, in spite of all their oratory about being in the IaaS business. Game over for them. Shades of HP a year ago.

9/ IBM sees huge decline in both vision and ability to execute. Relegated to the also-ran quadrant. Game over.

10\ Needless to say, no customer base cares more about Gartner’s perspective than IBM’s customer base. Live by the sword, die by the sword.

11\ The MQ is over two months late and rumor is the delay is due to IBM escalating, begging, cajoling, threatening, etc. Gartner.

12\ More later after I read the whole report.

Bonus:

See an updated timelapse of how the MQ has evolved over the past six years.

And an update of our previous geographic analysis of the MQ:

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Cloud City now claims the Leader and Visionary quadrants as well as the most forward looking part of the Niche quadrant. Must confess to being a little surprised that much-touted “technology” powerhouses Los Angeles and New York City are not represented here Winking smile.

Understanding Cloud Numbers

Tis earnings season, so cloud revenue and growth claims will fly fast and furious. The inability to compare vendors on an apples-to-apples basis can be frustrating. But by focusing on companies’ primary activities, and excluding their immaterial businesses, the sources of revenue for both the major hyperscale cloud providers and the remaining wannabes are easy to understand:

The diagram above illustrates the five distinct sources of cloud revenue: Infrastructure-as-a-Service (IaaS), Platform-as-a-Service (PaaS), Software-as-a-Service (SaaS), Hot Air about Services (HaaS) and Snapchat.

A Dispatch from Cloud City – State of the Union 2016

With a venerable tradition dating back over a year, the annual Platformonomics state of the cloud union strives to combine the exhilaration of the running of the bulls at Pamplona with the hyperbole of Oracle’s annual proclamation that this year they really are serious about cloud. Or at least to land a few jokes along the way.

In summary, we’ve reached the end of the beginning for cloud computing.

There is no longer much question whether public cloud will be the foundation for IT going forward; instead we quibble about timing and implementation details. The largest enterprises as well as the most sophisticated workloads are wafting up into the cloud. The leaders are distancing themselves from the pack while the dreams of cloud wannabes are deflating like footballs around Tom Brady. Legacy vendors’ worlds are imploding. Private cloud proponents are harder and harder to find: except for those few diehards hunkered down in their closet-sized data centers with several years supply of canned goods and tape backup cartridges, previous private cloud proselytizers now talk earnestly about hybrid clouds in hopes of retaining a few on-premises crumbs in the process. And even the very largest corporations are realizing they can’t keep up with the hyperscale public clouds.

I contend there were two critical inflection points for cloud this past year:

Customers tipped, specifically the enterprises who spend vast sums on IT. Most CIOs have shifted from resistance or tire kicking to active embrace, and are doing so increasingly for business reasons as opposed to technical. Sticking your head in the sand is no longer a viable option. The objections have been knocked down one after another. Security turned out to be powerful a reason to go to the cloud, not shun it. The enterprise tipping point is critical because it dramatically expands the size of the cloud opportunity. We can now realistically talk about a trillion dollars of existing IT spend in play, aka the “cloud jackpot”.

Amazon’s transparency, both financial and cultural. The breaking out of AWS financials in April forever banished the platitudes “your margin is my opportunity” and “the race to the bottom”. AWS proved to be a very large, very profitable and very rapidly growing business. Even bulls were surprised to learn not only that the business is profitable, but much more profitable than anyone imagined. The initial operating margins for AWS were almost identical to those of financial engineering savant IBM. Amazon also had some unsolicited transparency inflicted upon it by the New York Times, who took a deep look at the company’s culture.

“I CAN SEE THE CLOUD FROM MY HOUSE”

My thesis for the last two years has materialized: it is a two horse race located here in Cloud City (Seattle) with AWS in the lead and Microsoft the only other vendor who can still see them. Besides being extremely convenient for me, this means your cloud landlord is probably in Seattle. Please don’t be late with the rent check. The geographic version of Gartner’s Infrastructure-as-a-Service Magic Quadrant (™ ® © All rights reserved. p = 0.796513. Trough of disillusionment. Etc.) underscores that the cloud world is not flat.

It is so obvious that even the denizens of Wall Street have noticed, with one brokerage firm hyping it as a ‘206 area code street battle for the cloud’. (Never mind that Microsoft is in a different area code. I’m sure they’re using an area code map from The New Yorker where everything west of the Hudson blurs together, just as all those buy and sell recommendations from east of the Hudson blur together).

Where is Google in this race? In some ways they have the fastest horse and are certainly the third hyperscale player in terms of their global infrastructure footprint. But Google’s horse is sitting some other pasture, contemplating space elevators, indifferent to the idea they need to actually show up for the race to win it.

I have a fundamental question for each of the hyperscale players pertaining to whether and how market shares will shift as this market continues to grow, plus some thoughts on the rest of the rapidly diminishing field.

AMAZON WEB SERVICES

Amazon remains the cloud trailblazer, maintaining their frenetic pace of innovation while also making necessary investments to become a mainstream enterprise provider. The question for AWS is can they adapt and evolve their culture in order to extend their current leadership into dominant share of that trillion dollar cloud jackpot? (Note that cloud will also bring significant revenue compression, aka customer savings.) This is very much an issue of “what got you here won’t get you to the next level.”

Beyond all the substantive if boring investments required to sell to and support enterprise customers, there are a bunch of cultural issues AWS must navigate. Some stem from their position inside Amazon and some are unique to AWS. The broader Amazon culture issues that the New York Times highlighted also impact AWS’s ability to realize its potential, not least their ability to hire and retain talent. AWS is a very different business from the rest of Amazon and one sitting on the pole position of a trillion dollar opportunity. It requires a different culture than the core Amazon MVP trial balloon autocannon and one that doesn’t resort to zero sum political hackery to assuage its ego.

Public cloud providers are among the most important dependencies any company will take. Successful vendors in this position understand the nature of this relationship with their customers and actively work to build customer trust and mutual co-dependence. Not surprisingly, enterprise vendors are very transparent with their customers. Yet this is at odds with the secretive Amazon culture that seems incapable of putting numbers on the y-axis of charts.

Even more, successful enterprise vendors mitigate customer fears of lock-in. AWS has not figured this out and is struggling with lock-in fears, as evidenced by what can only be seen as disappointing adoption of higher level services like the EC2 Container Service and Lambda, despite their technical appeal. Business as usual will not overcome these fears, and not addressing them means a future where customers only feel comfortable consuming base compute and storage. Being cognizant about your own power is challenging, as big technology companies’ internal mindset invariably lags their growth. They go on thinking they’re the plucky little startup long after they’ve become Godzilla.

I used to think Amazon should spin off AWS so it could maniacally focus on retaining or expanding their current share of the cloud jackpot, and build the distinct culture necessary to fully realize that opportunity (and avoid the distractions from the rest of Amazon). After seeing the financials, I believe AWS should spin the rest of the Amazon e-commerce business.

MICROSOFT

Microsoft has executed extremely well to emerge as the only credible challenger to AWS, leveraging both their platform heritage plus the fortune of a massive and overly-optimistic infrastructure build-out for search. Further, they’re the only vendor from a previous generation to make the leap to hyperscale. Unlike many of their peers, Microsoft’s survival in the cloud era is not in doubt.

But as the enterprise market for cloud really begins to open, the question for Microsoft is whether they can bring their enterprise capabilities to bear in a way that both reels in AWS and allows them to materially expand their share of the cloud jackpot. It is not clear Microsoft fully appreciates those enterprise capabilities, in relative or absolute terms. It is a long road to become a credible enterprise vendor, and having lived through that process when I was at Microsoft, it brings great cognitive dissonance to realize they are by far the best of the hyperscale bunch (and it is even weirder to see the company getting good marks for “Playing well with others” these days). Microsoft also has an advantage as a full spectrum provider across IaaS, PaaS and SaaS, to which AWS is just starting to react. But more of the same is not going to materially increase Microsoft’s market share position. Further success starts with a strong dose of self-awareness.

GOOGLE

The big question for Google is when will they realize cloud is more than just an engineering problem? If they want to build a real business where customers take a enormous dependency on them, they are going to have to do some critically important but mundane things that don’t involve algorithms. Worse, it is likely to involve fickle humans. They must overcome their deep antipathy to both customer-facing operations and enterprises as customers.

Post Alphabet, where any previous inhibitions about pursuing new hobbies have evaporated, it is even harder to imagine the “capital allocators” choosing to invest in thousands of enterprise sales and support people given alternatives involving life extension and/or space elevators. After all, won’t the robotics division eventually solve any problem that today requires humans?

THE CULLING OF THE WANNABES

Last year we catalogued the delusions afflicting a long list of public cloud wannabes. This year we simply observe the epidemic of sobriety sweeping the vendor landscape (and the morning-after wreckage). HP managed to exit the public cloud business not just once but twice this year. Helion is Heli-off. Rackspace, still recovering from its OpenStack misadventure, is shifting its center of gravity from the data center to the call center. Both vCloud Air and Virtustream have disappeared into a miasma of highly leveraged financial engineering emanating from Austin. AT&T, CenturyLink and Verizon are all hoping no one remembers they once claimed to be public cloud providers (and probably will get away with it). Cisco, presumably, has filed a missing persons report for their InterCloud.

THE SUPERBOWL OF CLOUDWASHING

While the number of hallucinating vendors has plummeted, devotees of delusion should not despair. Despite all the departures, aggregate levels of industry delusion may be hitting new highs between the efforts of IBM and Oracle. These delusional dinosaurs are locked in a battle every bit as fierce as one between the hyperscale competitors, except they are vying for the World Championship of Cloudwashing™. Given cloud poses an existential threat to both companies, it is not surprising they are talking cloud. But their delusion manifests itself in the colossal gap between their rhetoric and their actual capabilities.

I have been arguing for almost three years that IBM is likely to be the cloud’s biggest scalp. Their best outcome is they’re just a much smaller company in the cloud era, not that they’re executing on that path. The stock is down a third since I started beating this drum and is currently exploring new five-year lows. They continue to confuse boutique hosting with hyperscale cloud, and have been reduced to asserting Watson will somehow be their cloud Hail Mary (at what point is it reasonable to expect Watson to progress beyond an endless PR campaign, never mind drive revenue material enough to bolster the ever-shrinking IBM topline?).

A year ago IBM had the cloudwashing title wrapped up but Larry “Lazarus” Ellison is not one to back away from a challenge. Hypercompetitive: yes. Hyperscale: not even remotely. The question for Oracle is do they really believe it when they assert they are the leaders in cloud (or even have a cloud as opposed to some SaaS apps?) or they believe that empty rhetoric is a legitimate substitute for millions of lines of code and billions of dollars of capex? It is embarrassing when your employees feel compelled to point out the discrepancy between announcements and action, and in particular recurring confusion around tenses (also a lesson here for press who happily write the “this time we’re serious AND we are already the clear leader” Oracle cloud story every year without reflecting upon their credibility or past proclamation performance).

But this speaks volumes about Oracle’s cloud:

For instance, when the team was struggling with Oracle’s central IT to get the server resources they needed, the team requisitioned a bunch of desktop computers from Oracle’s Seattle office and turned them into an OpenStack-powered private-cloud-development environment so they could continue their work in peace, right in the middle of the office floor.

IT involved? Check. Private cloud? Check. OpenStack? Inauspicious. Desktop computers under the desk? Are you f*%king kidding me?

To paraphrase William Goldman: “Follow the capex” with IBM and Oracle. We’ll see if they’re still pretending next year.

(CLOUD) BURSTS

Dell/EMC/VMware/WTF: the metal-bending M&A muttonheads have likely inflicted irreparable damage to VMware, the best asset in the so-called “federation”. Pivotal also risks being caught up in financial shenanigans perpetrated by those who neither understand nor appreciate software.

DevOps: if you’re buying DevOps tools, you’re doing it wrong.

Digital Ocean: needs to make its play as the dark horse window is closing.

Docker: despite all the political hijinks as competitors tried to box Docker in, Docker has become boring. That is good; the container infrastructure continues to mature. More exciting perhaps are new developer models emerging that are “native” to containers.

GitHub: the Craigslist of cloud?

HubSpot: this is not cloudy, but given the infrequency of my blogging, I will predict their CEO steps down in 2016 with p = .7. The board may follow. The level of transparency has not yet become “uncomfortable”. But it will.

Industry Foundations: after an ugly outbreak of industry foundations last year, we can only hope to be certified Foundation-free in 2016. As we have seen, this affliction is highly contagious. As with cockroaches, when you see one foundation, you will likely see more. So it is important to prevent potential foundation epidemics; the best protection is not letting companies that can’t write code get involved.

PaaS: still a zero billion dollar market though the data is suggesting I might finally have to stop using that line next year. Perhaps more importantly, containers have reinvigorated the endless ontological debate about what exactly constitutes a PaaS. Cloud Foundry is having some success selling to very large enterprises, but they seem to be selling hope more than product. The Fortune 500 is packed with companies grasping for anything that lets them believe they can become software companies.

OpenStack: like a poorly performing European football team, OpenStack has been relegated to a lower division. It is now a solution for telcos. As the saying goes, if at first you don’t succeed, you can still sell it to telcos. OpenStack is a great fit with the NFV misdirection, which gives telcos the infrastructure toys everyone else had a decade ago while leaving the networking crown jewels firmly in vendor hands.

(Free) Stock Tips: if wave one of the cloud disruption hit enterprise hardware, wave two is hitting enterprise software. VMware preemptively tubed its stock by letting itself be the funny business in the Dell-EMC deal, so it not clear how much more downside there is in VMW. Oracle’s stock has already started to roll over. But there is still time to short Red Hat who, despite being irrelevant to cloud, sports a multiple of over 75 yet will see a much smaller fraction of every dollar that shifts to the cloud. If you have a cloud infrastructure software company to sell, Red Hat is your first call.

Tweetstorm Digest: May 19, 2015

Lest you missed a bit of a @charlesfitz victory lap for Cloud City (Seattle) on Twitter:

1/ A geographic look at the Gartner Magic Quadrant for Cloud is revealing:

GeoMQ

2/ The Leader quadrant for cloud computing shall henceforth be known as the Seattle quadrant.

3/ Seattle has also annexed the best real estate in the visionaries quadrant.

4/ Yes, Google does their cloud infrastructure work in Seattle.

5/ The MQ has more companies from south of the Mason-Dixon line than from Silicon Valley.

6/ VMware (wedged in there like Oklahoma) is Silicon Valley’s champion, almost by default.

7/ The Cloud BS Brigade of Silicon Valley BigCos (Cisco, HP, Oracle) only appear in their own press releases.

Bonus: a fun timelapse of how this Magic Quadrant has evolved over the last five years.

AWS and the Bonfire of Amazon’s Vanities

The Bonfire of the Vanities

TL;DR – It is time for Amazon Web Services to get out of Amazon

A recent interview with Amazon Web Services’ chieftain Andy Jassy repeatedly touts the “trillion dollar opportunity” associated with the inexorable transition of enterprise IT to the cloud. Perhaps because his interlocutor was so busy inserting himself into the interview, Jassy isn’t actually quoted uttering the T-word (although he does manage to land “TAM”). But he certainly isn’t refuting the notion there are thirteen orders of magnitude associated with the Enterprise Cloud Jackpot (and I use Jackpot in a thoroughly non-Gibsonian way, though legacy vendors may see it apocalyptically). As the cloud computing leader today, AWS is in the pole position for this tectonic shift. The question is whether being part of Amazon going forward is on balance more help or hindrance to AWS winning their fair share of the Jackpot.

Amazon obviously was able to conceive, nurture and build a heretical idea into AWS today. It is inconceivable any traditional IT vendor could have done this and hard to imagine other candidates with comparable wherewithal and “willingness to be misunderstood”. But we’re past the point of being misunderstood. Pretty much everyone now accepts that vast chunks of IT are shifting to the cloud (with the notable exception, admittedly, of legions of enterprise IT people clinging to their servers in a desperate bid to preserve the status quo). Even the biggest technology dinosaurs now recognize that the incoming cloud meteor is a potential extinction event.

AWS continues to innovate and execute well. Their near and medium-term success is not in doubt. But being part of Amazon raises questions about their ability to fully capture the big prize. Can they achieve generational dominance a la IBM or Microsoft in their primes? Will they be one major player among several? Or does their early lead whither away? Being part of Amazon brings benefits, but also significant baggage, specifically difficulty concentrating, having sufficient cash to compete and adverse cultural factors.

Concentration

Big as it is in its own right, AWS is a relatively small part of Amazon and gets lumped into their glamorous “Other” segment, which did $5.6B in 2014 (about 6% of Amazon’s overall $89B in revenue). Notably, “Other” was the fastest growing segment at 42% vs. 20% for the company overall. The Amazon-branded credit card gets cited as another occupant of “Other”, but our grasp of the AWS business remains tenuous.

Beyond the trillion dollar Enterprise Cloud Jackpot, Amazon’s core e-commerce business still has tremendous upside. E-commerce in the US last year was over $300 billion and but only 6.5% of overall retail sales. Amazon takes an expansive view of the ecommerce business, investing in drone and local delivery, a broad line of consumer hardware for direct distribution of digital goods, a robot army and private label brands for everything from diapers to TV shows.

In contrast to Apple who says “no” by default, when confronted by new opportunities Amazon seemingly leaps up on the table and screams “Yes! Yes! Yes!” Their bonfire of initiatives has resulted in some notable and expensive misfires of late, including the disappearing Kindle Fire, the disastrous Fire Phone and the under-heralded Fire Diaper blowout And the jury is still out on Fire TV, the not-exactly-setting-the-world-on-fire Echo Fire, The Man on Fire in the High Castle, WorkMail Fire, and “hair on fire” one hour delivery amongst other efforts. And, for completeness, this is an AWS Fire.

It can be argued the company has poor impulse control, is fighting too many battles on too many fronts and must allocate cash, talent and attention across a very wide range. Amazon’s historical “willingness to be misunderstood” and success in defying past criticism (to which I hereby add my name to a long list) don’t do anything to suggest new restraint is imminent. This scattershot approach may make sense before product-market fit, but AWS is beyond that point. Many of these other activities are a distraction given AWS is chasing a plausibly trillion dollar market.

Cash

Cloud computing is not for the light of wallet, requiring many billions of dollars to build cavernous datacenters scattered around the planet, stuffed with millions of servers. GigaOm breaks down last year’s capex spending by the big players:

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Now these numbers aren’t pure apples to apples comparisons. Amazon’s capex also goes to erect even more cavernous e-commerce distribution centers with “more than 15,000 robots in 10 fulfillment centers across the U.S.” Google and Microsoft both spend big on search infrastructure, and Google’s numbers include YouTube, flotillas of automotive, sea-going, aerial and space-faring vehicles, and based on the sheer magnitude, maybe the odd space elevator.

For comparison (and in lieu of a much-delayed “So You Want to be a Cloud Wanna-be” post with etiquette and strategy tips for cloud also-rans), here are similar period capex numbers for some of the cloud wanna-bes and their growth (or lack thereof) over the preceding year as they try to play catch-up:

 

CAPEX (TTM)

Growth over 2013

HP

$956M

+4%

IBM

$3,779M

0%

Oracle

$727M

26%

Rackspace

$430M

-5%

VMware

$352M

2%

(These are the budgets from which bonsai datacenters are built).

Meanwhile, returning from Lilliput, Amazon has the shortest stack at the grown-up table, with $17.4 billion in liquid assets to Google’s $64.4 billion and Microsoft’s $90.2 billion. Google in particular intends to push Amazon to the wall financially, though it was Bill Gates who said, “Never get into a price war with someone who has more money than you.” Amazon has notably lost its prior enthusiasm for price cuts and obliquely grouses about networking costs where Google and Microsoft have a huge advantage in terms of facilities.

It has always been a bit of a mystery how Amazon could serve more cloud computing customers, spend less than Google or Microsoft and support aggressive build-outs of both datacenters and distribution centers. The assumption was search required significantly more infrastructure and/or Amazon was just somehow more efficient. But we’ve recently learned that Amazon has used capital leases to keep billions in capital spending off their cash flow statement. So their capital spending is closer to double what has been reported. This means their free cash flow, the metric they have relentlessly told investors is the key lens onto the company, is actually negative and declining in recent years (remember this: we’ll revisit it below when we talk about employee recruiting and retention).

It is an easy quip as a low margin retailer to say “your margin is my opportunity” but you still have to pay for your datacenters. Every dollar spent on half-baked consumer hardware (or worse, doubling down on a failed consumer hardware brand) or random TV shows, or giant distribution centers and bright yellow robots to support the core e-commerce business, is a dollar that isn’t going to AWS. And Amazon must continue to invest significantly in its core e-commerce business, whether defined narrowly or broadly.

Culture

It is an open secret, at least in Seattle and amongst top tier technology firms, that not many people enjoy working at Amazon. Many companies have come north to open offices (e.g. DropBox, Facebook, Palantir, Salesforce, Twitter) and usually say they are there to lure talent from Microsoft. Yet with the notable exception of recent SoCal immigrants Oculus and SpaceX who are on Microsoft’s side of the lake, most choose to locate their offices a stone’s throw from Amazon’s campus.

Amazon relies heavily on its stock for both recruiting and retention. They pay below market salaries, offer signing bonuses that pay out over the first two years and after that rely on stock to both carry the compensation load and overcome the drawbacks of the work environment. Independent of stock performance, you see a lot of Amazon resumes on the street as soon as the signing bonuses are paid out.

Amazon’s stock price obviously reflects perceptions of the company broadly. It has been run as a profitless machine yet been richly valued for most of its history. Skepticism has emerged over the last year or two about whether the company will ever get out of “investment mode” and focus on financial returns. Amazon turned in a strong Q4 including an unexpected profit (they have conditioned Wall Street well…) which popped the stock by over 25%, but it still trades below its all-time high even as the rest of the market hits record highs.

Amazon has guided investors to focus on its free cash flow as opposed to profits. Yet they felt the need to more explicitly call out the significant use of capital leases in their most recent earning call, which had heretofore been buried and largely ignored amongst the footnotes. The free cash flow picture looks very different, in both magnitude and trend, when these leases are considered:

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And note this debt is being incurred today at unprecedentedly low interest rates, a phenomenon that is unlikely to continue much longer.

AWS is growing fast and needs to continue to hire rapidly as it chases the Jackpot. Dependence on Amazon’s stock, and the company’s ability to sell Wall Street on anything-but-profit metrics, adds risk to their ability to recruit and retain. AWS also needs to build a culture that can meet enterprise customer expectations and that culture surely looks different than today’s Amazon.

For example, Amazon’s secrecy fetish and chronic inability to put numbers on the y-axis of charts is inconsistent with need to provide long-term roadmaps for customers contemplating taking enormous dependencies on AWS. The secretive culture alienates a whole range of useful hires for AWS. Further, Amazon the retailer gets confused about what it means to be a platform company. AWS has generally done a decent job walking this fine line (and platforms and their ecosystems are never static, which is a topic for another day) but a deft touch in nurturing the ecosystem is critical to AWS’s future success.

Set the Cloud Free

On balance, I think AWS would be better positioned to realize the opportunities in front of it as an independent company, away from the vanities and vicissitudes of Amazon.

A full spinout of AWS from Amazon or even a partial IPO a la VMware would establish a focused entity that can single-mindedly pursue the Jackpot, with its own culture and compensation model. Amazon can stake the new company and the transparency associated with being a pure play chasing a $1 trillion TAM should give it the opportunity to raise all the money it needs to compete, especially while growth is still in the mid double digits. More distance from Amazon would also help AWS land more customers. Many large retailers consider AWS verboten and as Amazon’s sprawl continues, that competitive dynamic could impact AWS’s ability to sell to media, consumer products and other industries.

A spinout of AWS may already be in progress. Amazon announced it will start disclosing AWS numbers this year, which could be a first step. These numbers will be scrutinized every which way and will be fascinating to see. We could learn that it is AWS’s capex specifically that is being capitalized and thus intended to be portable. Rumors also suggest AWS gets far less attention from the chief product designer and octopus taster at Amazon.

Will AWS still be part of Amazon in two years?