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…

Sorry Oracle, Clouds are Built with CAPEX, Not Hyperbole

The traditional Oracle marketing playbook is to draw a bead on the leader in any category and try to talk themselves into a rivalry. In what has become an annual event, they’re trumpeting yet again that they’re serious about their IaaS offering (and also distracting from their latest earnings disappointment).

I’m sure we’ll hear Oracle loudly and brazenly proclaim itself the leader in cloud in every imaginable dimension next week at OpenWorld. An Oracle recruiter recently wrote with a straight face: “we’re the only company delivering the most compelling services at every layer of the cloud” (I struggled to find a single factual statement in the unsolicited message). As with candidate Trump, the fundamental question about Oracle is do they really believe their delusional statements or are they just completely uninhibited by any need for basis in fact?

While Oracle has purchased a bunch of SaaS revenue, they are nowhere in cloud infrastructure (and falling further and further behind). They’re not even listed in the most recent Gartner Cloud Infrastructure Magic Quadrant. This is likely catastrophic for Oracle as the immense gravitational pull of the cloud infrastructure layer is already eating into their database and application platform franchises. I expect they will end up a SaaS company that also aggressively milks its legacy on-premises business for as long as possible (customers will look back fondly at today’s modest prices for Oracle software maintenance).

To play in cloud infrastructure, especially to serve Oracle’s enterprise customer base, requires a vast infrastructure investment in a global footprint of datacenters and networks, which in turn requires many billions of dollars in capital expenditures. When we compare Oracle’s expenditures over the last twelve months with the companies they claim to be competing with, it is hard to discern any commitment to building out a competitive infrastructure:

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But it gets worse when you consider that Oracle is trying to catch up with companies that have invested tens of billions of dollars in their infrastructures for a decade or more. Shouldn’t Oracle need to outspend them if it wants to claim it is catching up? Now these numbers are not pure cloud infrastructure spend as the Amazon numbers include distribution centers and Google’s probably the odd space elevator, but they do demonstrate that the three big cloud players are operating at a fundamentally different level when it comes to infrastructure.

You’d think Oracle could at least point to rapidly increasing levels of infrastructure spend as a sign it is serious. But their year-to-year capex spending is actually down:

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Even if Oracle has a extremely compelling offering (a big if given how early they are on the cloud learning curve and their desire to repurpose/host their existing non-cloud technologies), they have no capacity to deliver it.

So Oracle, do us all a favor and limit your cloud pronouncements at OpenWorld to detailing your future capex budget. Spare us the rest of the marketing hyperbole, because as the last several years of Oracle’s cloud rhetoric has shown, you can’t build a cloud with words.

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.

Google’s Scalability Day

In May 1997, Microsoft held a big press event dubbed Scalability Day. Microsoft was a relatively new arrival to enterprise computing and was beset by criticism it wasn’t “enterprise ready”. The goal of the event was to once and for all refute those criticisms and get the industry to accept that Microsoft would be a major factor in the enterprise (because, of course, that was what the company wanted…).

Microsoft at the time was an extremely engineering-centric company, so it processed all the criticisms through a technical lens. Soft, cultural, customer, and go-to-market issues were discarded as they did not readily compute and the broader case against Microsoft’s enterprise maturity was distilled down to the concrete and measurable issue of scalability. The company assumed some benchmarks plus updated product roadmaps would clear up any remaining “misunderstandings” about Microsoft and the enterprise.

The event was a disaster and served to underscore that all the criticism was true. It was a technical response to non-technical issues and showed that the company didn’t even know what it didn’t know about serving enterprise customers. Internally, the event served as a painful wake-up call that helped the company realize that going after the enterprise was going to be a long slog and would require lots of hard and not very exciting work. It took over a decade of very concentrated focus and investment for Microsoft to really become a credible provider to the enterprise. Enterprise credibility is not a feature set that gets delivered in a single release, but is acquired over a long time through the experience and trust built up working with customers.

I couldn’t help but think about Scalability Day while watching Google’s #GCPNext event today. After telling us for months that this event would demonstrate a step function in their ability to compete for the enterprise, it was a technology fest oblivious to the elephant in the room: does Google have any interest in or actual focus on addressing all the boring and non-product issues required to level up and serve enterprise customers?

As is their norm, Google showed amazing technology and highlighted their unrivaled infrastructure. And they have as much as admitted they’ve been living in an Ivory Tower since Google Compute Platform was announced in 2012 and “need to talk to customers more often”. Recognizing you have a problem is always the first step, but beyond throwing the word “enterprise” and related platitudes around, they did little to convince us they are committed to traveling the long and painful road to really serving enterprise customers.

Some may wonder why Google needs to focus on the enterprise at all. Isn’t it just legacy? Couldn’t they just focus on startups and position themselves for the future and not worry about the messy past or present? Unfortunately not, as it is the shift of enterprise IT into the cloud that makes cloud so interesting. As the enterprise moves, you have a jackpot on the order of a trillion dollars of TAM. To play to win big in cloud, you have to serve the enterprise (and serve it well).

Google has many intangibles to overcome if it wants to be a serious enterprise player. They still seem to believe every potential customer wants to be like Google. The vast majority of companies aren’t Google, can’t ever be Google and don’t even want to be Google. SnapChat and Spotify are not exactly emblematic enterprises. Culturally, Google starts with even less experience with enterprise customers than Microsoft had at the time of Scalability Day and arguably an even more engineering-driven culture with even less appreciation for the cognitive foibles of the median human. Unlike a Microsoft that had building an enterprise business as its top priority, Google the advertising company and Alphabet the technology conglomerate have many other (and frankly way cooler) priorities. It isn’t clear that a mundane investment in say 5,000 enterprise sales and support people will get the nod over the moonshot de jour (Drones! Robots! Life Extension! Board Game Championships! Squirrel! Space Elevators!).

It is great that Google has woken up, now recognizes the magnitude of the commercial cloud opportunity and wants to chase it. But we’re still waiting to see signs Google understands what that entails and will actually make the vast commitment and investment in activities beyond mere technology required for success.

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.