Tweetstorm Digest: January 26, 2015

Lest you missed an @charlesfitz Twitter excepting of a (paradigmatically paywalled) Goldman Sachs report “The Hardware Download” dated January 20, 2015:

1/ Missed a good Goldman Sachs report on cloud last week with focus on “the cloud’s impact on IBM”. Good CIO/VAR survey data.

2/ VAR survey “How has migration of your customer’s workloads to the public cloud impacted spending on infrastructure companies?”

3/ Positive responses minus negative responses: SAP +44, MSFT +40, RHT +35, VMW +6, CTXS -36, ORCL -50, IBM -74 (!)

4/ CIO survey shows $RAX a bigger player in the race for the enterprise public cloud jackpot than $GOOG

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5/ “many investors are focused on IBM’s ability to counter many of these secular pressures with its investments in cloud platforms”

6/ “the early read from our team’s surveys suggest much work is still needed in this respect”

7/ GS coyly concludes: “IBM’s infrastructure software sales could be seeing more pressure than peers with migration to public cloud.”

A Dispatch from Cloud City – 2014 Retrospective

IMG_6035

In an effort to make this an annual event, here is a plumbing-palooza stream of cloud consciousness. Last year’s broad themes remain intact though my Rackspace call didn’t pan out.

Cloud Infrastructure

  • Public cloud has won. Thanks Target. Thanks Sony. Thanks Kim Jung Un. If your public cloud gets hacked, you get to blame someone else and will have company in your misery. Public cloud will absorb vast quantities of enterprise on-premises IT spending and thus be an enormous pot of gold.
  • Docker – everyone likes Docker. Even people who don’t.
  • There are two and a half big league public cloud providers vying in what John Connors has dubbed the (WTO-free) “Battle in Seattle” (Google does a lot of cloud work in Seattle too):

Amazon remains the leader with incredible execution and is relentlessly pushing up the stack. They are on the same “enterprise journey” that Microsoft went through beginning in the late ‘90s (with some of the same people in fact), in an effort to get IT comfortable paying them vast sums of money. Amazon seems to have abandoned price leadership as they find themselves in a price war against competitors who have vastly more money than they do. Frittering away valuable cash on hardware misfires and TV shows is a growing opportunity cost. If Amazon’s stock price doesn’t recover, expect their employee retention problems to grow and discussions of spinning out AWS to get more serious. But they’re not going to yield their leadership in 2015.

What I said last year about Microsoft still works:

“Azure has become the clear challenger to AWS. The much maligned Mr. Ballmer is not getting credit for Microsoft’s embrace and execution on cloud. Unlike most of its cohorts rooted (mired?) in previous generations of technology, Microsoft is well on its way to making the cloud transition.”

Microsoft is executing like old school, taillight-chasing Microsoft with the added advantage of glass-half-full perceptions about the company for the first time in nearly two decades under the regime. The open source embrace (sans extend) is real after enactment of the strategy tax cut. If you’re still having cognitive trouble with this, the best analogy I can offer is Microsoft has become Intel and just wants to soak up all those datacenter compute cycles (a pithy analogy for what Intel has become eludes me, but it could be a fun exercise).

Google I don’t give a full big league integer to because cloud is still basically a hobby for them. In technology terms, they are in many respects the leader, but they’re just not serious about the non-technology investments they need to make to really compete for that broad enterprise transition to the cloud (they too need to embark on an “enterprise journey” as opposed to hoping those enterprises beat a path to their door). The company seems more interested in n+2 or n+3 opportunities (self-driving cars! life extension! an air force!) than mundane n+1 opportunities like cloud (which gets interesting if you believe we’re seeing weakness in Google’s search cash geyser for first time – will the further out new businesses spin up soon enough to offset slowing and/or deteriorating desktop advertising?). Presumably all those robotics investments are so they won’t have to hire humans to do enterprise sales and support. Google is the Crazy Eddie of cloud (note Eddie didn’t have much of an enterprise business and but did have a fraud problem. But far be it for me to suggest that the ad business is anything but squeaky clean). They will continue to push prices down which is a great way to push Amazon to the wall. But Google needs more than just technology and lowest price to really compete for the enterprise cloud jackpot.

  • Docker – did I mention Docker?
  • Below the big boys we have a bevy of wanna-bes, characterized by varying levels of self-delusion about their ability to really play this game. The old school announcements of “one billion dollar” multi-year investments aren’t even table stakes – Google spends that on capex in a couple weeks. IDC slyly and without elaboration predicts “75% of IaaS provider offerings will be redesigned, rebranded, or phased out in the next 12-24 months”, which brings us to this group:

IBM has been my poster child for the existential threat cloud poses to old school IT vendors. I’ve been pontificating about the peril they face and their clueless response for quite a while (here, here, here, here, here and here as a start). I took a lot of grief about this view when I first wrote about it but now their plight is widely understood and even conventional wisdom:

Bloomberg Businessweek (US)

My inner contrarian even wants to go bullish on the company just to flout the crowd except I can’t see any path that looks like clear success. Even the best outcome, where IBM keeps all its market share, still results in a dramatically smaller company (in terms of revenue, workforce and stock price) due to the deflation of cloud computing. IBM’s fundamental problem is it is their traditional customers who are being disrupted by technology wielding upstarts and they are going to have to show customers can actually use IBM technology and “business consulting” to be successful against competitors who don’t have that burden. Good luck with that. IBM’s streak as the worst performer in the Dow Jones two years running may not be over.

To their credit, IBM woke up this year and is no longer downplaying cloud or attributing their woes to simply poor execution of ye olde business model. I am amused that IBM’s leadership has expressed far more public concern about their prospects than the normally curmudgeonly IT industry analysts and pundits who evidently are telling IBM’s customers not to worry about generational transition risk.

Beyond their cloud wanna-be status, it is hard to get enthusiastic about their big initiatives of Watson and becoming an iPad reseller. After what seems like decades of hype, Watson is being devoured by hundreds of much more focused machine and deep learning startups. And it is uncanny how iPad seemed to flatline just as IBM got interested in it (and if you contend IBM’s apps are just what the iPad needs to reestablish growth, I ask only that you name an IBM app, and if you can do that, name one that you’d like to use). Delusion factor: low. The dubious marketing underscores their desperation.

HP (sorry Hewlett Packard Enterprise) trails IBM significantly in terms of existential angst and has a massive internal distraction in splitting themselves up. Helion: they only wish they had another L. While I have been assuming a “better than Autonomy” bar would lead to acquisitions like Box or Rackspace, their efforts to get their hands on VMware suggest there may be some sanity lurking somewhere. Delusion factor: medium.

Cisco is the company with the biggest gap between reality and their own cloud blather. While they are one of the few growing server vendors, their reckoning approacheth on multiple fronts. Delusion factor: highest

Rackspace – my prediction last year was they would not be an independent entity by the end of 2014. They did put themselves up for sale, but had no takers (HP let me down). They have realized they can’t play with the big boys and have retreated to their old hosting turf. OpenStack was a huge distraction for them. But their stock price supposes there is still an acquirer out there. Delusion factor: low. They touched the hot stove, and will not make that mistake again. 

Telcos – CenturyLink (also in Seattle) is executing the best here while the others are too busy chanting “cloud is our birthright” to do much. Delusion factor: medium to high.

OpenStack – another year where the number of press releases probably exceeds the largest number of nodes in production in any instance. They lost ground this year as public cloud continues to outpace private cloud and OpenStack public clouds aren’t very public. A pivot to Docker is coming, even as they perhaps settle to be a telco supplier. Delusion factor: high.

  • Docker – the most interesting aspect of Docker is it works because Linux has won as the operating system of the cloud (and having written those words, a new operating system must surely be upon us imminently). If you don’t need to virtualize multiple operating systems, you can push application isolation up above a single OS. But while Linux has won, Red Hat has lost. They just don’t play any material role in cloud infrastructure. They’re a legacy, on-premise operating system company. Maybe this year the markets will ask why they’re trading at a multiple of over 70.
  • Digital Ocean – while the old school vendors huff and puff, I’ll just note this is increasing where the cool kids run their apps. The problem with taking the “enterprise journey” is it almost always leaves you somewhere developers don’t want to be.
  • Docker – they really mishandled their first competitive blitz, which was actually pretty minimal. But good practice for when VMware finally gets around to announcing vCenter will manage both VMs and containers (and I have no inside knowledge here, it just seems like an obvious thing to do).

Cloud Platform

  • PaaS is still a zero billion dollar market, but there are signs revenue is ramping to the point where we can have a serious discussion about this threshold next year (note I define PaaS narrowly to net new, general purpose application platforms and don’t subscribe to xPaaS speciation/inclusion of decades old code) I still think this is the only layer at which most companies should be doing private cloud.
  • The Cloud Foundry Foundation – not sure if I’m more disappointed that it exists or that it wasn’t called the Foundration.
  • DevOps is a distraction and something you want other people to do on your behalf: if you’re actually doing DevOps, you’re doing it wrong. (That sentence will probably bring me more grief than any other in this post).

Big Data

  • FOMO is the biggest driver of big data in the enterprise. Lots of data is going into the lake, but not much is coming back out yet.
  • Hadoop, or more accurately HDFS, has won based on storage cost advantages and addressing the administrative and governance needs of IT. The programming model can charitably be described as unsettled, which is one of the factors hampering the realization of material value from big data. A big question for 2015 is how quickly Spark matures.
  • The most amusing announcement of the year was Google sucking it up and announcing full support for Hadoop, which they view as an obsolete and decade-old Google technology laundered through Yahoo.
  • The hype around big data will shift to the Internet of Things in 2015. IoT-washing will make cloudwashing look modest, as every data player adds at least those three letters to their home page. Some are doing more and actually building for specific IoT needs. Samsung is the biggest threat to IoT as they feel the urgency to ship half-baked spec sheets devices and crummy software that could set the whole market back significantly.
  • Get ready for data protectionism, as the EU (as a front for European manufacturers) decides they need to control their own data exhaust and not let those evil American technology companies squeeze all the value out of precision metal bending. We could see some very strange big data acquisitions by German manufacturing companies.

What else should we be watching in 2015?

Ballmer vs. Chambers: A Corporate Cage Match

Amidst adding Cisco to Dinosaur Row, I asked someone “If Steve Ballmer got run off by Wall Street, how does John Chambers still have a job?”

Both are/were long-tenured, non-founder CEOs of two of the biggest technology companies. Both have presided over erosion of prior dominance during the course of the 21st century, even as revenues and profits kept growing. Neither has been shy about making sweeping calls about the future, yet their predictions have stubbornly refused to come to pass. Both found themselves increasingly reacting to rather then driving key industry trends (although Ballmer will eventually get credit for not missing cloud computing, which is coming for Cisco, even as Chambers continues to ply ye olde enterprise playbook in response). Ballmer’s tenure as CEO began January 1, 2000 while Chambers took the CEO chair in January 1995.

I’ve related this story before, but Steve was acutely aware of the consequences of taking office almost exactly at the top of the dot com bubble. He would bellow, not proudly, that “I’ve lost more market cap than any CEO in history”. After a couple years, he could amend that with “Thank god for John Chambers”.

Lets look at their performance during their shared tenure (January 1, 2000 to February 4, 2014). Revenue and profits are generally up and to the right, but stock performance is negative – presumably their future performance was already priced into the stocks. Microsoft’s total return is better with all the dividends, but still in the red over Ballmer’s tenure.

Total Return: Advantage Ballmer (Microsoft -15.3% vs. Cisco -56.8% )

CSCO Total Return Price Chart

CSCO Total Return Price data by YCharts

Market Capitalization: Advantage Ballmer (Microsoft -49.7% vs. Cisco -68.2%)

CSCO Market Cap Chart

CSCO Market Cap data by YCharts

Revenue Growth: Advantage Ballmer (Microsoft +333.5% vs. Cisco +156%)

CSCO Revenue (Quarterly) Chart

CSCO Revenue (Quarterly) data by YCharts

Profit Growth: Advantage Ballmer (Microsoft +175% vs. Cisco 75.12%)

CSCO Net Income (Quarterly) Chart

CSCO Net Income (Quarterly) data by YCharts

Bigendian Suit: Advantage Chambers

John Chambers, chairman and chief executive officer of Cisco Systems

(A picture of Steve in his red v-neck sweater — or worse, forthcoming Los Angeles “America’s Team” Clippers garb — is omitted as a matter of common courtesy).

Now you may say “but lets look at Chambers’ full tenure”, as he assumed the big boy chair five years before Ballmer. And you’re welcome to do that, even in our what have you done for me lately culture, but the record is uglier than that of the much derided Microsoft (I won’t even start digging up all those acquisitions everyone has rightly forgotten about). Will Chambers declare victory and head for the exits before the future pain becomes more evident at Cisco, or will he overstay his welcome until the hounds of Wall Street start baying for his head? Stay tuned. And then we can have a discussion about whether Cisco’s next CEO should be a product guy or another sales guy…

Dinosaur Row

IBM’s cloudy predicament is now widely understood.

BusinessWeek made IBM’s existential crisis a cover story (a concept that doesn’t really exist any more if you read the publication online):

Bloomberg Businessweek (US)

Forbes then called out recently departed IBM CEO Sam Palmasaino for his financial engineering shenanigans with “Why IBM is in Decline”. Cringely went one better with the full Gibbon in his new book “The Decline and Fall of IBM”.

To which I say, welcome to the club!

IBM employees have been crawling out of the woodwork over the last year to defend the holy EPS roadmap (even as Wall Street tells them “um, you might stop the financial engineering games and optimize for survival at this point”). While I have listened patiently, not a single Big Blue booster made an argument based on their product portfolio or confidence in their ability to innovate or adapt. They have a bad case of assuming past performance guarantees future survival.

The most compelling argument I heard from any IBMer was “Well, at least we’re not HP”. HP is in a similar situation as IBM, except a few years behind. On the plus side, HP has less software legacy (there are positives to not being a software company period). I’m waiting for HP to buy Rackspace as their SoftLayer-like “Hail Mary”, except paying more and doing it a couple years later due to the need to rebuild their balance sheet “autonomy”. But a wise man once told me “life is too short to work with HP”, so enough about them. Unlike some other vendors, I don’t think anyone really cares whether HP make the next transition or not.

The storm clouds of creative destruction blow not just in Armonk and Palo Alto. Things also look blustery in San Jose, home of another dinosaur: Cisco (or as I like to call them, “the IBM of networking”).

Cisco has many parallels to IBM:

  • Revenue has plateaued and oscillates between flat and down.
  • Competitive threats abound including fundamental technical and economic disruption.
  • They can’t innovate and have relied on buying R&D for even longer than IBM and to a greater degree.
  • Lots of acquisitions that haven’t had much discernable impact. One can argue IBM has done better with its acquisitions, where they at least milk the installed base for revenue even if the acquired products go immediately into maintenance mode.
  • They have lost the leading edge customers who prefer to build their own switches or rely on other vendors.
  • Their biggest customers may face an existential threat by continuing to rely upon them, facing competitors who don’t have that legacy dependency.
  • Their core competencies have shrunk to browbeating the press (and watch the press pay it back that the dam has finally broken on IBM after years of oppression) and manipulating Wall Street expectations (revenue only down 5.5% – it’s a beat!!!).
  • They are dismissive of the threats they face (a la “it is early days for cloud”) and take their survival and market position for granted.
  • Their product efforts focus on trying to pull innovation back into the old way of doing things (see Cisco’s ACI, which kind of misses the whole SDN point).
  • They believe they can play with the big boys in cloud but on a bonsai budget. Cisco’s Intercloud is another “multi-year, one billion dollar investment” in cloud capex that amounts to about six weeks of Google’s capex spending.

Cisco is flailing all over the place when it comes to communicating their strategy:

  • Competitive bluster and/or schizophrenia: they plan to “crush” VMware who is “enemy number one for Cisco” (but also maintain this SDN thing is not a big deal…). Yet VMware doesn’t even make their slide of competitors today or in 2018, when it seems they plan to compete exclusively with the cream of the late 20th century NASDAQ:

Cisco competitors prediction

  • Misdirection and/or distraction: “Hey, look at this $14 TRILLION dollar market over here. It isn’t just the Internet of Things, it is the Internet of Everything!” I’m a big believer in the Internet of Things (hold the “Every”) but am hard-pressed to understand what Cisco is going to do to capture any disproportionate part of that. Cisco’s IoT executives are so impressed with the opportunity they keep bailing out.
  • Safety in numbers: they would like you to believe their challenges are not unique to Cisco, but plague the whole “industry” (aka Big Old Tech with no appearances from the companies taking share). John Chambers forecasts “brutal” times ahead and provides this handy chart by which to track his self-selected cohort’s misery:

Cisco Chambers Keynote 5 Tech Revenue

Cisco picked the right peers with HP and IBM (aka Dinosaur Row), but Microsoft and Oracle are in a different class as I am sure this time series will prove out over time. We’ll be tracking the “Chambers Chart” going forward.

Small Blue and the Bonsai Datacenter

Bonsai by Andreas D., on Flickr
Creative Commons Attribution 2.0 Generic License  Via Flickr

IBM today announced new datacenter investment plans to bolster its cloud computing presence. They’re going to spend $1.2 billion to build 15 new datacenters (seen above, lower shelf). After some consultation with the Twitterati on matters of long division, it appears IBM is going to spend a whopping $80 million per datacenter. That may sound impressive until you consider that the big boys in cloud can spend half a billion or more per datacenter. Google’s most recently reported quarterly capex was $2.29 billion.

Perhaps IBM is has some special sauce that lets them go toe-to-toe with the big boys on the cheap? If so, they haven’t bothered to mention it and they’re not known for their low costs or frugality. I for one am disappointed IBM has stifled its usual impulse to pitch the mainframe as the obvious choice for the workload de jour. Surely there is a story to weave about cloud computing bringing the industry back to its timesharing roots, blah, blah, blah, mainframe uber alles? Or maybe they’ve beaten their heads against that wall enough to knock some sense into them.

In the absence of special sauce, it seems more likely that IBM is either confused about what it takes to play in the big leagues and/or lacks the financial resources. They continue to confuse cloud computing with web hosting. Do they really believe their Amazon depositioning is relevant or is it just an attempt to muddy the water? What does IBM say when Amazon utters the letters C, I and A? IBM also has real constraints on their ability to invest due to their prioritization of financial engineering over engineering engineering.

I will offer IBM some free consulting for their next big initiative to help them come up with some differentiation and a storyline beyond how much money they are going to spend. What are the odds that they find themselves budgeting a billion dollars for almost every initiative? (The way we knew they had given up on AS/400 was when their grand revitalization initiative was only backed by $125 million). “One billion dollars” has been the only page in their marketing playbook for a long time. Had I more time and dedication to the cause, I would collect all the “one billion dollar” announcements and assess their subsequent market impact. Because this is capex (and because it isn’t a round billion dollars), the $1.2 billion number is probably a real number unlike most IBM investment numbers. But there is at least one real billion dollar number for IBM and that is their Q3 revenue miss.

Various evergreen belittlements aside, IBM seems to have woken up to the reality of cloud computing and the existential threat it poses. The “it is early days for cloud” speaking point seems to have been retired. They’re overreaching and flailing around with announcements and advertising. but are at least trying to get into the discussion. But they still face an extremely difficult road. IBM’s ability to develop technology (the engineering engineering thing) has atrophied (“SmartCloud? Just kidding…”) and letting others do the technology development is risky (e.g. taking an OpenStack dependency in the absence of controlling your own destiny is looking a lot riskier). And IBM is operationally unproven across multiple datacenters. It is easy to needle AWS for outages, but another to avoid outages yourself. The real question is would anyone notice an IBM outage. Finally, IBM is constrained financially relative to the competition.

Many financial observers assume that because IBM is one of the few technology companies to have survived multiple generational technology transitions, they will successfully traverse this one as well. Past performance is definitely no guarantee of future survival in technology and IBM’s past transitions are notable exceptions to the broader industry history. And this transition is different in that the workloads in play are core workloads for IBM. With the minicomputer and PC transitions (the later of which was near fatal to IBM), the workloads in question were mostly net new and didn’t directly replace mainframe workloads. The cloud is taking core workloads, so even if IBM executes well and moves existing customers to its cloud, they will take a revenue and margin hit.

IBM is damned if they do, damned if they don’t. If they accelerate the move to cloud, they will undercut their existing business and miss their sacred financial roadmap. If they don’t, everyone else will partition up their existing business. Maybe they can thread that needle, but IBM has not shown any reason to believe they can successfully catch up to and compete with the leaders in cloud computing. Bonsai datacenters show IBM wants (or needs) to compete on the cheap.

A Dispatch from Cloud City

A few end of the year observations from Cloud City (aka Seattle):

Cloud City, Bespin by TK769

Image via TK769

Cloud Infrastructure

  • AWS remains a beast. Yet a chink in their armor is emerging…
  • Azure has become the clear challenger to AWS. The much maligned Mr. Ballmer is not getting credit for Microsoft’s embrace and execution on cloud. Unlike most of its cohorts rooted (mired?) in previous generations of technology, Microsoft is well on its way to making the cloud transition.
  • Despite very strong technology and an impressive operational footprint, Google Cloud Platform is still a hobby for Google. They are as yet unwilling to make the necessary non-technology investments to really compete to win here.
  • Private infrastructure clouds just aren’t happening – instead enterprises are both getting more comfortable (surrendering?) with public cloud and continuing to invest in virtualization (VMware obituaries were definitely premature).
  • OpenStack’s identity crisis is warranted. Without a credible ecosystem of OpenStack-based public cloud providers and little enterprise private cloud adoption, the OpenStack bandwagon is left providing ingredient technology to the industry itself, which doesn’t really need what the vendors are selling.
  • Rackspace’s OpenStack bet outcome is increasingly clear: they may not exit 2014 as an independent entity. They should have invested up the stack in higher value services like Amazon, not down (and to add insult to injury, I’ll wager their VMware business still is bigger than their OpenStack business). They’ve lost over half of their market cap this year. While they still sport a premium multiple, the overall trend is towards a SoftLayer kind of valuation which could put them in play for acquisition by the kind of legacy vendors who confuse hosting with cloud (isn’t HP out telling the world their balance sheet has finally recovered from Autonomy?).

Cloud Platform

  • PaaS is still a zero billion dollar category, but could PaaS end up being the level at which enterprises implement private cloud? I see more traction for PaaS than IaaS in the enterprise.

Big Data

  • In the absence of a strong set of customer successes, I think Hadoop may be spending some time in the trough of disillusionment. The challenge is not filling the data lake, the challenge is extracting meaningful and material business results from the lake. It is a data science problem far more than an infrastructure problem. How long will it take to transition to a Hadoop 2 that is robust, deployable, performance, has ecosystem support, etc.?
  • I continue to be amused that Google is so far ahead when it comes to big data that it is a material disadvantage for them. They get dismissed as proprietary while the rest of the industry is enraptured with Google’s technology from two generations back that has been awkwardly laundered through Yahoo.

What else is happening below the clouds on the ground?