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.

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.

Fumbling the Future: Virtual Reality Edition?

The Sports Illustrated cover jinx pales in comparison to the curse of the barefoot young techie on the cover of Time

TL;DR Facebook’s Oculus virtual reality play is far from a sure thing.

Fumbling the Future is a great book that plausibly explains why Xerox merely copies and prints, despite having pioneered foundational elements of computing at PARC, including bitmapped displays, local area networking, WYSIWYG document editing, object-oriented programming and built the first GUI computers. More broadly, the authors ask:

“Why do corporations find it so difficult to replicate earlier successes in new and unrelated fields?”

With all their talent, resources, mountains of cash and often dead-on insights into the next big thing, why do leading technology companies almost inevitably fail to translate dominance from one era/area into the next?

There is no shortage of management theories which abstractly analyze such moves, but case studies can be much more edifying. It is too early to assess Hooli’s Google’s Alphabet adventure, which looks to be the mother of all corporate experiments in leaping into multiple new and unrelated fields, all at once, as they seek to build the world’s first advertising/life sciences/automotive/ fashion/space elevator conglomerate. But we have another example unfolding now with virtual reality where the early returns are deviating from the master plan laid out in a Fortune 500 boardroom.

The Next Major Platform

Social networking supremo Facebook decided virtual reality was the next big thing and has made it the company’s first major foray beyond its core. Mark Zuckerberg put the world on notice, repeatedly saying virtual reality is the “next major computing and communication platform.” One assumes the unspoken addendum to this is “…and we intend to dominate it”.

Facebook bought Oculus for $2 billion in March of 2014, and supposedly has committed another $5 billion of additional investment. Oculus gets (and deserves) credit for reviving virtual reality (henceforth VR, to save a few characters) from a long hibernation with its breakthrough 2012 Oculus Rift Kickstarter campaign. With the exception of some embarrassing contemporaneous Hollywood movies, VR’s initial ‘90s incarnation had been forgotten. Less heralded is the assistance Oculus received from Moore’s Law, the vast economies of the smartphone manufacturing complex and a few others who were quietly keeping the VR dream alive.

Oculus arrived at Facebook right at the closing of the “move fast and break things” frontier era. They were going to do VR “right”, as befits a major technology corporation, and set out systematically on multiple fronts. They vacuumed up talent, including luminaries like Michael Abrash from Valve and gaming legend John Carmack. They opened more offices than I can count (three in the Seattle area alone), plus established a research group as well as game and movie studios.

Part of doing VR “right” was to set an incredibly high quality bar, not only for themselves, but for the entire industry. They feared inferior VR could ruin the opportunity for everyone, and so became the industry’s self-appointed quality sheriff. Competitors like Sony were patronizingly chided for perhaps insufficient attention to quality.

Consistent with this high quality bar, the Oculus talking points shifted from the previous North Star of inexorable progress towards shipping the consumer version of the Rift to more philosophical discussions of all the difficult challenges they were so generously working to overcome on behalf of the entire industry. Oculus statements like “input is hard” were offered up so frequently as to become a meme with its own shorthand of “IIH”.

When Platformonomics last looked at VR back in December 2014, some cracks were already visible in the strategy (if I may quote myself):

Oculus, the uncontested leader in VR just a few months ago, backed by billions of Facebook’s dollars, is already in a bit of a strategic quandary.

After years of selling the dream of the “consumer Rift”, Oculus has gotten very vague about when if ever we will see that oft-promised device.

Big Company Games

As they arrived at Facebook, Oculus got entangled with Samsung, playing the kind of reindeer games that BigCos are obligated to play. Samsung, the world’s foremost practitioners of “ship first, people only care about hardware specs and worry about software later”, decided to do their own VR headset, which crudely speaking, bolted an Android smartphone to your face for a minimalist VR experience, and would be differentiated primarily by its ship date (like the dog who catches the car, it gets tricky for fast followers who find themselves out ahead of their role models).

Oculus was skeptical about VR on a mobile platform. The combination of underpowered hardware vis-a-vis Oculus’s PC-centric approach and Samsung’s software track record set off all of Oculus’ quality alarm bells. They worried Samsung would do their usual crap software job and ruin the pool party for everyone. There is also a question of to what degree Samsung held display panels for Oculus headsets hostage, but whatever the case, Oculus chose to take one for the industry team and partner with Samsung to make sure what became known as the Gear VR would not rely solely on Samsung software.

Into the breach went Oculus CTO John Carmack, who spent months working with Samsung on the Gear VR, noting bluntly along the way that Android development “really does suck”. In the end, the Gear VR, powered by Oculus software, didn’t outright suck, benefiting from Carmack the Magnificent’s efforts (and perhaps the low expectations Samsung brings to anything involving software).

At the same time, Google, congenitally unable to resist toying with their mortal enemy Facebook, kicked off their own big company reindeer game and introduced Cardboard, an eponymously constructed and priced VR headset for Android phones. No doubt their pride hurt by Carmack’s disparaging comments about Android’s graphics architecture, Google soon began to see VR as another front in the battle to retain control over the Android ecosystem. Cardboard added still further impetus to mobile-centric VR even as it risked to lower the quality bar even further, which in turn probably motivated Oculus’ mobile efforts even more.

Surprise Surprise

Ultimately, Oculus made their peace with mobile VR and began to talk about a platform spanning both mobile and PC experiences (even if they were papering over two incompatible efforts). But the Oculus dream of the consumer Rift headset was deferred by the attention required on Samsung and mobile VR.

Oculus went into the Game Developers Conference in March 2015 downplaying the prospect of any news, content to demo the “Crescent Bay” prototypes it had been showing for at least six months. Like everyone else, they were surprised by the bombshell announcement of the Vive headset from HTC, powered by Valve’s VR technology. The industry assumption was Valve’s long time VR efforts had been abandoned after Oculus hired away some key employees post Facebook hookup.

HTC and Valve did a great job of keeping the Vive under wraps – it appears to have been a complete surprise. The Vive product has several attributes important to our discussion. First, it delivers an exceptional VR experience, So good that Valve was willing to make an absolute statement that “zero percent of people get motion sick”, a claim that certainly could not be made about the Oculus. Even when I tried to induce motion sickness with the Vive by jerking my head around wildly, I couldn’t do it. Second, input may be hard, but the Vive comes with a pair of controllers that offer very precise control over objects in VR. The Longbow demo where you shoot a bow and arrow illustrates how capable these controllers are, and makes it easy to imagine manipulating all kinds of sophisticated implements in VR.. Third, the Lighthouse system uses “frickin” lasers (versus Oculus’ optical approach) for exceptionally accurate positional tracking within a roughly 12 x 12 foot space, which means VR no longer has to be a seated activity (though you are still tethered by the headset). And fourth, and maybe most importantly, they promised to ship in 2015.

Simply put, the Vive is great and enables amazing VR experiences. And it beat the prototypes Oculus had been showing with a smoother experience, better positional tracking, better input and an actual ship date. People who have tried both Vive and Oculus invariably give the nod to the Vive.

The Empire Strikes Back, Sort Of

My guess is Oculus convened their first meeting about actually shipping the consumer Rift on March 2, the day after the Vive announcement. Their first decision appears to have been to give themselves the corporate handbook standard of 90 days to pull together a plan and a year to ship their answer to the Vive.

On June 11th (just over 90 days later), Oculus announced the long-awaited consumer Rift would ship in Q1 2016, a hopefully insignificant interval after the Vive’s promised Q4 2015 date. But they had to really scramble to make this announcement and the compromises show.

Input seemingly remains hard for Oculus, as evidenced by their introduction of not one but two controllers. First, they announced the consumer Rift would ship with — wait for it — an Xbox controller. Second, they announced the Oculus Touch, their own controller which appears similar in function to the Vive controllers but with what seems to be more refined ergonomic design.

The Touch is clearly a work in progress, and the mockup plastic may still have been warm at the June announcement. Even in late August, the Touch is still clearly labeled a prototype: “What we’ve shown today in the Touch Half Moon prototypes is not necessarily representative of what the final product will be…” Access to the controllers remains tightly controlled, the first SDK has just shipped and the company continues to do input-related acquisitions.

But the most telling thing about the Touch is it is supposed to ship a quarter after the consumer Rift, a strategy that has been likened to Apple shipping the mouse for the original Macintosh a quarter after the computer.

Meanwhile, despite having at least one and maybe two orders of magnitude more people working on VR than Valve, Oculus has been jettisoning other deliverables left and right. They cut Mac and Linux support and despite the relationship with Microsoft for Xbox controllers, Oculus did not have Windows 10 support when it shipped and were in an awkward position of asking developers to hold off upgrading.

Developers also complain about the poor quality and architectural churn of Oculus’ SDK: some on the record, more off the record. And they report developer support is noxious brew of ambivalence and entitlement, as if Oculus are unaware that they are no longer the only game in town.

Beyond product and schedule, Oculus also has a communications problem. Their strategy seems to be very visible and loud to compensate for their market position, but are talking too much (e.g. the much ridiculed Time magazine cover above), are tripping over themselves with conflicting messages and often come across as tone deaf.

Here are Oculus’ top two people a week apart in the same publication:

Oculus VR CEO Brendan Iribe still thinks that the technology – and the company’s Oculus Rift PC-based HMD – is set to ‘take off very quickly’.

Oculus Rift creator Palmer Luckey doesn’t think that the tech will break into mainstream overnight, recently stating that it’s something that will take ‘a long time’.

Sometimes they seem to be trying to lower expectations for their first product by stressing just how far out their roadmap extends; other times they’re cheerleading version one. A serendipitous juxtaposition in my feed reader gives us this credibility-sapping combination:

image

But most of all, their June 11th announcement ranks as one of the most awkward product announcements ever. This video clip brutally highlights the vast disconnect between Oculus’ expected reaction and the non-virtual reality (what do you do when the teleprompter says “wait for applause” and there is none?).

Stay Tuned

It is way too early to call this market. The cliché would be we’re not even in the first inning, as neither Oculus nor Vive have shipped, while Sony lurks in the background with the forthcoming Project Morpheus headset for Playstation 4.

But Oculus is far from romping to victory here, as many expected a year ago (including presumably Facebook when they wrote that enormous check). They had and lost the pole position and find themselves behind on both capabilities and schedule. Valve and HTC are deep inside Oculus’ proverbial OODA loop, and by virtue of being forced to react, Oculus has made suboptimal decisions. And more consequences of being back-footed are likely to surface.

For example, Oculus’ business model is unclear. Are they going to make money on headset hardware or sell it at close to cost to create sockets for other businesses? If hardware is an enabler, where is the software revenue? Can they make money from an app store vig when they have made a pretty strong statement that they will allow sideloading and face a deeply established competitor in Valve’s Steam with its over 125 million users? Will they drive material app revenue? Or do they incur mass disdain and end up defaulting to Facebook’s ad-based model? When you’re behind, the desire/pressure to sacrifice margins and/or piggyback on the mothership increase because you just don’t have as many levers at your disposal. Or perhaps they sacrifice further time to transition the hardware to a partner?

The Vive isn’t a sure thing either. I am sure they’re also on a very tight schedule. HTC is financially precarious (although the fact they seem to be betting the company on Vive is good in terms of focus). The Vive lags Oculus in some areas like audio and maybe wirelessly connected controllers (I am not clear on whether they ship wireless controllers with the initial product). And the challenge of scaling manufacturing is already showing up with the statement that while the Vive will ship this year as planned, volumes will be limited, which was no doubt joyous news in Oculus’ many offices.

But returning to our Xerox lede, the expected VR coronation for Facebook/Oculus foretold on magazine covers is in question. Oculus has lost the clear leadership position they had a year ago and. if you are wearing a rose-colored headset, the best you can say is it now is a horse race. But they’re not unique. These kind of “unexpected” underdog outcomes seem to happen with remarkable regularity, much to the frustration of the technology titans and their megalomaniacal machinations. It is part of what makes tech so interesting to watch.

As with any BigCo initiative, Oculus’ execution to date has been impacted by some combination of a lack of strategic clarity, distractions, an inability to completely conceptualize the entire new value chain (vs. just building technology), an abundance of people, a lack of urgency combined with a utopian quality bar and who knows what other factors that always create drift from the strategy slides.

There is one other possible explanation, which is that Facebook’s VR dream suffers not so much from the usual imperfections in BigCo execution, but rather a strategic mistake. Maybe Facebook made a mistake buying a company whose capabilities were not what they seemed. One of the biggest unanswered questions in the history of VR is to what degree Oculus raised venture money and then sold themselves to Facebook based on demonstrations of Valve’s technology rather than their own. Oculus received a lot of help from Valve in its early days and even had their own “Valve room” installation in their offices in Irvine. Why are there pictures of Mark Zuckerberg trying out the Valve headset at Oculus as opposed to the Oculus headset he ponied up billions for?

Thanks to all the developers who shared their VR perspectives – you know who you are even if you don’t want to be named Winking smile

So will Oculus get it together and recapture the lead? Or will someone write a Fumbling the Future-esque book about how they didn’t? Or is this just narrative fallacy run amok?