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By | Jack Clark 17th May 2014 02:00

Cloud computing aka 'The future is trying to KILL YOU'

The brutal tech truth that links the problems of Rackspace, Dell, HP, IBM, Oracle, SAP, others

Analysis What do all ailing enterprise IT companies have in common? Trouble in their core businesses due to the rise of cloud computing.

The repercussions that the technology is having on the IT business are all around us, and its effects on the industry are as inevitable as gravity on a dropped bowling ball. Cloud computing's rise spells trouble for any traditional Western IT company you care to name, and has already started to bite into them.

Just how serious are the effects? Well:

  • Rackspace was reported on Thursday to be in talks with Morgan Stanley to help it partner or sell itself, as the effects of the cloud pricing war among Google, Microsoft, and Amazon bite into its business.
  • SAP is reported to be carrying out some "unavoidable" layoffs to help it restructure itself for the cloud while its earnings from traditional on-premise software continue to drop.
  • IBM has agreed to sell its server division to Lenovo due to the margin-slump in hardware as the rise of cloud systems and low-cost servers has eroded the value of IBM's gear.
  • EMC has had to create a new strategic software package named "ViPR" to protect it from the cloud-driven rise of low-cost storage hardware.
  • HP has partnered with Asian manufacturing giant Foxconn to help it build and sell low-cost servers to big cloud customers.
  • Oracle's proprietary hardware division has consistently failed to meet analyst expectations as the company's giant bet on an on-premises integrated appliance future looks less and less wise.
  • Cisco is being hit by a slowdown in its traditional business from a combination of overseas competitors and a rise in "software-defined networking" that lets people choose cheaper kit rather than its expensive and capable gear.

There are also some moves in the opposite direction, with a few companies benefiting immensely from this shift. For example:

  • Cloudera received hundreds of millions of dollars from Intel as the chip giant bought into the Hadoop-specialist to gain both a board seat and insight into a company whose tech is designed to run on low-cost commodity hardware.
  • Amazon's Amazon Web Services division is on track to pull in almost $4bn in revenue this year alone.
  • MongoDB – the anti-Oracle database startup whose tech is deployed widely on clouds – has been valued at $1.2bn despite what's thought to be a thin revenue stream.
  • Startups – both frivolous and not-so-frivolous – are being given huge valuations partly because they have no capital that can depreciate. Examples: SnapChat, which uses Google's "App Engine" service, and room-sharer Airbnb, which sits on Amazon Web Services.

And then of course there are Google and Facebook: two advertising giants raking in phenomenal amounts of cash entirely due to the strength of their technical expertise.

Tech tectonics reshape the landscape – and why

The reason why this is all happening is that during the past ten years there have been a series of advances within the technology landscape that make cloud computing's rise inevitable – even with the NSA revelations.

For one thing, there's been the rise of consumer web giants such as Google that, on running into issues with typical software, were forced to design software systems that could keep up with their vertiginous growth. This meant they created systems – in Google's case, GFS and MapReduce, which are the basis of Hadoop – in which it would be trivial to add another server, or ten servers, into a system and see a gain in performance. This triggered a movement away from integrating hardware with software and towards making software not care about hardware in the slightest, other than as additional capacity.

Once this had been achieved, companies like Google and, later, Facebook, were able to start designing their own data center systems out of cheap components and go to overseas commodity manufacturers such as Quanta or Wiwynn to have them made.

This not only developed the overseas ODMs' manufacturing skills, but it also increased the quality and lowered the cost of customizing systems, leading more and more companies to follow suit.

Last year, for example, the market for ODM shipments straight from the factory to big cloud providers grew 45.2 per cent to $783m for the year across 326,000 units. This is 6.5 percent of the total server revenue and 14.4 percent of market shipments, according to IDC.

"Initially [the rise of ODM servers] has affected the US more than the European market and what that really allows us to do in Europe is know it's coming, it's a threat and we need to make sure we are delivering value," HP told us last month.

As more cheap hardware has become available, companies have been compelled to focus more on software that can scale and deal with failures in its cheap underbelly, leading to less of an emphasis on hardware. And so on.

This cycle has, like everything else in the technology industry, been accelerating with software innovations leading to new hardware approaches that feed back into new software.

Google is thought, for example, to have started designing its own server and storage gear in the first half of the last decade, and then by around 2010 have moved into custom networking hardware.

This was followed in 2011 by Facebook founding the Open Compute, a cross-industry scheme which thinks up and publishes the designs of new stripped-down servers, storage, and networking gear to help other companies use these contract manufacturers.

The upshot is that not only is this way of doing things spreading, but the companies that can take advantage of this Ouroboros of technical experimentation and evolution are able to move far more quickly than their competitors – witness the rise of Amazon against typical retailers – and also depend far less on the services of the traditional IT companies.

The cycle of change spins ever faster

We can see the acceleration of this cycle in types of technology as well. VMware, for instance, was founded in 1998, but by many accounts its virtualization approach didn't have a serious effect on the industry until a decade later. Hadoop, by comparison, was created in 2005 and started to cause change in the marketplace by 2012 or so, though its revenue has lagged VMware.

NoSQL databases are on an even shorter trajectory to interesting uptake (and, later, money), with MongoDB – founded in 2007 – and other NoSQL databases already having an effect on the industry and causing incumbents such as Oracle to look closely at the new genre of databases.

The intervals between invention of new technologies and significant changes in the industry appear to be shortening, which means that if you are either a slow-moving organization or a hardware specialist, things are tricky.

For those who cannot take advantage of this accelerating situation, the future is grim. Without an understanding of how systems behave at huge scale, you can't design the inventions needed to surmount their problems – so as Google and Amazon get bigger, smaller competitors get proportionally less capable of out-inventing them.

This is why we have the troubled OpenStack project, a cross-industry open source software scheme to design software that can run at the scale of these consumer internet giants. OpenStack has been enthusiastically adopted by incumbents such as IBM, HP, Oracle, and others, to help them make tech to defeat their younger rivals. [In a sign that irony is dead, they have even referred to themselves as "The Rebel Alliance." — Ed]

It's a bad time to be either a small provider of cloud services or a big provider of on-premises software. For that reason, Rackspace's decision to investigate being acquired or partnered with should not be treated with surprise – it was inevitable.

By comparison, opportunities are rife for those distributed systems software companies that lack a traditional business to protect. It also aids the Asian manufacturing companies, as they have lower labor costs and are more comfortable with thinner profits than the established server, storage, and network-makers they are displacing.

HP, Cisco, IBM, Oracle, Dell, and other big incumbents should be extremely worried: every trend in technology points to a future that has no bias toward their current profit-generating businesses. The growth days are over and winter has arrived, forcing these companies to battle each other to maintain margins and shipments, and distracting them from the threats coming from below.

When Marc Andreessen said "software is eating the world," he neglected to mention quite how sharp its teeth would be. ®

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