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Are Storm Clouds Gathering Over the Public Cloud?

MarkNeuhausen

Are Storm Clouds Gathering Over the Public Cloud?

In my blog post on August 16 (http://community.hpe.com/t5/Grounded-in-the-Cloud/Busting-the-Eight-Fallacies-of-the-Public-Cloud/ba-p/6889406), I predicted that the public cloud would go through a life cycle similar to mainframe computing. In the 60s and early 70s, mainframes were expensive and only the largest corporations purchased them. Timesharing services such as Electronic Data Systems (EDS) were the first IT startups and bought mainframes. Companies who could not otherwise afford these mainframes leased time on them. Back then, as the performance-to-price point for computers doubled every 1-2 years, the economics soon changed to where few medium or large companies could afford not to own their own computers. The timeshare model evolved to a remote-operate model for companies that did not want their own data centers.

Fast forward to 2012 and beyond. We are now in the idea economy and everyone is in various stages of transition to the cloud. The performance-to-price point continues to double every 1-2 years in IT. Workloads that require 1000 servers today will run on 1-10 servers in ten years. Many companies that moved to the public cloud will, as the costs drop, choose to regain control over their environments and move to private clouds. I predicted this scenario over a year ago and was one of very few voices in the wilderness. Now, experts are coming around to the idea that white box (generic) servers are turning the tide back toward private cloud, or a mix of public and private, the hybrid cloud. After all, private cloud environments are getting cheaper—even within reach of relatively small companies—and economies of scale that used to exist for cloud service providers are shrinking.[1]

Why the storm clouds metaphor in my title? Building the public cloud is a capital-intensive business. Public cloud execs are required to sign ten-year and longer capital leases for football-field-sized data centers. The annual costs of these leases and facility improvements are expensed annually over the length of the contract. Server purchases are depreciated over five years (and probably only used for 3-4 years due to Moore’s law). As with a lot of investing, these particular investments are made with the long haul in mind, which makes sense, but only when the future is predictable with a reasonable degree of certainty. Will public clouds continue to see sustained growth or will more and more companies opt for on-premise workloads and hybrid or private clouds? I believe we will see hybrid clouds take off. Why? I will provide details in my next blog post.

Could the Analysts Be Wrong?

Most analysts see public cloud computing continuing to grow at 30+ percent YoY for eternity. This is not realistic, as we see the Total Addressable Market (TAM) for IT equipment and services continuing to shrink even as demand increases. Sure, demand is growing, but not as fast as technology increases the performance-price point ~2X every 12-18 months. To reinforce my point, look no further than IBM, once the world’s most valuable company, reporting their 17th straight quarter of declining revenue. Cisco Systems, Inc., has essentially flat revenues for the past three years and annual layoffs in four of the last five years. Yes, the public cloud is growing, but traditional IT, still estimated to be around 70% of the IT TAM, is splitting the budget between public, hybrid, and private clouds.

We know that humans are pretty good at predicting the future based on historical precedents and current events. But what’s past isn’t necessarily prologue. In fact, history can be a trap, blinding us to inflection points that change our world in the span of years or decades.

In Back to the Future II, which opened in theaters in 1989, Marty McFly goes thirty years into the future to 2015. Once there, he marvels at flying cars and real hover boards. But Marty also uses a pay phone in the diner. People were not even envisioning smartphones in 1989, but they have been predicting flying cars since the 1940s. Isaac Asimov, who wrote the Foundation and iRobot series in the 1950s, showed great foresight, and his books remain current 60+ years later. But even he totally missed the concept of the smartphone. So, too, did Chester Gould, creator of **bleep** Tracy. Gould got it right when he wrote that “the nation that controls magnetism will control the universe,” but his vision of the future only got him as far as the 2-way radio watch. Even Star Trek had phasers, communicators and body scanners, but missed the boat on handheld computers. In addition, there were the keen clairvoyants in the 1970s who predicted that bookstores would print books-on-demand with laser printers at checkout. How did that work out for Borders Books, which opened its first bookstore in 1971? They filed for bankruptcy forty years later in 2011.

Boom, then Bust?

We are all-too familiar with boom and bust cycles. We see a number of public cloud providers exiting the business (e.g., CenturyLink selling its data centers, Verizon looking to sell theirs, Rackspace being acquired by a private equity company, and HPE exiting the public cloud business) with the space being occupied by the Big Three (AWS, Microsoft Azure, Google Cloud Platform). Will growth continue or will the Big Three be knocked down? And if that happens, what is the impact on the public cloud? Should companies have strategies in place to move workloads to other public clouds if required? I will cover this subject as part of my hybrid cloud discussion in my next post.

 

1 White Box Servers Turning Tide Back Toward Private Cloud

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About the Author

MarkNeuhausen

Technology entrepreneur with 30+ years experience successfully launching new products and services for small-to-large companies. Now applying his knowledge and experience at Hewlett Packard Enterprise as a Chief Technologist. Also active in the Seattle start-up community. Educated in Physics at MIT and has an MBA from the Wharton School, University of Pennsylvania.

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