Recently Wall Street has been on a kind of cloud blitz, looking at both providers of cloud services and vendors whose fortunes will likely be impacted or even determined by the cloud. It’s always interesting to look at these stories, because it’s important to remember that companies are accountable to their shareholders, and investors are the focus of Street research. The Street isn’t always right (as we’ll see) but it’s always relevant.
Let’s get the “not always right” piece out of the way first, with both a general comment and a specific example. Investing is all about having your stock picks go up, and success isn’t the only factor in making that happen. Let’s assume you’re looking at a big player like Amazon or Microsoft, and a smaller up-and-coming. The Street would love to see the latter win, because the stock would have more potential for appreciation. Thus, they’d tout a modest win from a new player over a giant win over an established one, particularly if the established player wasn’t a pure play in the cloud alone.
The specific example is the almost-universal Street view that the cloud will eat all of information technology, eventually displacing every data center. Some of this view derives from my general comment about looking for appreciation in stocks; the cloud enables new technology and thus new players with a lot of upside. A lot is also due to the fact that it’s hard to write Street research when you always have to say the same thing, so a revolution is a welcome notion. Finally, the Street doesn’t understand technology, particularly cloud technology, so you can’t expect much technical insight.
I’m raising these points because it’s important to see Street views and issues through the lens of Street biases. Still, it’s interesting to note that the Street is making some cloud-related calls that make sense from the perspective of technical fundamentals. What I’ll do is take a “liked” company and one or two counterpoint like-less companies to lead into a discussion of the specific space the players fit in.
Let’s start with one pick that the Street particularly likes for the cloud, IBM. The fundamentals-oriented Street research seemed to like the Red Hat acquisition, seeing it as being IBM’s opportunity to grab control of the burgeoning “hybrid cloud” opportunity that will dominate both the overall IT space and the cloud space in the future. IBM had some solid assets all along, but Red Hat opens that hybrid cloud door. In addition, Red Hat opens a door for IBM that the Street doesn’t seem to value—an opportunity to broaden its customer base. IBM’s strength tends to lie in old-line IBM accounts, who are getting…well…older. Red Hat is the opposite, the darling of open-source success in the New IT World.
For every winner, there’s at least one loser, and the Street has a “relative loser” and “big loser” candidate in Dell and HPE, respectively. In both cases, the company’s cloud positioning and opportunity is a factor in the Street analysis. The Street sees Dell with assets it’s not maximizing, and HPE with either no assets or no strategy for leveraging them.
Dell’s big strength in the cloud is VMware, one of the subsidiaries. One analyst makes the point that if you were to add up the share prices of all the Dell subsidiaries (VMware, Pivotal, Secureworks) you’d end up with a value greater than the Dell market capitalization, which would mean that Dell’s own business has negative value. Two of the Dell subsidiaries could be the basis for a strong cloud story (VMware and Pivotal), and obviously these could be married to a server story to create a nice ecosystem. Dell doesn’t do that.
HPE’s issue is simpler; think of HPE as Dell without subsidiaries. If the server core of Dell has negative value, where does that leave a company that’s all server core? The problem is that in today’s world, even without the cloud dimension, a server is something you run your software on. Add in the presumption of hybrid cloud dominance in IT strategic planning, and a pure-play server strategy sure doesn’t look very survivable. Add to that the fact that HPE is probably as bad at marketing as IBM is, and you sure don’t look like you’re in a good place.
The key point here is that it’s not about IBM, HPE, or Dell as much as about Red Hat and VMware. What is true is that hybrid cloud has always been the key to the cloud market, not because it’s a path through which every data center app will pass as it heads to its inevitable cloud destination, but rather because most data center apps will never move entirely to the cloud. Instead, they’ll break into a cloud-front-end and data-center-back-end, and stay that way. The combination of componentization and deployment and management of the componentized and cloud-divided pieces creates a new software architecture, an architecture that Red Hat and VMware (and Pivotal, to a lesser degree) are well-suited to provide.
Who wins in the Red Hat versus VMware war, then? That’s tougher to say, because it may be that the strategies of their parents will decide the question. I think Red Hat has a broader set of software assets, a larger number of pathways to succeed, but VMware has made a lot of very smart moves lately, and Dell has largely kept hands off. IBM really can’t afford to treat Red Hat as totally separate or it probably won’t gain the symbiosis the Street expects.
The hybrid cloud story is also a battleground for the public cloud providers, notably Amazon, Google, and Microsoft. These players live in a market undergoing a largely misunderstood transformation. Early cloud computing, in IaaS form, got a boost from the “server consolidation” movement, a desire to eliminate under-utilized servers often located outside the data center. As time passed, OTT startups recognized the value of the cloud as the hosting point for web-related activity. The server consolidation mission never had a chance to displace more than about 24% of current servers, and so startups became the major piece of the cloud market. Now, the value of that two-piece front/back-end application model has come home, and enterprise cloud spending is on the rise. This is what “hybrid cloud” means to the cloud providers themselves.
Microsoft has long led the “hybrid cloud” space, to the extent that the space existed in the past, because it wanted from the first to tie in its data center Windows Server stuff with its cloud positioning. Amazon has been struggling to create a similar symbiosis, perhaps with VMware, and Google is now promoting a kind of exportable public cloud vision that even ties in competitors.
The Street seems to want to have Microsoft get the win here. They don’t think Google’s cloud business wags enough of the ad revenue dog to promote much share appreciation for Google if they won. They think Amazon’s share price already has the cloud baked in. One Street analyst said “Easy. Go long on Microsoft cloud, and sell Amazon short” (bet they’ll go down). I don’t agree.
There doesn’t need to be any specific symbiosis between data center and cloud products to win a hybrid cloud opportunity. The front and back ends of these applications are loosely coupled, so what really matters is having the right pieces inside the cloud to support front-end development, and a good hand-off strategy. Amazon and Microsoft are more evenly matched in that regard, and so the big question may well be the path to market for the solutions of each of the vendors.
Well-designed cloud applications require a new model of application composition and deployment, a new lifecycle management process, and even a new networking model. These are technical, even highly technical pieces that senior management is unlikely to understand. Without senior management buy-in, though, no hybrid transformation wave is going to crest very far in from the beach. Does each company have to rely on its technical geeks learning business-talk, its executives learning tech-talk? That hasn’t worked through the whole history of IT. Somebody, some vendor or cloud provider, is going to have to do a Rosetta Stone.
Google may have this in mind with its new strategy for the cloud, relying primarily on open-source elements rather than proprietary in-cloud-only tools. One hidden advantage of this approach is that it’s easy to hybridize because users can deploy the same stuff in their data center as Google is using to build its cloud services. Google could be intending to create a true hybrid cloud ecosystem that’s able to seamlessly cross the front/back-end boundary, an ecosystem created by assembling the right middleware tools.
This point is why Red Hat and VMware are important, why IBM is Street-positive and HPE Street-negative. You can’t promote a hybrid cloud, or indeed any form of modern application design, without the middleware toolkit. Both Red Hat and VMware provide that kit. Amazon and Microsoft are both reaping the benefits of the shift, but neither are really driving it. For drivers, we have to look back to Red Hat and VMware, which might mean that Amazon’s VMware alliance and IBM’s cloud linkage to Red Hat could be important for them. HPE needs to assemble its own arsenal of hybrid middleware and productize it, and Google needs to find some hybrid architectural model and promote it. Otherwise, the Street will be proven right.
The good news for both Google and HPE is that the role of “assembler-of-the-ecosystem” is one that’s at least de facto accepted in open-source. The best of open source has come to us through other players who have pulled together suites of symbiotic elements. HPE and Google could join that elite group, if they go about it right. There are signs that Google’s current open-source could initiative is aimed at that assembler goal, which leaves HPE as the outlier.
HPE has some hybrid cloud initiatives, the make-up with Nutanix being a recent example, but they seem to be aimed at boosting private cloud directly and hybrid cloud by proxy. Unlike IBM and Dell, they don’t seem to have a strong middleware-driven hybrid cloud vision, which they need.