Technology revolutions have a habit of devouring their own children. Tech executives facing up to hard realities of the cloud

August 21, 2013 7:34 pm

Tech executives facing up to hard realities of the cloud

By Richard Waters

Staying ahead of this storm front is challenging even industry giants

Technology revolutions have a habit of devouring their own children. There has never been a clearer case in point than the coming of the cloud, the great deflationary force of modern business computing. The centralised infrastructure of cloud computing threatens to turn the once high-value hardware and software components of IT systems into standardised commodities. Staying ahead of this wave is a challenge, even for the industry’s giants.A fascinating test will be the fate of VMware, the most successful business software start-up since Oracle. The server virtualisation technique that VMware perfected – tricking a computer into thinking it’s actually several different machines, which allows several applications to run at once and makes more efficient use of the hardware – turned out to be one of the first steps towards the pooling of computing resources on which the cloud depends.

But what happens when server virtualisation runs its course? With an estimated two-thirds of the market accounted for, and Microsoft giving away its own version of the software free of charge, the cloud has started to look a more hostile environment.

Under Pat Gelsinger, the former Intel chief technologist who took over a year ago, VMware has now chosen to double down instead on what it knows best: making the basic building blocks of cloud computing operate more efficiently. The virtualisation trend that turned the server market upside down is now threatening to subvert the other sectors of IT – networking gear and computer storage – and VMware wants to lead the charge.

That puts companies such as Cisco and EMC in the line of fire, alongside those that have struggled with negligible or non-existent growth: IBMHP and Dell.

It has been tempting for companies like these to blame wider macroeconomic issues for their sluggish performance – as Cisco did after posting weak results last week. But it’s hard to escape the feeling that they are increasingly on the wrong side of a technology shift that favours a new generation of disruptors.

Adding an extra twist to the VMware story is its majority ownership by EMC. Is the largest storage maker really prepared to see its core market eaten away by its own subsidiary? Mr Gelsinger’s response is: “If you don’t eat your own children, somebody else will.”

Tech executives relish this kind of talk. However, when the crunch comes, few believe that their shareholders will stomach the hit to sales that such disruptive behaviour implies.

EMC, at least, has a strong incentive to actually follow through. Its stake in VMware is worth $29bn – a large slice of its own $53bn stock market value.

But is there an even greater deflationary force, though, waiting in the wings?

Amazon.com, which is fast turning into the most feared deflator in techland, was once mocked by the heavyweights of business computing for its rush into the cloud, selling capacity in its own data centers. According to what was, until recently, received wisdom, big companies would never trust their most valuable data and important business processes to a “public cloud” service like this.

It now turns out that the rest of the business tech world was wrong: the convenience and cost advantages are so great that even big companies have overcome their qualms. According to Gartner, Amazon now has five times as much cloud computing capacity in use for its customers as its next 14 rivals combined.

Companies such as VMware and IBM, having initially turned their noses up at the idea that they needed to build public clouds of their own, are racing to add this as an option. They cling to the hope that “hybrid clouds” are a halfway house that play to their strengths, as customers look to move their IT workloads seamlessly between their own systems and “overflow” networks operated by others.

Much of the money to be made in this new world comes from the software needed to manage the more complex infrastructure. Yet the high ground of cloud management software only has room for a handful of players. Meanwhile, the profit margins in technology markets – in server, networking and storage hardware, and in the software on which these machines depend – face remorseless compression.

VMware has recently shown signs of traction in the cloud management business and is expected next week to outline more details of its own new public cloud service.

Like others facing up to the new realities of the cloud, however, it is very much a work in progress.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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