I recently came across a guest post from Savinay Berry on PrivateEquityCentral.net. Savinay is a vice president with Granite Ventures and the article is an overview of the Cloud Computing market. I thought it was a very good article that helps explain what is driving the growth of this market and he also renders his opinion regarding investment opportunities (for entrepreneurs this translates into ‘business opportunities’) that this new form of computing may provide.
Since you need to be a member to read the full post, I have included the article in its entirety at the end of this blog post for your reading enjoyment.
I will wait for you while you read the article.
Welcome back.
Savinay makes several good points in his article. For example, I, too, believe that Cloud Computing will ultimately transform the way IT delivers computational and application services within the enterprise. And, one of the key drivers of this transformation – as with previous IT transformations – is directly related to cost.
However, to make his point, he uses the analogy that Cloud Computing is similar to buying v. leasing a car and that this is a compelling reason for why IT will incorporate Cloud Computing into its operations. This is where he and I disagree.
Rather than buying/leasing a car, I believe that Cloud Computing is, instead, more analogous to hiring a taxi where the taxi driver/company is responsible for driving the car, managing the car as well as getting you from point A to point B. In exchange, you pay an agreed upon ‘rate’ for that service.
Whether you buy or lease a car, you (the customer) are still responsible for driving the car and managing the car (e.g. insurance, gas, mtce). However, when you hire a taxi you have transferred the burden of service delivery from your shoulders onto the shoulders of the taxi driver/company.
In fact, you will pay more (e.g. $ per mile) for the taxi service than if you drove yourself. However, by outsourcing the driving, you potentially derive multiple benefits: the driver may know a faster way to get to your destination, you don’t need to find parking, you don’t need to navigate traffic, and you are free to focus on getting other more valuable work accomplished during the amount of time you are in the taxi. And, it is a variable cost — you only pay for what you need.
Similarly, with Cloud Computing, you are transferring the burden of IT service delivery onto the shoulders of the Cloud Computing vendor such that the enterprise IT organization can focus on other more value-added issues. The Cloud Computing vendor is compelled to deliver a great product/application under an SLA with 4-5 9’s reliability, disaster recovery, 24/7/365 support. With IT departments shrinking daily, many are incapable of delivering comparable services at comparable (and variable) costs.
The fact that IT must increasingly do more with less resources and provide equal or better service at all layers – platform, infrastructure and application - will ultimately be the driving force behind the Cloud Computing transformation. Yes, this normalizes out to ‘direct cost’ but the simple fact is that Cloud Computing vendors will live or die by their ability to deliver a compelling service that many enterprises have been simply ill-equipped to provide irrespective of the amount of $$ available in their budget.
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Cloud Computing – Hype or Reality?
Guest Column by Savinay Berry, VP, Granite Ventures – PrivateEquityCentral.net
September 8, 2009
Cloud computing is the new “Web 2.0” of today’s tech world. Any company that remotely provided services associated with enterprise software now has products which have a “cloud” moniker attached to them – a phenomena seen not too long ago with Web 2.0, when a whole generation of companies doing fairly traditional Web-content development started calling themselves Web 2.0 companies. Given that both of these terms represent a set of related concepts spreading across software and hardware, the terminology has helped to guide a conversation in the right direction. Beyond that, many wonder whether the cloud is yet another tech trend caught up in a whirlwind of investment and media hype, or is it a model with real opportunity for market growth and success? What does cloud really mean? What are the components? And finally, where are the opportunities to invest? In this article, I will attempt to address some of these questions from an investor’s viewpoint, rather than from a technologist or management perspective.
To Buy or to Lease Is Really the Question….
One analogy to describe cloud computing is buying versus leasing a car. The first option (buying) is similar to the traditional license-based model of buying software, requiring a large lump-sum payment up front to cover the cost of the purchase and then running it on hardware that you own. The second option (leasing) is similar to running software on-demand on leased hardware. While the end-result of using the car is the same, the means to acquiring it are different. Consequently, the workflow and processes associated with leasing a car are different from that of buying a car (mileage constraints, geo constraints, payments, etc.). This analogy can be extended to cloud computing as well, where the end result of running applications with defined SLAs is the same, but the means to get to the application are different. Hence the workflow needed to access the application in a cloud computing paradigm is different – leading to the potential opportunity for innovation and investment.
To further illustrate this point, consider TurboTax, the tax preparation software from Intuit. Traditionally, over the last few years, if you wanted to use TurboTax, you went to the store, bought the CD, installed it on your desktop or laptop’s hard drive and then prepared your taxes. Cloud computing enabled Intuit to develop TurboTax.com, where users could easily log-in to the site, enter their information and file their taxes – without having to purchase any CD/software. Let’s walk through the costs associated with both of these workflows.
In the first case, the company (Intuit) will incur the cost of making the CDs, packaging them and finally shipping them to retailers. The retailers will markup the costs to make their margins, and finally you – the end user – will buy the software package at the store. In the second case, the company will setup TurboTax.com, and enable enough servers on the back-end (possibly by leasing them) to support peak load given the seasonal demand for filing taxes and establish monitoring software to ensure that the site is up and running all the time. Given the current access costs for leasing servers ($0.08 – $0.15/hour) and the relatively low amount of data that needs to be accessed (there are no video or pictures in a tax filing), the company (Intuit) will incur much less costs-per-user to serve the customer. In turn, Intuit will pass this cost savings to the customer, which clearly shows in the pricing – a CD-boxed version of TurboTax costs anywhere from $49 and up, while the online version costs $35 and up. This savings for the end user creates an opportunity for companies to capitalize on specific aspects of cloud computing. One caveat to this example is the potential growth in the internal cloud – which is a concentrated collection of servers either managed by a third party or operated as a separate business within a company. An internal cloud does not follow the lease model, since the hardware is owned by the enterprise, but it does follow the re-use tenets defined by the external cloud, which leads to similar or better efficiencies. Investors are paying attention to this sector for both internal and external clouds, as explicit consumer interest has a direct impact on driving new markets.
An Evolution in Computing: Lower Cost and Less Time Leads to Market Change
Before going further, it is helpful to review the evolution of enterprise infrastructure over the last several decades and how that innovation has helped both enterprises and consumers. The earliest implementation of computing was in a mainframe environment, which gave way to client-server. Client-server continues to be dominant today, but several evolutions on top of the client-server architecture created more efficiencies. For example, SOA and virtualization created opportunities to re-use both software and hardware resources more efficiently. Finally, the extension of the data center directly led into the cloud, which provides a way to utilize the best aspects of both virtualization and SOA, as well as take efficiency and reuse to the next level.
Within this entire evolution, two attributes were catalysts of change: cost and time to deployment. It turns out that these are the two most important tenets of IT managers as they grapple with the increasing number of choices for implementing enterprise infrastructure. Given the rise of cloud service providers like Amazon, Google and Rackspace, the IT departments within enterprises will be challenged to stay relevant and will try to turn themselves into service-delivery platforms, rather than pure cost centers purchasing hardware. Thus, from an enterprise’s perspective, the cloud is essentially providing an impetus for IT managers to re-evaluate their infrastructure and invest in proactive changes, which forms a credible opportunity for innovative startups in this space. To provide a perspective on the size of the market, in 2008, $870 million were spent on server management software alone, with the spend on this market expected to increase to $2.3 billion by 2013, according to the 2009 IDC report on cloud computing.
The Architecture and Opportunity behind the Cloud
Now that we have established the cloud computing impact from both a consumer and an enterprise standpoint, let’s go into more detail on the architecture of cloud computing and where some interesting opportunities for investing may lie. At the core, cloud computing can be divided into three layers: infrastructure-as-a-service, platform-as-a-service and software-as-a -service.
Infrastructure-as-a-service (e.g., hardware services like the ones from Amazon, Rackspace, GoGrid) will eventually get commoditized and platform-as-a-service is an area that will need the most work from established companies like Google, Microsoft and Amazon. However, the area of software-as-a-service will be ripe for innovation.
Specifically, as applications like Google documents, mobile apps, Salesforce.com, and others shift into the cloud, services driving these applications will be essential. Some examples of these services are databases, billing, analytics and security. Broader adoption of cloud computing within the production environments of companies like Pfizer and ING – where data security is critical – will not happen unless a robust end-to-end security solution exists in the market. Such opportunities will help to create a large and growing market for potential investments in the cloud computing sector.
Since I expect that the future IT environments will be a hybrid implementation of both internal data centers/cloud and external cloud, various tools will be required to ensure that applications, images and databases can be transferred from one resource to another without losing context, policies and security. The need for this “cloud brokerage” will create a category of companies for these management tools. Fundamentally, these tools will adapt existing functions in data centers, like resource planning, provisioning, applications management and transaction profiling, into services catering to the distributed and flexible nature of the cloud.
Finally, due to the potential commoditization of cloud infrastructure (e.g., Amazon Web Services, Google, Rackspace), companies may want to get the best pricing structure depending on time-of-day use, similar to the concept of energy usage on a time-of-day use in states like California. A third-party marketplace providing an arbitrage opportunity for enterprises to shift images from one cloud to another could be an interesting opportunity; however, this vision will not materialize until enterprise adoption of the cloud architecture reaches a critical mass.
By now you can probably establish that while the term “cloud” has a certain amount of hype associated with it, once you peel away the layers and dive in, opportunity is waiting. The cloud represents investment opportunities and a potentially robust market positioned to change the way enterprises conduct business. The only question remaining is when this market will ripen, rather than if it will ever come to be.
Savinay Berry is a vice president at Granite Ventures (www.granitevc.com), an early-stage venture-capital firm that invests in innovative software, services and communications companies. He received his M.B.A. from the Kellogg School of Management and a Master’s in Engineering Management degree from the McCormick School of Engineering & Applied Sciences, Northwestern University. He holds a Master’s of Science degree in Electrical Engineering from Michigan State University and a B.S. degree from the University of Pune, India.
Bruce,
Thanks for your comments and astute observations. I think the models for leasing or renting a taxi fit better depending on the perspective you are considering.
From a service provider’s perspective, they would rather be in the “leasing” business where they can add more services as upsells to the original resource (which eventually becomes a commodity), but currently, they are stuck in the “taxi model” where they only provide the resource (i.e compute or storage) and adding extra services would have a higher bar. However, from a end user perspective, a taxi model does indeed fit better.
Turns out that as an after-thought to this article, I was considering how the analogy would hold up with a Zipcar and/or taxi type of a model and you read my mind on this one.
Best,
Savinay
Bruce,
Interesting perspective.
Keep up the good post.
Mark
I agree with you that taxi service is a more accurate metaphor for cloud computing than Mr. Berry’s car leasing notion, although I also suspect that enterprise IT folks will find your idea less palatable because it brightly illuminates the mated pair of elephants in the middle of the cloud computing drawing room.
As you quite correctly point out, cloud computing transfers responsibility for (control of) delivering IT resources from the consuming company, the user, to the service provider. This is doubly problematic for most IT people. First, they think of themselves as providers, not users, and second, as we saw when so many of them fought desktop PCs and departmental servers in the olden days, they like to be in complete control. Saying that cloud computing is just a different mode of resource procurement or a different data center architecture is more politic, but it is also untrue.
My bigger beef with Mr. Berry, though, is that he promulgates the oxymoronic idea of the “private cloud”. If cloud computing finds a fair and faithful synonym in “utility computing”, then there is no such thing as a private cloud. It is like calling a PBX (remember those?) a “private phone company”. They are similar in function – they both route calls – but one is a private facility and the other a public utility. A corporate data center that employs SOA, XaaS, and virtualization, whether on premises or outsourced, utilizes the same technology as a computing cloud, but that doesn’t make them equivalent.
What makes a cloud a cloud is that it is “out there”; like power, water, TV, dial tone, trash collection, and sewer lines, it is a transparent, ubiquitous public utility service whose customers don’t need to know or care about its internal structure and function or the location of its physical facilities. Amazon EC2 and Force.com are clouds. Rackspace and whatever Pfizer is doing with SOA are not.
On the supply side, traditional server licenseware companies like Oracle hate the cloud because it kills their profit margin AND their business model. On the consumption side, business leaders love the cloud for the same reasons – it lowers costs and limits lock-ins. IT people are caught in the middle and, as you suggest, at the crossroads of added value and irrelevance. Unfortunately, allowing them to call a virtual data center a cloud just keeps them standing in the crossroads. Our old friend Marc Benioff is right – let’s get on with it.
Tim,
The reality is that despite the generally oxymoron nature of the term private cloud, it is happening right now. As an example, GoGrid, a infrastructure service provider with a application agnostic platform works with bigger brand name clients to setup a private cloud for the client (i.e. still owned and operated by GoGrid, but dedicated completely – including IP address, and VMs without any shared resources) to the client. Some large companies are contemplating setting up dedicated business units to manage their pooled data center resources to manage peak load requirements. Larger companies with mission critical data (e.g. pharma, financial firms) will gravitate towards an internal/private cloud to alleviate security and control concerns, while still being able to take advantage of the multi/re-use tenets of cloud computing. Smaller companies with less issues around security for mission critical data/apps will lean more towards a pure external cloud.
Savinay,
Yes, I must sadly admit that you are right and we semantic purists will probably lose this one. Plus, in very large companies, where divisions function like companies and a few years back the IT folks would have been talking about “insourcing”, the distinction between a public and private cloud is little more than academic, anyway.
Nevertheless, I remain an iconoclastic evangelist for the true public cloud for one simple reason. As a business federation-on-demand context, it will enable a business revolution where ad hoc aggregations of small agile specialists can form virtual corporations even at the transaction level, a true new new thing. This can go a long way to ameliorating the waste, inertia, and economic imbalance produced by the last century business model, an exclusive zero-sum game played only by giants.
Private clouds may save their owners money; public clouds will make the world a greener, smarter, fairer place.
The taxi analogy is very fitting, but I would like to extend the metaphor to that of the corporate jet. While most would take a taxi to cross town even though the cost per mile is a bit higher, when the distance needed to travel is greater, and time becomes the scarce commodity, travelers don’t opt for the taxi, they get on a jet and take to the Clouds.
So too, when the chasm between problem and solution is great, and business users need immediate benefit from an immediate solution they take to the Cloud. The question is by what means. One wouldn’t expect to see rank and file employees jumping on the company jet. Instead they enter a contract with a service provider; the airlines. The Cloud, like the airlines has made a commodity out of something that would otherwise be completely unrealistic simply by function of cost.
Although I doubt that Bruce would invest in any of them, I am quite certain that one can still find those companies that argue their executives are so important or offer such a security risk that they need to have their own jets. Likewise, traditional IT will continue to make a case for their most important applications and data to be in a dedicated DC. But the relative costs will continue to rise and more importantly, trying to remain at a “Constant state of state of the art” will bankrupt all but the largest IT organizations. One thing is absolute, most departmental, casual and situational applications belong in the Cloud, the same way most employees belong on an airliner.