The traditional enterprise computing server suppliers are in an ever-faster game of musical chairs with cloud computing competitors. Recent cloud price cuts will accelerate enterprise adoption of the cloud, to the economic detriment of IBM, HP, Oracle Sun.
Many IT executives sat down to a cup of coffee this morning with the Wall Street Journal opened to the Marketplace lede, “Price War Erupts in Cloud Services.” Cloud computing from the likes of Amazon, Google, and Microsoft is “changing the math for corporate executives who spend roughly $140 billion a year to buy computers, Internet cables, software and other gear for corporate-technology nerve centers.” This graphic begs the question,
“Gee, maybe my data-center computing model for the company needs a strategic re-think?” And while there’s a very active consulting business by the usual business-transformation consulting suspects, the no-cost answer is: yes, cloud computing is a valid model that most enterprises and applications should move to over time.
This blog post, though, is not about the nuances of cloud computing today. Rather, we need to take a look at how the supply-demand curve for enterprise computing must impact the traditional enterprise server business — hard. (And yes, I am breaking a vow made during Economics 101 to never mention economics in polite company).
Cloud computing is sucking the profits out of the traditional server business.
For over fifty years, in the case of IBM, the traditional server companies including HP and Sun sold big iron, proprietary operating software and storage, and lots of services at high margins. In the past two decades, Intel’s mass-market silicon evolved into the Xeon family that took away a large percentage of that proprietary “big iron”. Yet the Intel specialist firms such as NCR and Sequent never could beat the Big Three server suppliers, who took on Xeon-based server lines of their own.
Cloud computing is sucking the profits out of the traditional server business. IBM is selling its Xeon business to Lenovo, and is likely to considerably reduce its hardware business. Oracle’s Sun business looks like a cash cow to this writer, with little innovation coming out of R&D. HP is in denial.
All the traditional server companies have cloud offerings, of course. But only IBM has jettisoned its own servers in favor of the bare-metal, do-it-yourself offerings from Amazon, Google, and lately Microsoft.
Price-war-driven lower cloud computing prices will only generate more demand for cloud computing. Google, and Microsoft have other businesses that are very profitable; these two can run their cloud offerings lean and mean. (Amazon makes up tiny margins with huge volume). To recall that Economics 101 chart:
The strategic issue for IT executives (and traditional-supplier investors) is what happens over the next five years as lower server profits hollow out their traditional supplier’s ability to innovate and deliver affordable hardware and software? Expect less support and examine your application software stacks; you’ll want to make migration to a cloud implementation possible and economical. The book isn’t even written on cloud operations, backup, recovery, performance and other now well-understood issues in your existing data centers.
Meanwhile, what are your users up to? Like PCs sprouted without IT blessings a generation ago, cost-conscious (or IT schedule averse) users are likely playing with the cloud using your enterprise data. Secure? Regulatory requirements met? Lots to think about.
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