The Amazon (AWS) factor…

This is part 4 of a series of articles on: ‘Cisco, IBM, HP: still a cloud of uncertainty?’  Here are parts one, two & three

Amazon Web Services (AWS)

• Since launching a decade ago, AWS has taken the IT industry by storm. Today its a juggernaut with a $7bn run rate
• Jeff Bezos, CEO and Founder of Amazon.com has big plans for AWS, and those don’t currently include spinning it off !
• Amazon’s modus operandi is to: grab market share on its platforms using very low prices, build huge economies of scale; utilise new business models while innovating relentlessly 
• Andy Jassy, Head of AWS has a clear vision : “Our goal is to have every company run all of their businesses and all of their applications on top of our technology infrastructure platform”

AWS Financials

• In its Q3 2015, AWS generated $2.1bn in revenue, up 78% on the previous year, but with 25% operating margins
• That’s still only 8% of Amazon Group, but 52% of its operating profits 
• In Q3, Amazon Group made $79m net profit on Sales of $25.4bn (a tiny 0.3% margin)
• It hard to tell the actual net profit margins for AWS (especially after stock based compensation).
• We can see however, that Q3 stock based compensation for Technology & Content was 57% of the Amazon group total
• Since this was the first time (a normally secretive AWS) provided additional information on its financial performance, we probably won’t know more details for a while….

IaaS (Infrastructure as a Service)

• AWS dominates Infrastructure as a Service (IaaS). It invented the idea of Public Cloud infrastructure and Pay as you go pricing
• It was recently estimated that AWS, had more than 10 times the computing capacity of the next 14 largest infrastructure vendors combined
• It continues to race into multiple areas: Big data, Analytics, Databases, Business Intelligence, Artificial Intelligence, Internet of Things (IoT), Smart Homes
• Worldwide Cloud Infrastructure as a Service (IaaS) expenditure is forecast to grow 33% to $16.5bn in 2015, and at ~29% CAGR (compound annual growth rate) from 2014 to 2019
• The key players in IaaS are AWS, but also Microsoft Azure and Google Compute engine. They’re squeezing legacy tech companies like IBM & VMWare in Cloud price wars
• In July 2015, Amazon CFO commented that the race to zero is still on because it’s part of the AWS “business model.” 

Now taking on Oracle

• In fact, AWS recently focused its attention on Oracle
• Oracle is the biggest provider of traditional databases. Its a business that's been struggling to grow as more businesses move operations to the Cloud
• Larry Ellison, Executive Chairman and CTO of Oracle, recently declared at Oracle Openworld 2015: “We’re on our way to being the leader in SaaS.” 
• IaaS (infrastructure as a Service) is seen as a commodity play by Oracle.
• GE though may beg to differ, it’s planning to shift thousands of applications to AWS so that it can reduce its data centers from 34 to 4.
• Ellison isn’t used to playing second fiddle in any market. And he's got AWS firmly in his sights, especially with the launch of AWS Aurora Cloud database offerings

Future looks bright

• AWS continues to enrich is offerings adding PaaS (Platform as a Service) and SaaS (Software as a Service) capabilities.
• Its seen as a safe choice for Enterprises for their Cloud Infrastructure needs 
• Deutsche Bank believes AWS is forecast to reach $16bn in revenue by 2017, achieving a valuation of ~$160bn (based on a 10x multiple)
• This could make AWS the fastest growing Enterprise Tech company ever
• Deutsche Bank adds that AWS is forecast to hit $10bn in revenue on its 10th anniversary next year. By comparison, it took 9 years and 10 years respectively, for Google & Facebook to hit $10 billion revenues
• While Oracle and Microsoft took 23 and 22 years, respectively, to achieve that $10 billion milestone.
• Its thought the AWS business model originated from the need to utilise its spare processing capacity during low demand periods supporting e-commerce on Amazon.com
• Not a bad side line business to have (we all need one of those...)

Accenture and AWS 

• Accenture and AWS have also announced a joint venture to boost Cloud Services, which threatens IBM and HP on its traditional turf, with its more flexible terms. 
• This announcement would send a shiver up any traditional Tech company’s spine…

In part 5, we’ll be looking at How Cisco is positioned in the context of ‘Cisco, IBM, HP: still cloud of uncertainty’

What are your thoughts on Amazon Web Services ?

(All views are my own)

Digital Disruption and Enterprise IT

This is part 3 of a series of articles on: ‘Cisco, IBM, HP: still a cloud of uncertainty?’  Here are parts one and two

IT market in general

• The IT industry is renowned for its fierce competition. With seemingly never ending cycles of rapid commoditisation and innovation.
• Startups regularly challenge the status quo with ground breaking business models, technology & platforms
• But the need to remain dynamic in the IT industry is nothing new. So what is else is going on to have investors worried about HP, Cisco & IBM ? 

 

Digital Disruption

• The Digital workplace is having a fundamental impact on businesses & consumers. All industries are impacted. Some are calling it the dawn of a new Industrial age
• And it’s not just Digital technologies like Cloud but: Social media; Internet of Things (IoT); the growth of smart machines; machine learning; mobility; 3D printing; and Big data analytics/insight
• There have been platform shifts from traditional technology vendors to on demand and virtual infrastructure, as pioneered by the likes of Amazon Web Services (AWS)

According to Sam Palmisano (former CEO of IBM):

• Platform based models of consumption have sprung up across various industries (eg Uber, AirBnB)
• Data & analytics complexity is increasing; Barriers to entry have dramatically fallen and there is rapid globalisation by startups

In short, the Disruptive digital economy is here to stay.

Gartner’s key strategic technology trends for 2016 indicate that it’s not just hype.

 

The Term Disruption  

By the way, a point on the word ‘disruption’.

Harvard Professor, Clayton Christensen thinks the word is over used today and often misunderstood. 

He says:

• Disruption is a process, not a moment in time;
• Disruptive innovation does not guarantee success; and
• Whilst “incumbent companies do need to respond to disruption if it’s occurring, but they should not overreact by dismantling a still-profitable business”

Amazon Web Services (AWS) is seen by many as the original disrupter of the IT industry

 

Enterprise IT prospects

• The lucrative Enterprise IT market is becoming crowded. Huge scale is a critical factor for success. Relentless innovation alone is not enough
• Earlier this year, Gartner forecast $1.4 trn worldwide IT spend in 2015 for Data Center, Enterprise Software & IT Services. If you include Telecom Services that’s whopping $3.8 trn spend in 2015.
• Cloud IT infrastructure expenditure (Server, Storage and Ethernet switch) is forecast by IDC to grow 15.6% per year to reach $54.6 billion by 2019, with spending on non-cloud IT infrastructure declining at 1.4% per year.
• IDC forecasts Public Cloud to drive that growth, as Public Cloud service providers invest in expansion of their Datacenters & Service offerings

 

Long term competitive threats in Enterprise IT

• The cost of computing continues to decline, whilst IT operations continue to shift to the Cloud
• Traditional IT vendors are losing their pricing power, and AWS continues to have a deflationary impact on the market
• The rise of open source software has only added to the pressure
• Amazon, Alphabet (parent company of Google) & Facebook have built a new breed of IT hardware and software to scale their own businesses
• This infrastructure is seen as a serious long term threat to the traditional Enterprise Tech giants
• Traditional Tech giants are inhibited by: proprietary technology; old business models; outdated Sales compensation models; and some suggest the wrong generation of leaders

 

Coopetition, Cannibalisation & Consolidation:

• Are strategies adopted by traditional Tech titans like Cisco, IBM and HP in response to these challenges
• They’re using Digital technologies to move up the stack and deepening business relationships in Enterprise IT by driving business outcomes for customers, instead of competing on price
• IoT (Internet of Things), Big Data Insight/Analytics and Security offer hopefor the future
• And the pace of acquisitions in this space will accelerate as the battle for top talent and technology hots up in 2016...

 

In part 4, we’ll be looking at ’The AWS factor’ (Amazon Web Services) in terms of the Enterprise IT landscape

What did I miss in terms of the IT market and Digital Disruption ? 

(All views are my own)

Defining Cloud…

 

This is part 2 of a series of articles on: ‘Cisco, IBM, HP: still a cloud of uncertainty ?'

Contrasting headlines:

• ‘Cisco, IBM, HP in Trouble, Says Credit Suisse, As Cloud Moves Past Them' is the headline we reviewed in part one
• 'HP topples Cisco to become Cloud Infrastructure equipment market leader' is also a recent headline
• But, why the contrast ? The reason depends on how you define Cloud
• Here are some simple (non technical) definitions

What is Cloud ? 

• Cloud Computing (or Cloud for short) can be defined as Computing as a service that’s delivered over the internet.
• Such computing resources can be delivered on demand, across the internet and often include Storage, Servers, Networking, Data Centers & Applications
• Payment (for such Cloud Infrastructure) is usually on a metered or pay for use basis (a bit like a utility model)

There are typically 3 Cloud Services:

1) Infrastructure as a Service (IaaS):

• You’re renting the Cloud infrastructure (Servers, Storage and Networking) from a Service Provider on demand, in a Pay As You Go (PAYG) model.
• Basically you’re using somebody’s Data Center and its sometimes called Virtual Cloud, as you don’t own the equipment and software

2) Platform as a Service (PaaS):

• Developers use Tools & Cloud services here to build Applications. These Application infrastructure services are called Middleware. Database services can also be in PaaS
• Think of PaaS as the middle layer, SaaS the layer above it and IaaS the bottom (basic foundational) layer 

3) Software as a Service (SaaS):

• Is Application software provided in a one to many model on a Pay for Use or Subscription basis e.g. Google for Work, Microsoft Office 365, Cisco Webex, Salesforce's suite of offerings
• Since you’re paying for using the software, rather than hiring the infrastructure it runs on, SaaS is not generally referred to as Cloud Computing infrastructure. 
• It’s a Hosted Software model

 

Cloud Computing can be typically be deployed in 3 ways : 

1) Public Cloud:

• Users don’t purchase the hardware, software or supporting infrastructure. It’s owned & managed by Providers, who’ll serve more than one customerusing that infrastructure
• Its a style of computing where you can be given rapid access to scalable & elastic IT capabilities, but in an affordable way

 2) Private Cloud:

• Where infrastructure is owned & operated by one organisation, which ensures users are completely isolated from others when receiving that service.
• You have more control over virtualised resources and services. You still benefit from the efficiencies of the cloud

3) Hybrid Cloud:

• Combines Private cloud and Public cloud services.
• In practice, most companies end up managing workloads across Data Centers, Private clouds and Public clouds

IaaS and AWS:

• AWS (Amazon Web Services) is market leader in public IaaS. 
• It operates at a massive scale with a multitude of innovative web services that are being expanded at a phenomenal rate
• IaaS from AWS fits the pure definition of ‘Cloud Computing as a Service’ i.e. Cloud Infrastructure that’s paid for as a utility model (where customers rent instead of having to buy the equipment & software)

 

IaaS vs Cloud Infrastructure Equipment Suppliers:

• Cloud infrastructure equipment suppliers like Cisco and HP Enterprises dominate the $120bn Data Center infrastructure
• Cisco & HP Enterprises primarily sell (rather than rent out) this Cloud infrastructure to enable Cloud Services deployment in line with customer preferences e.g. Hybrid Cloud
• Its a different business model to that of AWS
• Cisco doesn’t compete in Public cloud with the likes of AWS, Google and Microsoft Azure
• HP announced the abandonment of its Public Cloud IaaS offering, moving to a partner led model for customers who need Public Cloud services

 

'Data Center Infrastructure':

• Data Centers form the foundation of Cloud services and as such there’s been an explosion of growth in spending on Data Centre Networking, Storage & Compute
• This 'Data Center infrastructure' includes Servers, Server Operating Systems, Storage, Networking, Network security and Virtualisation software
• HP Enterprises and Cisco are dominant suppliers of Enterprise & Service Provider Data Centre Hardware respectively. 
• As demand for Public Cloud has taken off, Hyperscale Data Centers are being deployed and Service Providers are spending record amounts on Data Center equipment

Hazy Cloud Comparisons:

• Clear cut comparisons on Cloud amongst suppliers can be difficult.
• For competitive reasons, suppliers don’t report a detailed breakdown of Cloud in their financial results. Also what they classify as Cloud varies
• Amazon Web Services (a hugely secretive organisation) though has actually increased transparency in its reporting recently
• Microsoft, however, has reduced the number of segments it reports on, bundling Azure (its Cloud computing platform) into a new reporting segment. 

What did I miss ? Would be interested in hearing your perspectives

(All views are my own)

In part 3, we’ll be looking at ‘Digital Disruption and Enterprise IT’ landscape

Cisco, IBM, HP: still a cloud of uncertainty ?

“Cisco, IBM, HP in Trouble, Says Credit Suisse, As Cloud Moves Past Them”: is a recent perspective that’s sparked much debate.

It’s not the first claim that Cisco, IBM and HP are being left behind in Cloud, and it probably won’t be the last…

Cloudy prospects ?

• But are sweeping statements like these, underestimating the ability of these Tech titans to adapt ?
• After all they: have a large installed customer base; extensive ecosystems; are investing in startups/partnerships/R&D; and generate significant cash flows each quarter
• Yes, faster innovation is needed in some segments (Cisco & IBM, are ahead of HP there) but refocusing billion dollar companies and retaking market share takes time
• Or does bashing the original Enterprise Tech giants make good headlines ?
• Perhaps its a simpler explanation than that: Stock market nerves

Stock market pressure

• Shareholders want early warnings and guidance from analysts to protect their investments. Analysts duly oblige. Stock buy backs are never enough
• The Tech sector is characterised by: rapid market shifts & commoditisation; hype new Tech will topple market leaders; and fear market leaders lack agility
• Transforming Tech giants involves patience and inherent uncertainty. But stock markets are fickle, short term in outlook and expect higher returns for that additional risk
• Ask Michael Dell, he knows all about that…

Relative positions of the 3 Tech titans

• Cisco is in the strongest position financially of the 3, with its: $59bn cash pile; Q1 results of $12.68bn revenue; 63.2% Gross margins and $2.5 billion of free cash flow
• Though anyone writing off IBM, when Warren Buffet is doubling down on IBM stock, maybe missing the point. IBM has a 104 year history of reinventing itself & is moving up the stack
• HP appears the most challenged of the 3. Its slashing operating costs and split on November 1st into 2 parts:
  1. HP Inc. (HPI): PC and Printing products & services; and
  2. Hewlett Packard Enterprise (HPE): essentially an IT Operations business
• As it slims down, HP is revving up its innovation engine. However, it might find itself subject to takeover bids, as businesses seek ever increasing scale in Enterprise IT.

Dell moves in

• Indeed whilst HP and IBM undergo painful restructuring, Dell has made public its intention to acquire EMC for $67bn, along with its crown jewels of VMWare.
• Assuming Dell is successful in the integration, this move will create a rival to HP, IBM and Cisco.
• However, some have recently questioned whether the deal will even close

 

Research & Development (R&D) and Innovation

• R&D expenditure in their last full financial year ends was as follows Cisco $6.2bn, IBM $5.4bn and HP $3.5bn.
• The World’s 50 Innovative companies (2015) list has just been released by Boston Consulting Group (BCG):
• The rankings place:
  • Apple 1st , Google 2nd, Microsoft 4th and Amazon 9th
  • IBM 13th, HP 23rd and Cisco 31st
• So whilst IBM, HP and Cisco are diverse businesses and at different stages of evolution, they are hardly laggards.
• Not everyone can be Apple…

Microsoft example, offers IBM, Cisco and HP hope

• Doubters on the ability of Cisco, IBM and HP to bounce back might recall that Microsoft’s future 18-24 months ago, was also shrouded in uncertainty
• But with new CEO Satya Nadella and a focus on the Cloud, its come roaring back (albeit still grappling with an aging software licensing business and a mobile unit lagging the market)
• And Microsoft is partnering like never before:
  • Its forged ahead with partnerships to bolster its Cloud computing platform called Azure (e.g Dell and HP); leveraged its installed base and huge ecosystem
  • And its even working with Red Hat to offer Linux on Azure! Linux is an open source operating system that competes with Microsoft Windows
• Microsoft shares hit a 15 year high in October 2015 and it appointed former CTO at Cisco, Padmasree Warrior, as a new board member

Future articles

• We’ll look at the more positive aspects of Cisco, IBM & HP in future articles (including financials and a more balanced view of their competitive positions)
• This is part 1 of a series of articles on: 'Cisco, IBM, HP: still a cloud of uncertainty ?’
• In part 2, we’ll be looking at ‘Defining Cloud’ in simple terms and in part 3: 'Digital Disruption and Enterprise IT'

What's your perspective ? It would be great to know...

(All views are my own)