Losers in the cloud revolution

Losers in the cloud revolution

Summary: Some companies stand to benefit from the rise of the cloud and others stand to lose — ZDNet looks at the big names with the most to lose.


The shape of the IT industry is due for a shake-up as cloud becomes a utility, due to the greater influence that cloud providers can wield over IT suppliers.

The winners are likely to be those companies that can serve the peculiar needs of huge infrastructure operators, like Amazon or Google, or those that can give advanced software tools to businesses to let them spend less on costly hardware.

Judging by the results of a round of interviews with industry figures and analysts, combined with recent technological shifts, the companies that have the most to lose are those saddled by legacy businesses selling technologies developed in another time for another market. 

Established hardware makers

Original equipment makers (OEMs) like Dell, HP, EMC and IBM that specialise in selling datacentre equipment to large enterprises are going to face difficulties for two reasons: the trend for small companies to opt for cloud services, and the disruption of the datacentre infrastructure market by the move to equipment commodification.

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Winners in the cloud revolution

Winners in the cloud revolution

Some companies stand to benefit from the rise of the cloud and others stand to lose. ZDNet picks the IT winners.

A recent Gartner report found that as companies went to the cloud for cost savings this could sometimes cannibalise on-premise equipment spend

The mechanism for this is fairly simple: if a company opts for hosted email, like enterprise Gmail, and they were using on-premise Microsoft Exchange previously, then when they go to the cloud they no longer need their Exchange server. The equipment spend disappears and the cloud service has eaten the on-premise expenditure.

Whenever cloud-based IT service companies, like Salesforce, report growth this comes at the expense of spending on on-premise software and hardware. Along with this, these types of 'as-a-service' applications have a heavy emphasis on mobile devices, so they can drive either IT department spending on mobile devices or a slacking of rules to allow workers to take part in the BYOD (Bring Your Own Device) trend.

"Enterprise [IT] is being squeezed out in a barbell," says Chris Swan, the chief technology officer of client experience at UBS. "On one end [there is] commoditised consumer technology [and] at the other end commoditised datacentre technology."

This trend means modern enterprises are spending more on client devices and cloud services and less on the middle layer — the on-premise computers, network, server and storage gear.

"For the last few years as far as I know [Google] have never purchased servers from a branded vendor," Giorgio Nebuloni, research manager for servers for IDC’s European Systems and Infrastructure Solutions division.

Along with cloud cannibalisation, some of the world's largest infrastructure operators — Google, Facebook, Amazon Web Services, various major banks — have taken a look at OEM datacentre equipment and found it wanting. Instead they have begun designing their own. 

Facebook, for instance, designs its own server and storage gear to be manufactured by Asian technology manufacturers like Quanta, Foxconn or Wistrom (known in the trade as 'Original Device Manufacturers', or ODMs, from their heritage of manufacturing consumer products like netbooks).

Search giant Google has been designing stripped-down servers for many years.

"For the last few years as far as I know [Google] have never purchased servers from a branded vendor," says Giorgio Nebuloni, research manager for servers for IDC’s European Systems and Infrastructure Solutions division.

Amazon is thought to do the same, and recently launched a low-cost cloud storage technology named 'Glacier' that's believed to be based around custom Amazon-designed equipment.  

Companies doing it for themselves

Intel can attest to how enthusiastic these companies are about building their own equipment: In 2008, HP, Dell and IBM made up 75 percent of Intel's server processor revenue. Four years later, eight companies are on that list, with Google ranking at number five, Diane Bryant, head of Intel's datacenter group, told Wired Enterprise in September.

By building their own equipment cloud companies can sidestep typical OEMs and achieve significant cost reductions. Not only does this reduce the pool of customers available to the large OEMs, but it also bites into their margins as they buy proportionally fewer components so get lower price reductions. 

The commoditised-equipment trend is also visible in smaller cloud companies, like web hoster and OpenStack-supporter Rackspace. 

As of today, "at least 10 percent" of Rackspace's servers are either built to the ODM model or bought from OEMs' datacentre-specific wings, such as Dell's Datacentre Solutions Unit, John Engates, Rackspace's CTO, says.

"In a number of environments we've chosen to buy equipment from some of the guys like DCS, but are also working with [ODM] companies," Engates says. 

Even if Rackspace buys directly from an OEM, the equipment it buys will be stripped down and lack many features that are found on traditional OEM datacentre equipment, so it will cost less and generate less money for the OEM.

This means more revenue to the Asian ODMs, which are branching out: in May Quanta launched a US subsidiary to sell configurable datacentre infrastructure that undercuts traditional suppliers. 

"Our flagship cloud product, which is our fastest growing product, is based on DCS or ODM gear," says Engates. "Over time the trend is that less and less will be enterprise-branded gear and more and more will be [DCS-style] OEM or ODM."

Industry response

The Dells, HPs and IBMs of the IT industry have not been blind to this shift, and have been attempting to service large cloud customers by producing equipment for them through specialised divisions, such as Dell's Datacentre Solutions Unit. They have also been targeting medium-sized enterprises that would otherwise go to the cloud with appliance systems that wrap storage, servers, networking and software together.

"The challenge in the long term is how you can compete against some of these [Asian ODM] competitors that are able to deliver at lower prices" — Nebuloni

This strategy addresses the commodity hardware shift in two ways. The specialised divisions target large infrastructure buyers with products tailored around their needs. Then, the appliances are sold to smaller companies that want to use a cloud architecture, but do not have the expertise to build their own gear. 

Such a strategy has its dangers. One is a margin-sapping price war with Asian ODMs on datacentre equipment; another is that appliances are vulnerable to open-source software tools. As these improve, smaller companies can build their own appliances by buying gear from an ODM and putting mature open, free software on top. Open source is strong in infrastructure management, with many large IT-based companies seeing the benefit in collaborating in the open development of key technologies traditionally forming rich revenue streams for OEMs and systems vendors. 

"The challenge in the long term, perhaps three to five years time, is how you can differentiate and compete against some of these [Asian ODM] competitors that are able to deliver at lower prices," Nebuloni says. 

The software-defined networking apocalypse

Networking looks set for a shake-up due to the arrival of software-defined networking. SDN lets companies separate the network's data plane (the part that forwards packets around the network) from the control plane — the more sophisticated layer that dictates, monitors and controls the overall structure of the network.

This technology means companies can outsource intelligence of the control plane to commodity servers while leaving the less sophisticated forwarding work to less intelligent — and therefore cheaper — networking equipment. This has the potential to bite into the revenues of established networking companies like Cisco, Juniper and Brocade as many of their products wrap complex control plane features directly into the networking gear.

Just as the storage and server makers face competition from a new breed of hungry companies, established networking companies are dealing with the same problem

By separating the two, SDN means companies can buy less networking gear and, as with storage and compute, can even go as far as to design the networking equipment themselves, as Google has done with its adoption of the OpenFlow software-defined networking protocol for wide-area network access.

The networking companies are attempting to deal with this via new products and acquisitions: Brocade recently announced plans to acquire Vyatta, and Cisco is developing its own SDN technology. 

However the academic community is busily working on the OpenFlow networking standard, and virtualisation king VMware acquired SDN expert Nicira for over a billion dollars to help it take advantage of this shift.

Although network companies are developing their own SDN technology, there are signs that these companies are hobbled by their legacy commitment to combining hardware and software, whereas SDN startups come from an all-software world. Cisco prefers to emphasise software and hardware working in unison — the same line Oracle adopted after it acquired Sun Microsystems — but SDN requires very little sophistication of the networking hardware. 

Meanwhile, the open source OpenStack cloud platform, which is backed by over a hundred major IT companies including HP and Rackspace, has SDN-style networking capabilities thanks to the 'Quantum' networking code that was contributed by Nicira prior to the VMware acquisition. Rackspace have based their cloud on OpenStack, as have HP, so over the coming year we will start to get good information on how SDN works in production. 

Just as the storage and server makers face competition from a new breed of hungry companies, established networking companies are dealing with the same problem.

The chip margin slump 

Chip companies stand to be hurt as well, although to a lesser extent: the cloud means fewer companies buying ever-larger amounts of chips, which will hit overall margins as these massive buyers can demand volume discounts.

For this reason Intel has been investing ever-larger amounts in hard-to-commoditise areas, like its massively multicore Xeon Phi coprocessor and associated HPC technologies. However, while these areas are becoming more specialised again after a period where pure commodity processors had edged out the custom designs of the early supercomputers, the market is nowhere near big enough to compensate for the loss of mainstream enterprise. 

AMD, meanwhile, has embraced ARM's low-power RISC processor architecture in the hope it can appeal to power-conscious datacentre operators that have the resources to port their applications from x86 to RISC. Intel hopes to make progress here too with its Atom processors, but the momentum in low power is very much with the ARM architecture and its near-total dominance of mobile and embedded technologies. It too is unlikely to compensate Intel for the loss of margin and reduced OEM influence in the enterprise.

See here for more on the winners in the utiliity cloud revolution. After that check out our assessment of how close cloud is to becoming a utility.

Next, ZDNet looks at how the cloud revolution could make a few large cloud providers tech giants and make life difficult for start-ups.


Topic: Cloud

Jack Clark

About Jack Clark

Currently a reporter for ZDNet UK, I previously worked as a technology researcher and reporter for a London-based news agency.

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  • Pure short-sightedness

    Even without "cloud" there was an inevitable shift for the hardware vendors. It's happening because they are not really making the hardware anymore: Quanta, Foxconn and the other Asian companies are the *real* manufacturers. Google, Amazon and Rackspace are just cutting out the middleman.

    It's just another example of the "hollowing-out" of American tech companies.
    terry flores
    • Exactly

      Hey Terry flores,
      Thanks for commenting. During the course of my recent cloud investigations I've been running into this point again and again: company develops tech > Company becomes big > company off-shores some tech dev / opens up in other countries > employees in company began to leave to found other companies > new companies slowly eat different parts of the originating company's traditional market.

      I suppose what is happening in servers/storage/networking is exactly the same type of shift that happened when we started getting competition for Asian car manufacturers in the automotive market? What do you think?
      Thanks for commenting,
      Jack Clark
      • Long Live good old fashioned hardware.

        I hope servers/storage/networking does not go the way of Asian car manufactures, after the 5 year warranty runs out you throw them away !
        • Spoken like a true fan of American car manufacturers.

          "I hope servers/storage/networking does not go the way of Asian car manufactures, after the 5 year warranty runs out you throw them away !"

          Except that isn't the case with many Asian manufacturers, if perception is anything to go by. Toyota and Honda are two very good examples of companies known in the industry as a whole as producers of cars that last a lot longer than those of their american counterparts.

          If Toyota or Honda's reputation is to be considered, we'd be seeing these manufacturers building the modern versions of AS/400s and other hardware that "Just Won't Quit".
          • Have to agree on this comment.

            Have to agree about the example of Toyota and Honda. I have an 8 year old Toyota I paid $11,000 for and after an accident, my insurance company forked out $7,000 to repair it. It is well on its second 100,000 miles and going strong.
          • I am spartacus

            Everybody should just occasionally send out emails with the trigger words that get government attention. Basically we can all do a denial of service attack on snooping, flood them.
            Jeff Krogue
          • Bad idea

            Not that I am a fan of Gov't snooping, but if we did what you suggest, they would simply use more of our tax money to increase the size of their depts. Do we need another giant useless bureaucracy like the TSA and DHS?
        • asian cars?

          What your insane, Toyota and Honda's last longer than almost everything on the road. By the way the truly bullet proof engine is the Subaru boxer engine, they aren't cutting edge but are insanely reliable.
          Jeff Krogue
      • don't focus on the company, focus on the product/technology

        New high-tech products become mainstream due to improvements in reliability and production, hence price, then become low tech due to integration, then become commodity due to mass production and - consumption.
        The further down you come in this chain, the more cost price becomes important. The consequence is that first the manufacturing of these products start to move to low-cost areas, quickly followed by development.
        Look at textile, shoes, bicycles, cars, ships, consumer electronics, white goods: they all ended up in China/India.
        By the way: this has nothing to do with a product or technology being American. It is a law of nature and applies equally to American or European products and technology. And as long as we manage to maintain a free economy and open markets we will see the lifecycle of new technologies end in some low-cost country.
        Don't despair: all low cost countries eventually develop and become high cost countries!!
        • Hope and prey the socialist / liberals have no say in the matter.

          Unless the *administration* deems these companies *to big to fail* and decides to stifle free markets like they already have.
          Rick Spears
          • pray for the gramma

            pray vs prey ;-)
          • Spelling

            I presume you deliberately included your own spelling mistake (gramma vs grammar) when you pointed out someone else's, for comic effect?
          • Actually..

            It's the socialists and liberals that would want to keep jobs in the country and slow down globalization. The big business types want to lower costs by exporting jobs and manufacturing abroad. Your rights as an employee all come from socialism, so don't criticize what you haven't even bothered to think about.
          • Not actually

            What kind of "Rights as an Employee" are you referring to?
            Employment is a very simple business arrangement which is easily dissolved if both parties are not happy with it.
            Spiny Norman
        • Not a rule of nature

          Sorry, while mostly I agree with you, it is not a rule of nature but a rule of free market economics. Man-made! And the laws that substantiate these markets are designed to turn producers into paupers - just like in the old days of the aristocracy... someone has the money and power, but it isn't those doing the work.
        • Low Cost countries becoming high cost countries...

          I fully agree and endorse this view. BEing in INdia, I have first hand knowledge of our country slowly starting to become high cost country. But what it means, the whole world benefits. Rsources will automatically flow towards less developed low cost countries and then, those countries getting more developed. Hence, the whole world slowly gets the benefit of development by the flow of resources towards low cost countries.
          • Outsourced, automated, cloudomated, and unemployed.

            While those of us in high cost countries can at least hope that the world will run out of large low cost countries to outsource our jobs to in the next couple of decades, that's only half the problem.

            More American manufacturing has been lost to automation than to outsourcing, and the robots are taking over more and more jobs. IBM's Watson is specifically targets at call center work for example.

            On top of outsource, there's obsoleting... 10 years ago being a systems administrator seemed to be a safe, lifelong, career path. But when the server heads to the cloud, so does the job..
            Timothy Poplaski
      • Microsoft?

        Don't understand why it wasn't mentioned in the entire article as Azure is always a part of any cloud conversation.
  • Is the Cloud hot air?

    Interesting, but exactly what proportion of enterprise users are moving to the cloud?

    Obviously the vendors like Google, Microsoft and Amazon are pushing it hard, but many people remain unconvinced.

    We, a small business for one, are not. We prefer the privacy, security and total control of running our own in-house servers including Exchange server.
    • corporate

      What % of corporates are going to cloud providers? HUGE percentages. Exchange/collaboration infrastructures in particular. These are a nightmare and take huge skills to implement, then the same skilled admins spend their time administering inboxes, resource accounts and sharepoint permissions because they are perceived to be too difficult for lower level skill groups to do - so they move on. What is staying in house is complex interfaced applications and custom built solutions for key business processes. But "commodity" services like web, collaboration, communications and similar is ALL going to the cloud.

      Unlike the others, by the way, IBM does have cloud offerings but not as extensive as big providers. If they can plug the gaps they will win the business, particular with smaller customers who trust IBM. HP in particular are history because of the way in which they sell through multiple channels - I've seen some horrendous examples of resellers making a dogs dinner of customer relationships - both IBM and Dell gain from this, usually. Dell might do better as direct sales keeps up close relationships with customers but their services lack maturity and they compete with some of their own biggest customers.

      Bear in mind also that a small few companies are going the whole hog a la Atos Origin and throwing out email altogether in favour of collaboration tools.

      Exchange is expensive to manage and maintain, and many companies don't scale properly or upgrade when required, leaving a nightmare when they need to. At least 2 of my last 3 clients are either looking for a cloud replacement of Exchange or have already done so. Client no 3 I suspect if definitely looking at moving to Microsoft 365.
      Laura Farrell