CloudPundit: Massive-Scale Computing
the business of Internet infrastructure, cloud computing, and data centers
Updated: 17 min 55 sec ago
In an interesting move that seems to be predominantly an acquihire, HP has bought Eucalyptus for an undisclosed sum, though speculation is that the deal’s under $100m, less than a 2x multiple on what Eucalyptus has raised in funding (although that would still be a huge multiple on revenue).
Out of this, HP gets Eucalyptus’s CEO, Marten Mickos, who will be installed as the head of HP’s cloud business, reporting to Meg Whitman. It also gets Eucalyptus’s people, including its engineering staff, whom they believe to really have expertise in what HP termed (in a discussion with myself and a number of other Gartner colleagues) the “Amazon architectural pattern”. Finally, it gets Eucalyptus’s software, although this seems to have been very secondary to the people and their know-how — unsurprising given HP’s commitment to OpenStack at the core of HP Helion.
Eucalyptus will apparently be continuing onward within HP. Mickos had indicated something of a change in direction previously, when he explained in a blog post why he would be keynoting an OpenStack conference. It seems like Eucalyptus had been headed in the direction of being an open-source cloud management platform (CMP) that provides an AWS API-compatible framework over a choice of underlying components, including OpenStack component options. In this context, it makes sense to have a standalone Eucalyptus product / add-on, providing an AWS-compatible private cloud software option to customers for whom this is important — and it sidesteps the OpenStack community debate on whether or not AWS compatibility should be important within OpenStack itself.
HP did not answer my direct question if Eucalyptus’s agreement with Amazon includes a change-of-control clause, but they did say that partnerships require ongoing collaboration between the two parties. I interpreted that to mean that AWS has some latitude to determine what they do here. The existing partnership has been an API licensing deal — specifically, AWS has provided Eucalyptus with engineering communications around their API specifications, without any technology transfer or documentation. The partnership been important to ensuring that Eucalyptus replicates AWS behavior as closely as possible, so the question of whether AWS continues to partner going forward is likely important to the fidelity of future Eucalyptus work.
It’s important to note that Eucalyptus is by no means a full AWS clone. It offers the EC2, S3, and IAM APIs, including relatively full support for EC2 features such as EBS. However, it does not support the VPC networking features. And of course, it’s missing the huge array of value-added capabilities that surround the basic compute and storage resources. It’s not as if HP or anyone else is going to take Eucalyptus and build a service that is seriously competitive to AWS. Eucalyptus had mostly found its niche serving SMBs who wanted to run a CMP that would support the most common AWS compute capabilities, either in a hybrid cloud mode (i.e., for organizations still doing substantial things in AWS) or as an on-prem alternative to public cloud IaaS.
Probably importantly to the future success of HP Helion and OpenStack, though, Mickos’s management tenure at Eucalyptus included turning the product from its roots as a research project, into much slicker commercial software that was relatively easy to install and run, without requiring professional services for implementation. He also turned its sales efforts to focus on SMBs with a genuine cloud agility desire, rather than chasing IT operations organizations looking for a better virtualization mousetrap (another example of bimodal IT thinking). Eucalyptus met with limited commercial success — but thus far, CloudStack and OpenStack haven’t fared much better. This has been, at least in part, a broader issue with the private cloud market and the scope of capabilities of the open-source products.
Of the many leaders that HP could have chosen for its cloud division, the choice of Mickos is an interesting one; he’s best known for being CEO of MySQL and eventually selling it to Sun, and thus he makes most sense as a leader in the context of open-source-oriented thinking. I’m not inclined to call the HP-Eucalyptus acquisition a game-changer, but I do think it’s an interesting indicator of HP’s thinking — although it perhaps further muddies waters that are already pretty muddy. The cloud strategies of IBM, Microsoft, Oracle, and VMware, for instance, are all very clear to me. HP hasn’t reached that level of crispness, even if they insist that they’ve got a plan and are executing on it.
Edit: Marten Mickos contacted in me in email to clarify the Amazon/Eucalyptus partnership, and to remind me that MySQL was sold to Sun, not Oracle. I’ve made the corrections.
In Gartner’s 2014 research for CIOs, we’ve increasingly been talking about “bimodal IT”. Bimodal IT is the idea that organizations need two speeds of IT — call them traditional IT and agile IT (Gartner just calls them mode-1 and mode-2). Traditional IT is focused on “doing IT right”, with a strong emphasis on efficiency and safety, approval-based governance and price-for-performance. Agile IT is focused on “doing IT fast”, supporting prototyping and iterative development, rapid delivery, continuous and process-based governance, and value to the business (being business-centric and close to the customer).
We’ve found that organizations are most successful when they have two modes of IT — with different people, processes, and tools supporting each. You can make traditional IT more agile — but you cannot simply add a little agility to it to get full-on agile IT. Rather, that requires fundamental transformation. At some point in time, the agile IT mode becomes strategic and begins to modernize and transform the rest of IT, but it’s actually good to allow the agile-mode team to discover transformative new approaches without being burdened by the existing legacy.
Furthermore, agile IT doesn’t just require new technologies and new skills — it requires a different set of skills from IT professionals. The IT-centric individual who is a cautious guardian and enjoys meticulously following well-defined processes is unlikely going to turn into a business-centric individual who is a risk-taking innovator and enjoys improvising in an uncertain environment.
That brings us to VMware (and many of the other traditional IT vendors who are trying to figure out what to do in an increasingly cloud-y world). Today’s keynote messages at VMworld have been heavily focused on cost reduction and offering more agility while maintaining safety (security, availability, reliability) and control. This is clearly a message that is targeted at traditional IT, and it’s really a story of incremental agility, using the software-defined data center to do IT better. There’s a heavy overtone of reassurance that the VMware faithful can continue to do business as usual, partaking of some cool new technologies in conjunction with the VMware infrastructure that they know and love — and control.
But a huge majority of the new agile-mode IT is cloud-native. It’s got different champions with different skills (especially development skills), and a different approach to development and operations that results in different processes and tooling. “Agility” doesn’t just mean “faster provisioning” (although to judge from the VMware keynote and customer speakers, IT Operations continue to believe this is the case). VMware needs to find ways to be relevant to the agile-IT mode, rather than just helping tradtional-IT VMware admins try to improve operations efficiency in a desperate grasp to retain control. (Unfortunately for VMware, the developer-relevant portions of the company were spun off into Pivotal.)
Bimodal IT also implies that hybrid IT is really simply the peaceful coexistence of non-cloud and cloud application components — not the idea that it’s one set of management tools that sit on top of all environments. VMware admins are obviously attracted to the ability to extend their existing tools and processes to the cloud (whether service provider IaaS or an internal private cloud), but that’s not necessarily the right thing to do. You might run traditional IT both in non-cloud and cloud modes and want hybrid tooling for both — but you should not do that for traditional-IT and agile-IT modes (regardless of whether it’s non-cloud or cloud), but instead use best-of-breed tooling for each mode.
If you’re considering the future of any IT vendor today, you have to ask yourself: What is their strategy to address each mode of IT? The mere recognition of the importance of applications and the business is insufficient.
(Gartner clients only: See Taming the Digital Dragon: The 2014 CIO Agenda and Bimodal IT: How to Be Digitally Agile Without Making a Mess for a lot more information about bimodal IT. See our 2013 and 2014 Professional Effective Planning Guides, Coming to Terms With the Nexus of Forces and Reshaping IT for the Digital Business for a guide to what IT professionals should do to advance their careers and organizations given these trends.)
Investors are asking, probably reasonably, what’s going on here. Is the overall market for cloud computing weakening? Are competitors taking more market share? Or is this largely the result of the price cuts that went into effect at the beginning of 2Q? And if it’s the price cuts, are these price cuts temporary, or are they part of a larger trend that eventually drives the price to zero?
The TL;DR version: No, cloud growth remains tremendous. No, AWS’s market share likely continues to grow despite the fact that they’re already the dominant player. Yes, this is a result of the price cuts. No, the price cuts are permanent, and yes, cuts will eventually likely drive prices down to near-cost, but this is nevertheless not a commodity market.
The deep dive follows. Note that when I use the term “market share”, I do not mean revenue; I mean revenue-generating capacity-in-use, which controls for the fact that prices vary significantly across providers.
What’s with these price drops?
I have said repeatedly in the past that the dynamics of the cloud IaaS market (which is increasingly also convergent with the high-control PaaS market) are fundamentally those of a software market. It is a market in which customers are ultimately buying IT operations management software as a service, and as they go up-stack, middleware as a service. Yes, they are also getting the underlying compute, storage, and networking resources, but the major value is the actually in all the software that automates this stuff and delivers it as an easy-to-consume, less-effort-to-manage solution. The automation reduces a customer’s labor costs, which is where the customer sees cost-savings in services over doing it themselves.
You’ll note that in other SaaS markets, the infrastructure is effectively delivered at cost. That’s extremely likely to be true of the IaaS market over time, as well. Furthermore, like other software markets, the largest vendors with the greatest breadth and depth of capabilities are the winners, and they’re made extra-sticky by their ecosystems. (Think Oracle.) Over time, the IaaS providers will make most of their margin off higher-level services rather than the raw resources; think about the difference between what a customer pays for Redshift data warehousing, versus raw EC2 compute plus EBS storage.
The magnitude of the price drops is scaring away many rival providers. So is the pace of innovation. Few competitors have the deep pockets or willpower to pour money into engineering and data centers in order to compete at this level. Most are now scurrying to stake out a niche of the market where they believe they can differentiate.
Lowering the price expands the addressable market, as well. The cheaper it is to do it in the cloud, the more difficult it is to make a business case to do an on-premises solution, especially a private cloud. Many of Gartner’s clients tell us that even if they have a financially viable case to build a private cloud right now, their costs will be essentially static over the amortization period of 3 to 5 years — versus their expectation that the major IaaS providers will drop prices 30% every year. Time-to-value for private cloud is generally 18 to 24 months, and it typically delivers a much more limited set of features, especially where developer enablement is concerned. It’s tough for internal IT to compete, especially when the major IT vendors aren’t delivering software that allows IT to create equivalent capabilities at the speed of an AWS, Microsoft, or Google.
The size of the price cut certainly had a negative impact on AWS’s revenues this past quarter. The price cut is likely larger than AWS would have done without pressure from Google. At the same time, the slight dip in revenue, versus the magnitude of the cuts, makes it clear that AWS is still growing at a staggeringly fast pace.
The Impact of Microsoft Azure
Microsoft has certainly been on an aggressive tear in the market over the last year, especially since September 2013, and Azure has been growing impressively. Microsoft has been extremely generous with both discounts and with free credits, which has helped fuel the growth of Azure usage. But interestingly, Microsoft’s proactive evangelism to their customers has helped expand the market, particularly because Microsoft has been good at convincing mainstream adopters that they’re actually late adopters, spurring companies to action. Microsoft’s comprehensive hybrid story, which spans applications and platforms as well as infrastructure, is highly attractive to many companies, drawing them towards the cloud in general.
Some customers who have been pitched Azure will actually go to Azure. But for many, this is a trigger to look at several providers. It’s not unusual for customers to then choose AWS over Azure as the primary provider, due to AWS’s better feature set, greater maturity, and better ecosystem; those customers will probably also do things in Azure, although they may be earlier-stage and smaller projects. Of course, many existing AWS customers are also adding Azure as a secondary provider. But it may well be that Microsoft’s serious entry into this market has actually helped AWS, in terms of absolute usage gains, more than it has hurt it — for the time being, of course. Over time, Microsoft’s share gains will come at AWS’s expense.
The Impact of Google
Google has been delivering technology at an impressive pace, but there is an enormous gulf between its technology capabilities and its go-to-market prowess. They also have to overcome the perception problem that people aren’t sure if Google is serious about this market, and are therefore reluctant to commit to the platform.
While everyone is super-interested in what Google is doing, at the moment they do not seem to be winning significant customers from AWS. They’re doing reasonably well in batch-computing scenarios (more as a rival to AWS spot instances), and in scenarios where all of Google Cloud Platform, including App Engine, is of interest. But they do not seem to have really gotten market momentum, yet.
However, in this market and in many other markets, a competitor does not need to win over the market leader in order to hurt them. They merely need to change customer expectations of what the price should be — and AWS has allowed Google to set the price. As long as Google seems like a credible threat, AWS will likely continue to be competitive on price, at least for those things that Google also offers. Microsoft has already publicly pledged to be price-competitive with AWS, so that pretty much guarantees that the three providers will move in lockstep on pricing.
The Impact of Smaller Providers
Digital Ocean, in particular, is making a lot of noise in the market. They’ve clearly established themselves as a VPS provider to watch. (VPS: virtual private server, a form of mass-market hosting.) However, my expectation is that Digital Ocean’s growth comes primarily at the expense of providers like Rackspace and Media Temple (owned by GoDaddy), rather than at the expense of AWS et.al. A Digital Ocean droplet (VM) is half the price of an AWS t2.micro (the cheapest thing you can get from AWS), and they’ve been generous with free-service coupons.
VPS providers have friendly control panels, services that are simple and thus easy to use, and super-low prices; they tend to have a huge customer base, but each customer is, on the average, tiny (usually just a single VM). These days, VPS is looking more and more like cloud IaaS, but the orientation of the providers tends to be quite different, both from a technology and a go-to-market perspective. There’s increasing fluidity between the VPS and cloud IaaS market, but the impact on AWS is almost certainly minimal. (I imagine that some not-insignificant percentage of AWS’s free tier would be on VPS instead if not for the free service, though.)
There’s plenty of other noise out there. IBM is aggressively pitching SoftLayer to its customer base, but the deals I’ve seen have generally been bare metal on long-term contracts, usually as a replatform of an IBM data center outsourcing deal. Rackspace’s return to its managed hosting roots is revitalizing. CenturyLink continues to have persuasive sales. VMware customers remain curious about vCHS. And so on. But none of these providers are growing the way that AWS and Microsoft Azure are, and both providers are gaining overall market share at the expense of pretty much everyone else.
The sky is not falling
With Microsoft and Google apparently now serious about this market, AWS finally has credible competitors. Having aggressive, innovative rivals are helping to push this market forward even faster, to the detriment of most other providers in the market, as well as the IT vendors selling do-it-yourself on-premises private cloud. AWS is likely to continue to dominate this market for years, but the market direction is no longer as thoroughly in its control.