Thoughts about cloud.

The economic basis is two-fold: economies of massive scale; and, commodity parts.

The corollary to massive scale is monoculture. Monocultures have their advantages – look at America’s corn-growing prowess – but their economic advantages also bend use cases to sub-optimal ends: ethanol; high-fructose corn syrup. Or Elastic Block Storage.

There are a few natural tech monocultures. Everyone is on Facebook because everyone is on Facebook and no one is on Google+. Everyone buys Office because everyone already has Office.

Unlike, say, utilities, tech monopolies tend to rise and fall. PCs no longer rule. Windows and x86 domination are imperiled.

The current monopolists, seeking growth, are encroaching on each other’s formerly unchallenged turf: Cisco into storage and servers; HP into networking; Microsoft into mobile; IBM into cloud; Amazon and Google into almost everything.

Another couple of years and we may see serious competition for infrastructure dollars. But where?

VCs should stop reading right now because what is coming isn’t pretty. What’s already happened in servers – gross margins in the 15-30% range – is headed to networks and storage.

Software defined networking? Commoditization.

Scale-out storage? Commoditization.

It won’t be easy, because the big players want to stay big. They’ll muck around in the standards bodies and open software groups to show they “get it” with no intention of getting to four nines quality – unless you buy it all from them.

That happened with Fibre Channel. That’s why SANs never got the network effects we’ve enjoyed with Ethernet. Sure, that stunted the SAN market, paved the way for NAS – which didn’t take off until after SAN’s promise had faded – and now cloud, but the margins were great until Amazon took the punch bowl away.

The StorageMojo take
Three business models suggest themselves for this brave new world.

  • The Red Hat model of nearly free software with services.
  • Commodity-based, channel-friendly appliances with a gross margins in the 40s (or a really great TCO story).
  • Scale-out converged computes and storage that starts in the $20s.

Red Hat is doing the Red Hat thing darn well. They’re a $1.5B company with a stratospheric P/E ratio and a market cap near NetApp’s. And they’re investing 20% of sales in R&D.

Nimble Storage is kicking butt with the appliance model and a killer TCO story. I expect their GM will be in the 50s if not the 60s.

Nutanix is possibly doing even better than Nimble in the converged scale-out category. They could do better on entry level pricing, but us Americans like big numbers and their average sale price is about double Nimble’s. But they offer a better deal than Cisco’s UCS even now.

Scaling up is difficult, but scaling down the Google/Amazon infrastructure may be harder. But unlike the past many companies are thirsting for change because the cloud has made IT costs much more transparent. The demand is there.

Amazon will remain a fast-moving target, but the advantages of local infrastructure are worth something too. The next big winners will figure out how to unlock that value.

Courteous comments welcome, of course. What say you?