The first post on shadow IT looked at R&D spend. Now we look at CapEx spend – specifically PP&E – property, plant and equipment. That’s where new datacenters, servers, storage and networks go.
Big Spend
The FY13 PP&E spend in billions from major players:
While R&D expense is a proxy for innovation velocity, PP&E is a subtler metric. To the extent that the major cloud providers buy large quantities of kit, they influence the commodity market more than traditional system vendors.
Why? Because vendors are no longer on the cutting edge of demand or technology. Suppliers focus on where the growth is – and it isn’t in the legacy vendors. The opportunity to sell 500,000 units concentrates the mind wonderfully.
Big (ops) data
Another difference is that cloud vendors have deep insight into their operations that is not available to legacy vendors or analysts. They don’t need to explain the “why” to vendors, just the “what”. That means that even their suppliers have little insight into the opportunities their customers are exploiting.
We see this influence in several developments over the last 8 years.
- Rapid adoption of high efficiency power supplies
- Continued investment in high-capacity optical disks despite little consumer uptake
- Advent of shingled magnetic recording drives (SMR) without public announcement or availability
- DC power distribution systems
There are probably dozens of less obvious changes due to the cloud vendor’s buying clout, such as the many-core chips, many-drive (≈40 or more) servers, and containerized data centers. Since these changes aren’t responding to enterprise needs, most enterprise people don’t try to understand them.
The StorageMojo take
As Arthur Conan Doyle put it in his Sherlock Holmes story Silver Blaze:
Gregory (Scotland Yard detective): “Is there any other point to which you would wish to draw my attention?”
Holmes: “To the curious incident of the dog in the night-time.”
Gregory: “The dog did nothing in the night-time.”
Holmes: “That was the curious incident.”
It’s hard to see the action of unseen forces. Whether it’s dark matter or dark money, we are forced to look for the strange effect and then reason backwards to the cause. It’s not easy.
The most obvious long-term effect of the cloud vendor’s OpEx and CapEx primacy is legacy vendors will fall further behind in both invention and implementation. By extension, so will enterprises who outsource their infrastructure architecture to legacy providers pushing low-scale systems.
The shadow IT industry is changing IT faster than ever before. Now is the time to start following and planning for it.
Courteous comments welcome, of course. See the first part here and part III here.
Robin- a great twist in this conversation is that for AGFM, if you take out money spent on the PP part and look at only the equipment spend, how much of their spend would be on IBM, HP, Oracle, Cisco, etc versus spend on white label kit? Seems like the rise of AGFM spending and adopting more commodity hardware has helped them outspend on equipment because they are probably getting a two for one spend than what they got in the past when they bought all name brand servers, storage and networking kit from the big brands.
You also make a great point on the why versus the where… Many cloud providers, hosting companies and SaaS companies are leveraging the secondary hardware market as they have their own support models and really look to drive costs out by finding the best possible deal for their kit without worrying where it came from.
Very intriguing article. What is the 3rd act going to be? care to extrapolate?
Hi Robin.
I agree with your overall analysis, however it’s important to separate general R&D spend by AGFM with actual storage/networking R&D.
In the USA, companies get an R&D tax credit for all software development, including CRUD web development, which has no research component.
The legacy enterprise storage and networking companies have a more legitimate claim to doing large-scale R&D than AGFM, as most of what they develop is actually used downstream by other companies.
Having said that, cloud service companies like AGFM do have the usage data to decide where to focus, so they don’t need to spend as much. For example, they can focus on supporting one hypervisor instead of all, or a subset of networking protocols instead.
I hope you’re right about ex-AGFM employees developing new data center technology, but I’ve noticed employment agreement legalese getting longer and longer. Very un-Silicon Valley.
Thanks, James.