FT : Buffett’s IBM Move

Monday, November 21, 2011

Warren Buffett has famously steered clear of the tech sector on the grounds that he is ill-equipped to assess the periodic disruptions that sweep through the industry. Yet with the $10.7bn bet he has just placed on IBM , he has stepped into the middle of the biggest disruption since the emergence of the PC.  The rise of cloud computing is exactly the sort of secular tech shift that has kept the Sage of Omaha on the sidelines in the past. That he has invested regardless is a testament to the fortress IBM has constructed around its business. It also represents a bet that the cloud disruption will be different, and that old names like IBM are in a position to manage this one to their advantage.  In many ways, the surprise is not that Mr Buffett has finally taken the plunge in tech, but why it took him so long.  It’s not just that IBM has been a fixture of the US business establishment for decades. As an executive at one of the company’s biggest competitors ruefully admits, IBM is exactly the kind of business that Mr Buffett loves. Its relationships with its customers are the most durable in tech and its single-minded mission – to win a progressively bigger “share of wallet” from the chief information officers who have come to rely on it – has been remorselessly effective.

With its push into services and business consulting, IBM has cemented those relationships in a way that no rival has been able to match. There is no surprise here: IBM’s approach has long been seen as the model to copy in tech. But its rivals have been either too slow or have mishandled their response, with HP’s belated acquisition of services company EDS – and troubles integrating the business with the rest of its salesforce – just the most visible example.  Behind the giant services division, meanwhile, lies Big Blue’s real secret weapon: a software business that has been the main driver of its earnings and margin growth. There is little natural operating leverage in services, which relies on hiring more people the more work there is to do. But software has given IBM a way to enshrine repeatable processes in code, increasing the bang for the buck it gets from its services engagements.  Perfecting this approach to services and using it to drive hardware and software sales also accounts for Sam Palmisano’s success in defusing the threat from low-margin Indian IT services companies during his decade as IBM’s chief executive.

While fine-tuning this business model, Mr Palmisano has also made IBM a machine for delivering higher shareholder returns. There has been little overall growth: revenues, which hit $88bn in 2000, were still under $100bn last year. But as Mr Palmisano has shuffled IBM’s portfolio of businesses, the net profit margin has climbed from 9 per cent to 15 per cent.   Also, aided by the buy-backs and other shareholder-friendly actions so praised by Mr Buffett, earnings per share have risen from $4.44 to $11.52.  With his five-year “roadmaps” laying out detailed financial targets, Mr Palmisano, who retires at the end of this year, has left an unrivalled process for holding his successors accountable. With IBM, he promises, what you see is what you get.  How defensible will IBM’s high-margin citadel be in the cloud disruption that lies ahead? The centralisation of computing resources in larger data centres, along with the transformation of the output of IT into easily consumable services, promise to bring massive reductions to unit costs in computing.  IBM has stood partly aloof from this. Rather than bet on the shared “public clouds” that will have the biggest economies of scale, it is betting that it can bring ingredients of the technology to bear in company-specific “private clouds”. The pay off will be smaller, but the upheaval to IT functions less. The natural conservatism of IT managers suggests that this is a solid bet.

Yet most corporate IT departments are also under pressure. Departmental business managers are impatient: they want to equip their workers with the latest smartphones and tablets. Rather than wait for the IT department to allocate the resources to back their latest projects, they would rather tap into the new online services that public clouds are starting to foment.  These forces will create dynamic new businesses with growth rates that far exceed the plodding progress of IBM. From the makers of new cloud-connected devices to software-as-a-service providers and suppliers of the technology infrastructure to support the public cloud platforms, there will be many hotter stocks in the tech world.  Mr Buffett is prepared to let such opportunities pass by. His bet is that Big Blue’s brand will remain the gold standard in corporate IT, and that generations of CIOs to come will grow up repeating the mantra of their forebears: You can’t get fired buying from IBM.

Reference : http://www.ft.com/intl/cms/s/2/fd27b166-106b-11e1-8298-00144feabdc0.html

FT : Salesforce Breaking New Ground

Monday, January 24, 2011

Stock market investors have finally been warming up to a software trend that has been more than 10 years in the making. That’s how it goes with big transitions in the underlying architecture of IT: there are many false dawns in what can appear to be inevitable long-term shifts – in this case, a new approach to information storage and processing, carried out remotely in large datacentres and delivered over the internet. The trick is not necessarily predicting what will happen next, but deciding which horse to back – and when to enter the race. So it has been with something that goes by the ungainly name of software-as-a-service (SaaS.) Like many tech trends, this one surfaced under a number of different guises – application service providers was one name given to the early players, on-demand software was another – before taking its current form. Is this finally its moment? The pioneer in this market, Salesforce.com , has seen its shares jump by 70 per cent in the past year. It sells an online service for salespeople to manage their customer data. At nearly $20bn, it is now worth more than software companies like Adobe, Symantec and Intuit – all of them much bigger and more profitable. Other SaaS names like NetSuite and SuccessFactors have been caught in the updraft.

Entrepreneurs and early investors usually blame accounting for the length of time it has taken Wall Street to get excited about SaaS. The argument goes like this: unlike traditional software companies, which book revenues upfront when they make a sale, these companies sell subscriptions – for instance, $50 a year per employee for a company that wants its sales staff to use an online application that manages their customer relationship data. Since those subscriptions often continue for years but all the costs of selling the service gets booked up front, SaaS companies can look unprofitable for many years, which makes investors cautious.  That argument is hard to swallow. Sure, Salesforce only just scrapes out a profit, but its operating cash flow jumped nearly two-thirds in the first nine months of 2010. It doesn’t take a maths genius to understand the economics of this business. A more likely explanation is the length of time it sometimes takes Wall Street to get comfortable with a new market and a new business model. Like all subscription businesses, SaaS companies live or die on a handful of key measures: the money they spend finding new customers, the amount they can extract from those customers in each accounting period, and the rate at which customers fail to renew their subscription agreements and have to be replaced with new ones (known as churn).

In a new market, it is not easy to tell how the dynamics of marketing costs, pricing and churn will settle down.  Salesforce, which has been at this game for 11 years, spent 47 per cent of its revenues on marketing costs in the latest nine months, a higher proportion than the year before. Does that mean it is ploughing everything into growth, or that it has to spend more on marketing because the business is getting more competitive? What happens to pricing when there is a thriving market of companies vying to outsource the handling of business processes like this? Another factor is the capital investment and operational risks involved in building what amounts to a utility business. Make no mistake, these companies aim to reach huge scale. ADP, the big, boring payroll processing company that has been around for half a century, is the darling that many in this industry look up to. Start-ups, which often lack patient long-term investors and struggle to control breakneck growth, may not seem the obvious entities to which large companies would want to entrust their key data and business processes. That caution points to the other, overriding reason why SaaS has taken time to emerge as a stock market investment story. The early market has been fuelled by small businesses that can not afford an IT department, along with departmental managers of large businesses who have enough autonomy to make decisions about how to handle non-core processes without involving the CIO. Getting to where the real money is – handling things like the financial processes and supply chains of big corporations – will take years. It’s all in the timing. Wall Street has finally decided that this is a business that’s here to stay – and that, in Salesforce, it has already thrown up at least one company that may emerge to stand alongside the big players in business software (if it isn’t bought by one of them along the way). But to live up to the new expectations they have created, it is time for the SaaS companies to prove that IT managers no longer fear the cloud.

Reference : The Financial Times, Jan 20th 2011.

Gartner Disses Amazon’s EC2

Friday, January 14, 2011

Gartner’s Magic Quadrant report has placed Amazon’s cloud computing service in one of its lower tiers, saying that for all of Amazon’s commercial success it is “visionary” but “unproven.” Amazon’s Elastic Compute Cloud, which provides on-demand access to virtual machines and other computing resources, has helped define the infrastructure-as-a-service (IaaS) technology model and bring cloud computing into the mainstream of IT. But that doesn’t mean it’s the best option for customers, according to the Gartner analyst firm. The Gartner Magic Quadrant for cloud infrastructure-as-a-service and Web hosting, published last month, places Amazon in the “visionaries” tier, one step below the “challengers” and two steps below the “leaders.” In Gartner’s view, the leaders are Savvis, AT&T, Rackspace, Verizon Business and Terremark Worldwide. Visionaries include Amazon, GoGrid, CSC, Joyent and IBM. “Visionaries have an innovative and disruptive approach to the market, but their services are new to the market and are unproven,” Gartner writes. Gartner did express some admiration for Amazon’s cloud service. “Amazon is a thought leader; it is extraordinarily innovative, exceptionally agile and very responsive to the market. It has the richest cloud IaaS product portfolio, and is constantly expanding its service offerings and reducing its prices,” Gartner analysts Lydia Leong and Ted Chamberlin write. But the analysts caution customers on several fronts. “Amazon does not offer any managed services … Amazon is the only evaluated vendor that does not also offer the standard options of colocation, dedicated nonvirtualized servers. … Amazon is a price leader, but it charges separately for optional items that are often bundled with competitive offerings. … Amazon’s offering is developer-centric, rather than enterprise-oriented, although it has significant traction in large enterprises.”

Some of these criticisms are simply a byproduct of the fact that Amazon is purely an infrastructure-as-a-service vendor, whereas rivals who place higher in Gartner’s Magic Quadrant are in the business of hosting physical servers and managing the data center infrastructure for clients. In fact, Gartner’s recommendation to customers for “visionaries” is to “buy these services on demand, or in contracts of one year or less.” Amazon sells its services in an on-demand model, so this is hardly much of a restriction. But Gartner also criticizes Amazon’s service-level guarantees. “Amazon has the weakest cloud compute SLA of any of the evaluated competing public cloud compute services, even though its uptime is actually very good,” Gartner writes.

“Most providers offer 99.99% or better, with many offering 100%, evaluated monthly, with service credit capping at 100% of that monthly bill. Amazon offers 99.95%, evaluated yearly, capping at 10% of that bill.” Amazon spokeswoman Kay Kinton defended the company’s service-level agreements. “Many of the SLA’s you see out there are written in a way that either [excludes] downtime (calling that downtime ‘maintenance’) or are written so the vendor never has to pay out,” Kinton writes in an e-mail. “AWS [Amazon Web Services] is clear about how our SLA’s are calculated, we do not [exclude] downtime, and our service health dashboard gives customers complete constant access to how the services are performing. What matters most is demonstrated performance, and ours has been strong.” Forrester analyst James Staten also gives high marks to Amazon. While the Magic Quadrant looks at both infrastructure-as-a-service and Web hosting, Staten notes that Amazon is strictly an infrastructure-as-a-service vendor. “While many will complain about the SLAs for AWS, they do improve over time (you used to not get one at all) and second the users of AWS put availability and performance into the [software] stack, rather than relying on that in the infrastructure,” Staten writes in an e-mail. “That said, if I were to do a quadrant strictly on IaaS I would be hard pressed to put anyone higher (or ahead) of AWS. They are by far the largest player, with the broadest customer base and service portfolio, have the most stable API (which really matters in this market), have driven cloud economics the hardest and have the most rich ecosystem of partners and services that integrate or run on their platform.” BTC Logic, an IT consulting firm, gave both Amazon and IBM a strong endorsement last year in a report calling the two vendors “cloud champions,” ahead of Microsoft, Google, Cisco, Red Hat and VMware.

Gartner’s Magic Quadrant is divided into leaders, challengers, visionaries and niche players. The challengers who placed ahead of Amazon are SunGard, Datapipe, NaviSite and OpSource. Niche players who placed behind Amazon include Hosting.com, Carpathia Hosting, SoftLayer, Layered Tech, Media Temple, and NTT Communications. The challengers, as defined by Gartner, “have a track record of delivering good service capabilities, but they are trailing the market’s evolution,” while niche players “are typically specialists with more limited product portfolios, or emerging vendors.” The leaders, meanwhile, have proven they “have staying power in the market,” and customers should be comfortable signing two- or three-year contracts with them, Gartner says. AT&T, for example, “has a very strong corporate commitment to cloud computing, and has the broadest and deepest vision of any global carrier,” Gartner writes. “It has an ambitious and comprehensive road map of services that are highly integrated with its network capabilities.” Microsoft’s Windows Azure service, primarily a platform-as-a-service offering, was not included in the Gartner Magic Quadrant.

Reference : http://www.cio.com/article/print/654513

The Economist : Measuring The Clouds

Thursday, December 30, 2010

…..The “cloud of clouds” has three distinct layers. The outer one, called “software as a service” (SaaS), includes web-based applications such as Gmail, Google’s e-mail service, and Salesforce.com, which helps firms keep track of their customers. This layer is by far the easiest to gauge. Many SaaS firms have been around for some time and only offer such services. In a new study Forrester Research, a consultancy, estimates that these services generated sales of $11.7 billion in 2010.  Going one level deeper, there is “platform as a service” (PaaS), which means an operating system living in the cloud. Such services allow developers to write applications for the web and mobile devices. Offered by Google, Salesforce.com and Microsoft, this market is also fairly easy to measure, since there are only a few providers and their offerings have not really taken off yet. Forrester puts revenues at a mere $311m. The most interesting layer—the only one that really deserves to be called “cloud computing”, say purists—is “infrastructure as a service” (IaaS). IaaS offers basic computing services, from number crunching to data storage, which customers can combine to build highly adaptable computer systems. The market leaders are GoGrid, Rackspace and Amazon Web Services, the computing arm of the online retailer, which made headlines for kicking WikiLeaks off its servers.

This layer is the hardest to measure. It is growing rapidly and firms do not report revenue numbers; nor are they very forthcoming with information, arguing unconvincingly that this would help their competitors. Amazon, for instance, only reveals that it now stores more than 200 billion digital “objects” and has to fulfil nearly 200,000 requests for them per second—impressive numbers but not very useful ones (an object can be a small file or an entire movie). Rackspace says it operates nearly 64,000 servers globally, but notes that only some are used for IaaS. This reluctance to share information has inspired analysts and bloggers to find out more, in particular about Amazon.

That is where the tanks come in. During the second world war, the allies were worried that a new German tank could keep them from invading Europe. Intelligence reports about the number of tanks were contradictory. So statisticians were called in to help. They assumed that the Germans, a notoriously methodical lot, had numbered their tanks in the order they were produced. Based on this assumption, they used the serial numbers of captured tanks to estimate the total. The number they came up with, 256 a month, was low enough for the allies to go ahead with their plans and turned out to be spot-on. German records showed it to be 255. Using this approach, Guy Rosen, a blogger, and Cloudkick, a San Francisco start-up which was recently acquired by Rackspace, have come up with a detailed estimate of the size of at least part of Amazon’s cloud. Mr Rosen decrypted the serial numbers of Amazon’s “virtual machines”, the unit of measurement for buying computing power from the firm. Alex Polvi, the founder of Cloudkick, then used these serial numbers to calculate the total number of virtual computers plugged in every day. This number is approaching 90,000 for Amazon’s data centres on America’s East Coast alone (see chart).

The results suggest that Amazon’s cloud is a bigger business than previously thought. Randy Bias, the boss of Cloudscaling, a IT-engineering firm, did not use these results when he put Amazon’s annual cloud-computing revenues at between $500m and $700m in 2010. And in August UBS, an investment bank, predicted that they will total $500m in 2010 and $750m in 2011. These numbers give at least an estimate of the size of the market for IaaS. Amazon is by far the market leader with a share of between 80% and 90%, according to Mr Bias. Assuming that Cloudkick’s and Mr Bias’ numbers are correct, revenues generated by computing infrastructure as a service in 2010 may exceed $1 billion.

So how big is the cloud? And how big will it be in, say, ten years? It depends on the definition. If you count web-based applications and online platforms, it is already huge and will become huger. Forrester predicts that it will grow to nearly $56 billion by 2020. But raw computing services, the core of the cloud, is much smaller—and will not get much bigger. Forrester, reckons it will be worth $4 billion in 2020 (although this has much to do with the fact that even in the cloud, the cost of computer hardware will continue to drop, points out Stefan Ried of Forrester). At any rate, the cloud is not simply “water vapour”, as Larry Ellison, the boss of Oracle, a software giant, has deflatingly suggested. One day the cloud really will be big. Given a little more openness, more people might actually believe that.

Reference : http://www.economist.com/node/17797794/print

Economic fluctuations and business uncertainty, accelerated service globalization, and increasing competition of IT services are major factors that could force businesses to move further toward low-cost IT, according to Gartner, Inc.  “The price of IT will continue to drive decision making,” said Claudio Da Rold, vice president and distinguished analyst at Gartner.  “As credit markets in the U.S. and Europe remain challenging, end-user organizations are reducing costs by sourcing IT services from emerging countries and lower cost providers.  Cost cutting, restructuring and the move toward offshore outsourcing continue to increase while growth in emerging countries accelerates, widening the gap between high-growth areas (e.g. Asia/Pacific and Brazil, Russia, India and China) and stagnant economies (e.g. Europe, Japan and North America), and low and high-cost IT providers.  This trend could drive a prolonged reduction in the unit cost of IT services, significantly affecting the IT services market by 2013.”

Gartner describes “industrialized IT services” as the standardization of IT services through predesigned and preconfigured solutions that are highly automated and repeatable, scalable and reliable, and meet the needs of many organizations.  The industrialization of IT services is also enabling a greater orientation toward outcome-based and pay-per-use services.  Early offerings like infrastructure utilities or cloud e-mail show that providers can deliver one-to-many services at price points that are one third of in-house/traditional costs, due to the right combination of industrialized one-to-many services, offshore outsourcing and technologies such as virtualization and automation.  Gartner analysts said that based on the proliferation of advertising ‘IT as a service’ as a pricing model, business buyers would force traditional providers to switch to PUPM pricing models by 2012.  “If the scenario of low-cost IT accelerates in the next few years, we foresee a growing number of delivery models that could cut the cost of IT by a third or more.  This could lead to the emergence of viable low-cost IT providers,” said Frank Ridder, research vice president at Gartner.

In such a scenario, the IT services market could sustain a year-on-year reduction of 10% to 25% in the average market unit price PUPM for three to five years. A yearly reduction of 10% to 25% in IT services costs, affecting 30% of the market, could cause the overall, average market price to decline by 5-10% yearly.  This worst case scenario reduction would equal the revenue of two to four of the largest IT service providers. “This reduction is possible because, in 2009, we saw the IT services market shrink 4 percent, with a market loss of $42 billion, with outsourcing prices plummeting,” Mr. Ridder said.  “Such extensive reductions in price and market size would stall growth in the overall IT services market by 2013.”  “Organizations must invest in scenario planning and risk management,” Mr. Da Rold said.  “About two or three times a year — depending on dynamics in their business environment — they need to assess their multisourcing environment against risks, including changing service pricing, regulatory changes and providers’ viability.  They also need to consider leveraging new IT services options depending on their compatibility with their corporate risk profile, and add business value through risk mitigation and business continuity planning.”

Reference : http://services.tekrati.com/research/11240/

BBC Digital Planet : Clay Shirky

Thursday, July 8, 2010

Brilliant interview with the author of the concept of Cognitive Surplus.

(click for audio which runs 10m49s)

…Behavior is just motivation filtered through opportunity…
…It’s not information overload, it’s filter failure…
…The printing press did not cause the scientific revolution, and the scientific revolution would not have been possible without the printing press…

Investments in computer hardware will bolster a tech recovery in 2010 as corporate IT buyers look to buy mobile PCs, desktops, servers, storage and network devices in the coming months, according to industry watchers.  Forrester Research and Gartner separately released IT spending forecasts for the coming year, and both research firms point to positive growth in hardware and software spending, developments that will contribute to a tech recovery in 2010…..According to Forrester’s research for Q1 2010, U.S. spending on information and communications technology products and services will reach $741 billion 2010.  Software and telecommunications services will represent the biggest part of the total, at $194 billion and $191 billion respectively, while computer equipment spending will represent about $83 billion.  Forrester points out that in the U.S. computer equipment spending is set to increase by more than 11%, mainly due to “replacement of old PCs, servers and storage equipment.”  The research firms says software spend will grow by 10.5% while communications equipment spending will increase 7.2% to $108 billion in IT spend for 2010, “based on better-than-expected results from network equipment vendors in Q4 2009,” the Forrester report reads.  “For software, growth will result from a mixture of the revival of deferred license software purchases following the 2009 capital freeze, ongoing growth in SaaS software and continued strong growth in Smart Computing platform technologies like service-oriented architecture (SOA) infrastructure, virtualization software and analytics,” Forrester states.  IT outsourcing, set to increase by 3.8% to $79 billion, will be the “laggard, according to Forrester, which says IT consulting services will lag slightly behind the software growth at an expected 7% increase, or $86 billion, most of which is expected in the second half of 2010.

Separately, Gartner forecasts worldwide IT spending to reach $3.4 trillion in 2010, representing a 5.3% increase from IT spending of $3.2 trillion in 2009…..The IT industry will continue to show steady growth with IT spending in 2011 projected to surpass $3.5 trillion, a 4.2% increase from 2010.  The research firm also points to hardware as a key driver to IT spending.  For instance, worldwide computing hardware spending it forecast to reach $353 billion in 2010, a 5.7% increase from 2009.  “Computing hardware suffered the steepest spending decline of the four major IT spending category segments in 2009.  However, it is now forecast to enjoy the joint strongest rebound in 2010,” said George Shiffler, research director at Gartner, in a statement.  “Consumer PC spending will contribute nearly 4 percentage points of hardware spending growth in 2010, powered by strong consumer spending on mobile PCs.  Additionally, professional PC spending will contribute just over 1 percentage point of spending growth in 2010 as organizations begin their migration to Windows 7 toward the end of the year.”  Gartner also notes a more than 5% increase in worldwide software spending, totaling $232 billion in 2010…..The infrastructure market, which includes all the software to build, run and manage an enterprise, is the largest segment in terms of revenue and the fastest-growing through the 2014.  The hottest software segments through 2014 include virtualization, security, data integration/data quality and business intelligence.  The applications market, which includes personal productivity and packaged enterprise applications, has some of the fastest-growth segments.  Web conferencing, team collaboration and enterprise content management are forecast to have double-digit compound annual growth rates (CAGR), in the face of growing competition surrounding social networking and content.  “Cost optimization, and the shifts in spending form mega suites to the automation of processes will continue to benefit alternative software acquisition models as organizations will look for ways to shift spending from capital expenditures to operating expenditures,” said Joanne Correia, managing vice president at Gartner.  “Because of this, vendors offering software as a service (SaaS), IT asset management, virtualization capabilities and that have a good open-source strategy will continue to benefit.  We also see mobile-device support or applications, as well as cloud services driving new opportunities.”

The worldwide IT services industry is forecast to have spending reach $821 billion in 2010, up 5.7% from 2009.  The industry experienced some growth in reported outsourcing revenue at the close of 2009, an encouraging sign for service providers, which Gartner analysts believe will spread to consulting and system integration in 2010.  “We continue to see a long-term recession ‘hangover’ as a more-cautious mind-set continues as the norm among a lot of buyers who keep looking for small, safe deals where cost take-out is a key factor, said Kathryn Hale, research vice president at Gartner.  “In the face of that ongoing strong pressure to renegotiate contracts, and in the absence of equivalent pressure from stockholders, we believe vendors will generally choose to maintain margins over revenue growth.”  Worldwide telecom spending is on pace to total close to $2 trillion in 2010, a 5.1% increase from 2009.  Between 2010 and 2014, the mobile device share of the telecom market is expected to increase from 11% to 14%, while the service share drops from 80% to 77% and the infrastructure share remains stable at 9% of the total market.  Worldwide enterprise network services spending is forecast to grow 2% in revenue in 2010, but Gartner analysts said this masks ongoing declines in Europe and many other mature markets as well as an essentially flat North American market.  “Longer term, the global enterprise network services market is expected to grow modestly, largely on the back of growth in Internet services, such as hosting,” said Peter Kjeldsen, research director at Gartner.  “Ethernet services will also grow significantly, albeit at the expense of both legacy services and multiprotocol label switching (MPLS).”

References :