Cloud Computing or the IT Industrial Revolution (ITIR): Economic impacts on supply and demand in IT.

Louis Naugès

Co-Founder & Chief Evangelist Cloud

Revevol

Abstract

In the early 20 th century, the economist Joseph Schumpeter became famous by popularizing the concept of "creative destruction".
http://en.wikipedia.org/wiki/Creative_destruction
Schumpeter's central idea was that "capitalism can be understood as an evolutionary process of continuous development and of creative destruction.

In the IT world, the 2010 - 2020 decade will be the one of the Cloud ; it will be a perfect example of this "creative destruction ». New actors, new business models will arise and undermine the incumbents vendors who will have a  very hard time adapting to strong and profound changes induced by Cloud Computing.

• Cloud computing is a great new for organizations which will see their IT budgets decline sharply, the quality of their IT solutions improve and the time needed to implement them decrease by a ratio of 10 or more.
• Cloud computing is a very bad new for the vast majority of IT legacy vendors which will see their traditional sources of revenue and activities shrink very fast.

1 - Background: keys for understanding the "real" Cloud Computing

Today, Cloud is everywhere! All vendors have added to their offerings the word Cloud because it has become "fashionable". Too often, this is no more than a repackaging of a traditional solution, to which the Cloud label has been added.
In the remainder of this text, I will focus on Public Cloud Infrastructures and  SaaS (Software as a Service) usages; these are the two main areas where the real economical disruptions generated by the Cloud Computing movement will be the strongest, and where innovation plays a key role.

Public Cloud infrastructures

On a Public Cloud, Organizations are using servers and infrastructures they don't manage, which are owned and operated by large industrial players such as Amazon or Google. Over the past 10 years, these vendors have been busy building huge Data Centers  which allow them to share the economies of scale they have achieved with their customers. It is estimated that Google has about 3 million servers in its 40+ Data Centers and Amazon has more the 500,000 servers in operations. AWS, Amazon Web Services, started in 2006; since that time, they have reduced their prices 19 times!

This graph shows the high level of Capex investments by Google; in 2011, they have invested $ 3.5 Billion and most of this money has been spent on Data Centers.
Google was absent from the IaaS market (Infrastructure as a Service) until June 2012, when they announced at their annual I / O conference that they were entering the IaaS market under the name Google Compute Engine.

Among the legacy providers of IT infrastructures, HP, IBM and Microsoft have entered the IaaS market and they all have sufficient financial resources to be able to play an important role.

To summarize: to have a reasonable possibility to be a significant player in the IaaS market today, the ticket for entry is $1 Billion.

SaaS usages

All SaaS solutions  three mandatoryfeatures:
- Hosted on public clouds.
- Billed as a service.
- A « tenant » architecture:

• All customers share the same instance of the software.
• Customers don't  access to the source code. They are not allowed to make any changes to the SaaS application.
• Any change in the solution which is implemented by the SaaS vendor is immediately available to all customers. All customers use only one version of the software, the most current one.

This double industrialization, in infrastructures and applications, is the key for understanding the profound economic impacts of cloud computing on the demand and supply side of solutions and services.

2 - ITIR: IT Industrial Revolution: impacts for client organizations

CEOs, CFOs, line of business managers, CIOs, end users ... rejoice! I have great news for you: the Cloud Computing Revolution has arrived.
Let's summarize its main advantages, both in terms of infrastructures and usages.

Benefits of ITIR in infrastructures

The industrialisation of infrastructure brings to business clients:

• A sharp reduction in  investments (Capex), increasingly replaced by operating costs (Apex):
  • The computing power of public clouds is charged by the hour, with very competitive rates, which start at 5 or 8 cents / hour for basic Linux servers.
  • They pays only the power needed. A prime example of this is that of a pharmaceutical research laboratory which used the solution from CycleComputing built on AWS, Amazon Web Services. They needed 50,000 servers in parallel for a few hours to analyze a database of proteins and were able to do it at the very low hourly cost of $ 5 000. How many companies can mobilize 50,000 servers when they need them for a few hours?
• Access to a variety of  solutions, tailored to every need, for networks, servers or workstations. Le's take one example: CCD, Cloud Connected Devices, the successors of legacy PCs! CIOs who understand the benefits of Cloud Computing can extricate themselves from the unique "Master" view for PC and say to all users: « To access SaaS applications, you can use the PC, Macintosh, tablet or smartphone of your choice. It only has to be equipped with a modern browser, and make sure all applications are written using the HTML5 standard.
• Universal  Mobility: "Anywhere, Anytime, AnyDevice". Any wireless network, Wi-Fi, 3G or LTE and a mobile CCD will allow any employee to use all SaaS applications.
• Excellent  security: all important data of the company remains in the hyper-secure Data Centers of leading suppliers of Public Cloud. Even better, no applications or data reside on employee's workstations, eliminating one of the greatest risks of IT, today. All network communications are done using HTTPS. There are even  now, for cases where confidentiality is absolutely critical, excellent solutions, such as CipherCloud (Disclaimer: Revevol is a partner of CipherCloud), which allow you to encrypt your data in the Data centers of public cloud providers such as Google or Salesforce.

Benefits of ITIR in usages

SaaS solutions do not meet all the needs of businesses, especially in large organizations. For many years to come, "Core Business Applications" will still need custom developments to adapt to the specific business processes and provide important sources of competitiveness and differentiation.

But, for all universal, horizontal applications, the only answer today is ... SaaS or SaaS!
The most iconic examples are well known:

• Communication and Collaboration: Google Apps or IBM SmartCloud for Social Business are two good examples of these solutions.
• CRM, Marketing ... Salesforce which started in 1999, will have this year sales of about $ 3 Billion.
• Human Resources Management: the two leaders in this field, SuccessFactors and Taleo, were bought in 2012 by the two largest legacy vendors of enterprise software, SAP and Oracle, respectively. Is this good news for customers of these SaaS solutions? I'm not convinced.
• Adaptive Planning, who is the leader in budgeting and reporting processes.
• Project management, monitoring of travel expenses, cash management ... The list is long of all areas for which tyou can find today excellent SaaS solutions.

For businesses, the benefits of SaaS are even greater than those induced by the public cloud infrastructures:

• applications ... that  work. The hypothesis "my application does not work" no longer exists! When a company decides to acquire a SaaS solution, it will access the same application which is already used by hundreds or thousands of other organizations.
• Short Deployment times : they are measured in weeks or months, never in years.
• Simultaneous deployments  in all subsidiaries, all countries. No more endless planning, country by country, spread over several years. All employees have access, at the same time, at the same applications, everywhere.
• Applications always up to date . All business customers of a SaaS solution always run the latest version ... because it's the only one available!
• No more migrations nightmares.  In the ancient world of legacy applications, it happened, sometimes, that an application deployed in-house would eventually work, after much effort. It was the moment chosen by the software editor to announce that you need to change versions, because the old one you were running is no longer maintained!
• Lower, variable and predictable costs.  All SaaS solutions are billed by time, months or years and by the number of users. The organization therefore knows precisely its applications budgets, year by year, and can continuously adjust its costs based on the evolution of the actual number of users for each application.

The following financial table, prepared by the research firm Forrester, come from a comprehensive analysis, comparing the costs of a SaaS application, Google Apps, to the ones from Exchange, the legacy messaging solution from Microsoft, still used in 2012 by a few companies ...

Three important remarks on this data:

• The smaller the size of the organization, the better the saving from the SaaS solution. Even for very large companies, cost reduction exceeds 50%.
• This study compares Google Apps to Microsoft Exchange ; Google Apps also provides, for the same price of $50 (or 40€) / year / person, functions equivalent to the ones of Sharepoint , Lync and Office (for most users).
• Contrary to what was written at that time at the end of the table, in 2012 Google Apps allows users to work in off-line mode for messaging, calendar and writing text documents.

These financial benefits, shown here ​​for Google Apps, are found in all SaaS applications, without exception.
Applications which are reliable, continuously updated, and whose costs are 5 to 10 times lower than those of legacy applications: Who can be against SaaS?

In summary,this ITIR, IT Industrial Revolutionis great news for all organizations, regardless of their industry, their size or their country.
This is ... the end of a DIYIT.

3 - ITIR: IT Industrial Revolution: Impacts for providers

As much of cloud computing profits are  strong and immediatefor client organizations, it represents a big challenge to most legacy IT vendors.

For the majority of legacy suppliers, which lived very well in the prehistoric age, or "pre-cloud" one, the widespread use of Public Clouds infrastructures and SaaS applications is a very, very bad news because their business models will be undermined. The Schumpeterian "creative destruction" will find in Cloud Computing a perfect illustration.

I propose to focus this analysis on four core activities of IT, which are among the one which are the most deeply impacted by the ITIR:

• Workstations vendors.
• Manufacturers of servers.
• Editors of business applications.
• The IT Services Companies.

Workstations.

The majority of IT professionals still view workstations as a Windows PC (XP or 7), preloaded with Office. But as the general public has shown, this is changing rapidly with three key changes:

• Mobility  has won as it's clearly shown in this graph. Since 2011, 80% of  objects access tools to IT applications are mobile : laptops, tablets or smartphones.
• The variety of forms, power and OS: 4" Smartphones, 5" Phablet (Phone-Tablet such as the Samsung Note), Tablets from 7" to 10", Notebooks, 12" to 17", running Windows, MacOS, iOS, Android or ChromeOS. The variety of choices is already staggering and will continue to grow.
• The browser, as the universal window to access all SaaS applications, on all CCD, Cloud Connected Devices.

Today, all "former kings" of the PC era are suffering: Intel is attacked by ARM, the leader in mobile devices, Microsoft, HP, Dell Lenovo and others who dominated the PC market see sales flat or going down every quarter.

Service Companies

Every morning, hundreds of thousands of Indian engineers, intelligent, well-trained employees oflegacy IT services companies such as Accenture or WiPro push the doors of huge « software factories ». There, all day long, they will tinker to modify codes for the specific version of a SAP or Oracle Applications for a large company in Europe or in the United States.