by Rob Enderle

Microsoft’s Cloud Services Mix Leaves Many Vendors in the Dust

Nov 09, 20125 mins
Cloud ComputingEnterprise ArchitectureInternet Service Providers

IBM became 'Big Blue' because it leased hardware and provided free software, but its collapse divorced the two. The growth of the cloud has caused another marriage, one that brings together software and services. Vendors such as Amazon, Google and especially Microsoft understand this, columnist Rob Enderle says, and they are bound to leave those trying to sell a 'cloud solution' in their dust.

Trends aren’t often fully understood until they are over. One of the first big trends in the IT industry, called management information systems (MIS) back then, marked a move from a services-based market to a hardware-based market. This happened when IBM shifted from leasing hardware and providing software largely for free to selling both, thereby assuring its dominance was over and effectively launching companies such as Microsoft, Dell and Sun Microsystems.

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While we wrapped this up with terms like “personal computing” or “client/server,” the reality was that we changed economic models, moving from one based on how utility companies work to one based on sales.

We are doing the same thing now with “the cloud” because the change we are actually making is more about the economic model than it is about hardware, software and services. In a very real way, we are moving back to computing as a utility, and companies such as Google, Amazon and Microsoft appear to be understanding this move best.

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At the core of this misunderstanding is the common mistake made by companies that specialize in hardware or software: the need to maintain related sales and margins. They want to talk about their “public” and “private” cloud activities and position them solely in terms of what they sell.

However, this effort forces vendors to look at the world differently than what it actually is. While they could provide competitive services, they are more concerned with making sure they don’t compete with customers, not recognizing that the growing powerful service providers are moving to create their own hardware (Google), commoditizing what they buy (Amazon) or implementing a blend (Microsoft). In short, behind the cloud smokescreen, the existing hardware/software/services market is becoming obsolete and margins are shifting to the cloud service providers.

In many ways, the systems of the future will be implemented by others and are likely to have more in common with mainframes than the server products that exist in the interim. This is why Microsoft is quietly doing a massive amount of work on massive multi-processing systems based on ARM, why AMD has announced an ARM processor strategy and why BMC is focusing increasingly on workshops that blend services and on-premises solutions.

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All are shifting to address a different load model, one that will increasingly be based on tablet- and smartphone-optimized apps running on remote servers as utilities. The hardware requirement will be huge systems with secure shared service capabilities that can be charged out and provisioned with high granularity in real time. In other words, systems that are different than those in market today.

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This is also an annuity market of sorts similar to the one that made IBM dominant last century. The true cost advantages come at scale, while services are increasingly provided under a subscription, not as part of a software/hardware sale. The companies that eventually dominate this market will be those that can provide the best services at the lowest cost and most effectively market this benefit.

In short, it will be the firms that most successfully recreate the IBM model, only with cloud services rather than on-premises leased hardware. For the successful company, minimizing customer churn and optimizing customer advocacy will be a path to success, far more reliably steady revenue growth and increasingly constant profit margins.

Like other big trends, this will take a decade to mature. The end results, at least the one the service providers currently are demonstrating, fall down two paths: one in which the service provider buys commoditized hardware and sells the service to line management, and another in which the service provider is the hardware manufacturer, uses this to create competitive advantage and sells that advantage to line management.

Right now, both paths suggest that IT as we know it is largely outsourced to the service provider—rendering IT obsolete as it currently exits. We’ve seen this play out early in the trend cycle as line employees have used personal credit cards to buy Web services for their line of business.

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If you look at the cloud service providers, only Microsoft has the full solution right now. With Azure and services such as Office 365, Redmond has both desktop- and server-based subscription services that comply with corporate requirements. Microsoft also has a sales force that can sell these services and is increasingly crafting this entire capability internally, from specialized servers to the new Microsoft Surface clients (the company’s equivalent of a terminal).

The irony is that Microsoft never wanted to become IBM, yet that now appears to be its path to success. While Microsoft remains in front, Amazon and Google give chase, and even Apple appears to be adjusting itself to come after this opportunity.

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For IT departments, the best self-defense may be to stop pretending this trend isn’t happening and to start driving it themselves by facilitating these moves, assuring they are done properly and pushing vendors into supplying the services that line executives want. IT survives if it can become a strong advocate for line executives’ needs and can effectively facilitate a more successful response—but it becomes obsolete if this service gets internalized.

Rob Enderle is president and principal analyst of the Enderle Group. Previously, he was the Senior Research Fellow for Forrester Research and the Giga Information Group. Prior to that he worked for IBM and held positions in Internal Audit, Competitive Analysis, Marketing, Finance and Security. Currently, Enderle writes on emerging technology, security and Linux for a variety of publications and appears on national news TV shows that include CNBC, FOX, Bloomberg and NPR.

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