The Buggy Whip Companies About To Be Undone by Cloud Computing
Most of you have probably heard the buggy whip metaphor - the (completely fair) comparison between those tools used to prod horses that pulled wagons or carriages and more modern-day products that will soon suffer the same fate of obsolescence. When companies are so focused on delivering a product that will soon be irrelevant due to market forces, whole industries have been destroyed in the same way the buggy whip industry went away when horse-drawn carriages were replaced by the automobile. Products such as typewriters, calculators, magnetic tapes, and even disposable cameras have both revolutionized and energized entire industries while marching inescapably toward their doom when a new industry was about to make them irrelevant. Today, a new industrial revolution is underway, and there are more than a few lemmings that will be buggy-whipped as cloud computing comes of age. This is their story.
What exactly is cloud computing? I'm not talking about iCloud for your iPhone, or the way you use Dropbox to share files. Cloud computing is about digital infrastructure for businesses. A good friend describes it in an interesting way:
During the industrial revolution, each factory needed their own power source. For some, this was a water wheel or a steam engine. But once electricity became widespread due to worldwide investments in the electrical grid, factories stopped producing their own power because it was less expensive, faster, and easier to use electricity produced and managed at a central power plant. Today, it would be very odd for a business to decide to create their own power grid due to the capital cost of the equipment, the maintenance and eventual upgrade or replacement of that equipment, and the specialized expertise required to run that equipment. So much better to just pay a monthly bill and let someone else manage the headaches, right?
Cloud computing is the power plant centralization of the modern era. In the before time, businesses had to power their own computing infrastructure, and they bought servers, rented racks in data centers, and licensed software to help them run their business. Today, however, that's no longer as necessary, because services from companies like Amazon (Amazon Web Services, or AWS), Microsoft (Azure), Google (Google Cloud Platform, or AWS), Oracle (Oracle Cloud Infrastructure, or OCI), IBM (IBM Cloud), and Alibaba (Ali Cloud, Aliyun, or Alibaba Cloud) all provide Infrastructure as a Service (IaaS). Here's a simple chart explaining the difference.
So now that we're on the same page, let's get to the meat of it. More than a few businesses are going to fail within the next decade because cloud computing will make the "old way" of doing things obsolete, so this is my view of which types of businesses are most at risk if they fail to pivot.
Many businesses rely upon licensing software that runs on physical servers for their main revenue stream. Microsoft, the king of licensed software, started the pivot long ago to cloud-based subscription delivery, and today their Office 365 and Azure infrastructure offerings are both large and growing quickly. On the other hand there are plenty of others, like VMware, that remain beholden to their old business models and are more focused on defending that revenue stream than competing with themselves.
Computer and Networking Equipment
Many great businesses have been built, and destroyed, in the computer and networking equipment industry over time. Back in the dot-com day, businesses like 3Com were at the top of their game, only to later sell their modem business and eventually their entire business to HP at a severe discount to its peak value. Today, there is still significant risk in businesses that derive a significant portion of their revenue from hardware sales. Instead of listing them all, I'll point you to a nice Wikipedia listing that is pretty comprehensive.
Data Center REITs
Businesses that own their own equipment tend to house that equipment in buildings called data centers. Like traditional office spaces, owners of those buildings will rent their tenants space for some amount of money per square foot, and in the data center industry the "per square foot" rent tends to be much higher than other types of real estate because of the services provided around it. For example, data centers often also provide customers with power, cooling, and sometimes internet service as well. But if you aren't going to build and run your own power plant, you may not need a data center as much in the future, so there are definite headwinds on the FFO (funds from operations) for the Real Estate Investment Trusts that own data centers. Many are maintaining their cash flow by locking customers into long term contracts, which masks the risks of customer churn during the time when this digital transformation reduces the need for their rental space.
Hardware providers spawned a parallel industry of channel sales for that hardware generally known as Value Added Resellers, or VARs for short. They range in size from the joey-bag-of-donuts-local-IT-shop that brings carbs once a month and plays golf with your accountant, to large corporations with offices in every major metro market. The largest providers are smart enough to recognize the coming change and have already maneuvered to mitigate the risk by adding cloud services to their rate cards, and many of the others have shifted from a VAR-based business model to an MSP-based business model. MSPs, or Managed Service Providers, generally have recurring revenue streams from the management of technology stacks as a service, including cloud services. The ones you have to worry about are the local/regional VARs that don't know what "MSP" means, don't have the capital to fund a shift from one-time revenue to recurring revenue, and don't have the scale to effectively compete for increasingly scarce cloud talent.
Just because a business is in one of the industries above doesn't mean that it's doomed to failure. Cisco, for example, is heavily investing in cloud security technologies today that are sold to cloud-native businesses independent of a need for networking hardware. Oracle, a bastion of traditional software licensing models, is investing heavily into a new cloud computing service offering. CoreSite, a traditional data center REIT, is leasing datacenter space to businesses that actually provide cloud computing (like Amazon, Microsoft, Google, and Oracle) and to businesses that need close proximity to the cloud because they are using a hybrid of traditional computing and cloud at the same time. And leading channel businesses like Ingram Micro, SHI, Tech Data, World Wide Technology, Wipro, and CDW have made significant investments in the cloud, have the experience to help their clients navigate the options, and are the de facto path to the cloud for their target markets. Everyone has the chance to pivot, and those with bold management teams, an entrepreneurial ethos, and sufficient financial runway have the best chance to succeed.