Sun Sees Amazon Changes the Game Even for Hardware Vendors

The announcement that Sun has partnered with Amazon to make Open Solaris available on Amazon Web Services is fascinating.  It’s free, so Sun sees no revenue from it.  One wonders if Amazon has charged them for the inconvenience, so it may carry a cost.  In fact somebody somewhere paid a cost to at least cover the testing and development of whatever provisioning is required to get it started.  So why do it?

At the moment, Amazon is running away with the cloud computing show.  Last I heard there are over three hundred thousand developer accounts there.  It’s a thriving ecosystem, and if Amazon sold no more new customers, one has to suspect that just the growth centered around those existing customers would be significant.

Suddenly, this is a platform that matters for everyone that is trying to establish their own platform.  If you want your OS (Open Solaris) to have a chance, you’d better look into Amazon Web Services.  There is no Microsoft equivalent yet, so that’s a problem.  As I’ve said, Ballmer would’ve done better to buy Amazon than Yahoo, so perhaps now he’ll give that a try.  If you want your database or application server (hello Larry Ellison) to thrive, you’d better look into Amazon Web Services.  If you want your language (hello Python, Ruby is already there with Heroku) to be ubiquitious, you’d better look into Amazon Web Services.

In fact, as if to underscore this realization, the Amazon partnership is just one aspect of Sun’s official launch of Open Solaris.  But, it is a critical one.  It will be interesting to see how well it does, and whether there are aspects of the Cloud Computing world’s needs that give it any special advantages.  I’ve heard of a few things, but it hasn’t really sounded compellling so far (see Jason Perlow for more).  There’s an awful lot of momentum behind Linux already.

The availability of Amazon Machine Images does another thing.  These are freeze dried snapshots of a particular collection of software installed on a machine.  This makes them easy to propogate.  The best practice combination of various pieces of software can be combined, converted to an image, and made available for broad consumption.  This lowers operating costs and helps ensure that the “good” combinations are more prevalent in this ecosystem.

Sun’s announcement is a fasciniating indicator of just how important Amazon Web Services has become.  Look for more indicators as we go forward.

Hurry, The Cloud Computing Platform Opportunity is Perishable!

As I write this post, many are predicting that the big announcement from Google tonight will be that it’s opening up BigTable for the world to use.  At least Kevin Burton and Mike Arrington think so.  I hope so, because the world needs a lot more cloud computing choices.  I wonder how many have figured out just how little time remains to introduce new cloud computing platforms?

Ray Ozzie has said, “[the cloud market] really isn’t being taken seriously right now by anybody except Amazon.”  He’s right on the mark:  it isn’t being taken seriously by anyone except Amazon.  The distant runner up is Benioff’s Force.com.  I say distant because there are a lot of problems with it, not the least of which is an economic model that makes it completely untenable for anyone but big corporate IT to use.  Technically, it is a completely closed and proprietary environment that offers only minimal leverage.  It’s true, they’re very seirous about it, so in that sense we should add them to the list, but the way they’re going about it makes it seem less than serious.

Here’s an important tip for various big industry players who’ve made noise about Cloud Computing at various points:  it’s a perishable opportunity!  You don’t have forever to contemplate how to get in and start winning.

Why?

Because ultimately it boils down to differentiation and commoditization like any market.  The longer you wait, the more bipolar the market becomes.  Allow Amazon to get too strong and you’ll have two choices:

-  Copy Amazon’s API’s very closely and charge a lot less. 

-  Launch a radically different approach that offers big advantages in some other way.

The middle ground will be untenable.  An API or service that is only slightly better than Amazon’s but is incompatible won’t succeed.  We’ve seen this time and time again in our industry.  It’ll play out the same way here.  For a brief time everyone can be slightly different.  Then the world will discover the differences don’t matter and they’ll gravitate towards one player.  If someone already has huge momentum (e.g. Amazon), you must either be incredibly differentiated or much cheaper.  Both are pretty hard to do.

We could ask whether Amazon has already reached a stage that only the two options can fly.  I don’t think so.  Not quite anyway.  It takes longer than you’d think, although their success has been phenomenal.  My prediction is that the window to introduce a major new cloud computing platform initiative is not quite 2 years.  If you’re not out by end of 2009, you will face a major uphill struggle.  In fact, if you’re not a great big player, the window is much less.

There are significant challenges for the big players to execute quickly enough:

-  Sun never seems to execute on anything quickly enough.  Sorry guys, but the company just doesn’t evolve very fast.  That’s why you’re buying properties like MySQL, right?

-  Google wants to be a precision machine, focused on squeazing margin out of a lucrative model.  What would they do, if like Amazon, they announced this thing and suddenly had more traffic to it than their core properties?  They have a history of absorbing startups and then taking a long time to get the thing to a level they feel is commensurate with their standards.  Cloud computing is in many ways worse.  They lose control and let other people’s software run inside their firewalls on their servers. 

-  Microsoft is in the unenviable position the old RISC world was in against Intel.  They have to build everything themselves on their platforms.  There is no synergy with third parties.  It’s ironic really.  The Intel/Microsoft PC Kiretsu could divide and conquer and they were so successful even Apple finally went Intel because the others couldn’t afford to do it themselves.

-  Yahoo?  People used to talk about them in the same breath, but clearly the wheels are coming off that stagecoach.  For a big player, cloud computing is not a little investment.  Particularly now when there is quite a lot of momentum already built.  Yahoo’s bets are laid, and they’re a lame duck besides.  Count them out.

-  IBM?  Could be.  They’ve made announcements but the follow up is weak.  IBM could certainly afford to throw enough services at the problem to get it going until the technology catches up.  They can sure sell such a thing.  The biggest challenge they have is their command and control culture may never let it reach critical mass.

-  Tata et al:  Big Indian or Chinese.  Why not?  These are huge companies overseas.  They have the expertise to do quite a lot.  The Asian markets are hot, hot, hot, and they’re not that well served by Amazon.  These guys would be my bet for the odds on Dark Horse players if they get it and can get their act together.  They’re ideal as low cost providers and like IBM, they can throw service at it until they get it right.  There is surprisingly little technology required at this stage to get started at the level Amazon is at.  You need an EC2 and an S3 clone and a bit of window dressing that does something they don’t.  How about an identity system?  I’ve written about that before.  Wouldn’t you think if a service was announced business would fly to it overseas?

Meanwhile, Amazon is coming to a sort of crossroads as well.  The traffic to Amazon Web Services exceeds the traffic to the rest of their properties combined.  This is no longer a remaindering strategy for unused MIPs as many VC’s I talked to late last year seemed to feel.  Amazon is now experiencing significant growth and scaling pains for the service.  EC2 just went down for about an hour for many customers.

This is both good news and bad news for Amazon.  The good news is that they’re learning how to keep these systems up and they others haven’t even started up that learning curve.  The bad news is it annoys customers mightily. 

The other thing I watch Amazon for is signs they’ll offer anything with AWS that they didn’t already have to build for their core business.  The availability of something interesting and new would be a further signal that this is not just a remaindering business.  More importantly, it would be a further barrier to entry and exit around their valuable property.  As it stands, EC2, S3, and SimpleDB are pretty low level.  They do not represent big barriers.  All that is available in one form or another via Open Source to others who want to play.  Amazon’s expertise in billing and payment processing is more differentiated, but not compelling and as currently offered, very Amazon-centric.

Note to Werner Vogels:  it’s time look for key innovations in AWS to build lock in while you continue to make the service more robust.

Note to others:  Time is running out.  Get in the game or move on.

Note to self:  Look for a dip and buy AMZN stock.

Related Articles

Google responded well to the challenges I set forth above with App Engine.  See my blog post for more details.  By focusing on language support instead of raw virtual machines, they’ve actually raised the bar in the sort of way I keep saying Amazon needs to above and below in the comments.  I stick to my 2 year prognosis.  If you aren’t a Big Player here within 2 years, the window will close.  What Google has done is raise the ante on what you must deliver to be in the poker game.

Publishers Stunned by Kindle Sales

I like Richard McRoskey’s Silicon Valley Insider article about publishers being stunned by how well their work is selling on Kindle. I chalk it up to a couple of factors. First, I would expect the early Kindle adopters to have voracious appetites. Second, any new and successful paradigm is startling in how fast it can grow.

I’m still waiting for Kindle 2.0 before making my purchase, but I’ll bet we’ll see it in 5 or 6 months.

Amazon Ran Out of Capacity

As I suggested in my original post on the topic, Amazon’s recent S3 outage was due to running out of capacity.  Specifically, they ran out of authentication capacity.  In part, this problem was due to the fact that Amazon wasn’t monitoring exactly this part of their capacity envelope very well.  High Contrast has the Amazon quote telling us that it was also due to just a few customers radically increasing their load on the system in an unpredictable way:

the surge was caused by at least one very large customer plus several other customers suddenly and unexpectedly increasing their usage. 

So far, most of the pundits are in something of a denial mode.  They argue that nothing really new and interesting is happening here.  All services go down, including the electric company.  Vinnie Merchandani says corporate data centers have been going down a lot more often than 99.999% uptime allows for since forever.  Folks like Nick Carr seem to feel the biggest issue in this outage was that users didn’t have timely information and Amazon is fixing that.

This all misses a bigger point.  What these writers are doing is attempting to apply the old standards and methods against the new world of Cloud Computing.  The trouble is, there is something genuinely new at work here that goes beyond the inevitability of some outages and the need to be more transparent with customers about what is going on.  The problem Amazon and other would-be cloud platform purveyors face is predictability.  The world they deal in is radically less predictable than corporate data centers of old because the Internet today has much lower friction and higher connectivity between different web sites that make load spikes increasingly sudden and intense.  There is a cascade of dominoes effect that is enabled by the low friction web that wasn’t nearly so twitchy in the past. 

The premise of any large computing infrastructure is that by sharing the load across many customers (and in Amazon’s case, sharing excess capacity from their core retail business), we enable headroom for such load spikes.  But how realistic is that concept?

Consider this Alexa plot of CNN and Flickr traffic over time:

 

Do these two curves look predictable to you?  Take CNN, for example.  To handle the big spikes requires 2-3x overload capacity.  Flickr is a little less crazy except for one massive event that involved a doubling in a very short time.  This latter even was permanent in its effect, so if you were counting on temporarily borrowing some headroom, you would have had to keep it in place indefinitely and grow from there.  Ironically, that chart was brought to my attention at Amazon Startup Project where they used it to sell the idea of unlimited headroom a startup can’t afford to purchase by using Amazon Web Services.

These charts are displaying non-linear behaviour, the hardest of all phenomena to predict.  This non-linearity is becoming more and more common because the Internet has become extremely viral.  It is crosslinked, the very meaning of the word “web”, and messages travel along the links with almost no friction.  Viral has become a virtue, and much of the current innovation is focused around how to make the viral spread of information more likely.  Social Networks are all about such behaviour.  Take a look again at those CNN spikes.  Now let’s imagine your cloud computing infrastructure is hosting a bunch of different blogging, micro-blogging, video, photo sharing, and other social sites.  The CNN spikes no doubt represent something newsworthy happening.  The greatest likelihood is that each spike will be echoed at some level across all of these sites that are in the business of spreading information.  Friction has been lowered to the point it is almost non-existent when it comes to the spread of memes on the Internet.  We have major spikes from world events, such as the assassination of a world leader.  In the Internet, we can have major spikes from such inane moments as Scoble shedding tears of delight over new Microsoft secret software.  And the whole thing is wired together.  That one tear on Scoble’s cheek breeds a thousand or more accounts ranging from poking fun to trying to guess what this secret software is.  There is a ravenous beast poised over the keyboard waiting for something interesting to pass onto its network of other ravenous beasts.

This is decidedly non-linear behaviour and impossible to predict.  The answer is major cloud computing infrastructure providers will need to have considerable excess capacity available on tap at all times to avoid outages.  Take Amazon.  Web bandwidth to their web services now exceeds to total traffic to all of their other properties.  What might have once been a nice remaindering business allowing them to resell their excess capacity is now driving the need for more capacity.  They have just a few choices.  They can invest in a lot more hardware and lower the margins on their business, or they can implement some strategies to limit the availability of the service to some customers.  It strains credulity to think they’ll limit capacity to their retail business.  How will they decide?  Tiered pricing of some kind? 

Think in terms of other unexpected networked events.  I’m reminded of financial markets and the law of unintended consequences.  Look at today’s housing market.  Remember Long Term Capital, a hedge fund with Nobel Laureates who had mathematical proofs they would continue making money.  Right up until they unpredictably went bankrupt.  BTW, this sort of thing used to happen with the electrical grid too.  In both cases, the financial markets and the electrical grid, elaborate means were put into place to artificially inject friction to damp the machine’s oscillations before it could destroy itself.  There are elaborate rules in the stock exchanges about shorting stocks that are falling.  They inject a form of friction back into those markets to prevent total free fall. 

Perhaps this points the way to new technology for Cloud Computing infrastructure.  A gentle injection of the right kind of friction at the right point for a limited time might prevent suddenly massive spikes and outages.  It’s an area ripe for innovation.  Meanwhile, Amazon could sorely use some competition.  If a customer could contract for emergency capacity from elsewhere, or even better, if the Cloud Computing Providers could share slack capacity as the electrical companies do, it would be tremendously helpful when the inevitable load spikes arrive.

Google Reports iPhone Usage 50x Other Handsets; Amazon S3 Goes Down: Low Friction Has a Cost

As I write this post there are two articles that caught my eye.  For most, the iPhone and Amazon’s Web Services have little to do with one another, but I see a bit of a pattern here that’s interesting.

Slash Lane of Apple Insider reports that Google was shocked that is was seing 50 times more search requests coming from Apple iPhones than any other mobile handset — a revelation so astonishing that the company originally suspected it had made an error culling its own data.  It’s an amazing statistic, really.  But I can attest to hitting Google quite a lot myself whenever I’m out and about and killing time before the next meeting.  In fact, I am very pleased to have my bookmarks out on a web page rather than in my browser so I can easily access all of my favorite sites from whatever device is at hand.  The iPhone is quite a credible web browser.  I can’t wait for the 3G version and higher speeds.

Following closely on my read of the iPhone piece is Nick Carr’s article about an Amazon S3 outage.  Nothing all that earth-shattering or unexpected, just that S3 was out for several hours this morning, beginning at 7:30am EST.  The gist of the article is that while the outage was to be expected, Amazon did a poor job keeping users informed of what was going on and providing explanations after the fact.  Carr is right, of course, but business is always embarassed when things go wrong and the first (and wrong) human instinct is to be shy about details.

Why do these two go together?  I’ll give you a hint:  the tales of Facebook applications reaching millions of users in an incredibly short time also goes with the theme I’m thinking of.  That theme has to do with friction.  Friction is my word for all the factors that slow adoption.  The time needed for word of mouth, decisionmaking, purchase, installation, getting through the learning curve, and finally being a first class citizen of whatever community results is governed by the degree of friction.

One of the things the Internet does is reduce friction.  In its most extreme, friction actually reverses and becomes a propelling force.  We call that viral marketing.  Most of the innovations in this second Internet round (post-bubble) have been focused on reducing friction.  Social Networks, for example, dramatically reduce the friction of networking.  Twitter dramatically reduces the friction of blogging, right down to limiting the article length to 140 characters so you don’t have to labor over the wordsmithing.

While it’s harder, the web is also a powerful means of reducing friction for more physical things.  The iPhone and Amazon Web Services are two great examples.  In an extremely short time the iPhone has racked up 50x the usage of other competing handsets for the Internet.  The traffic to AWS in approximately the same short time now exceeds the combined traffic for all other Amazon properties.

While the web itself helped to spread the word, I think it is no coincidence that these two have a lot to do with the web and offer a lot of value back to the web.  It’s what some folks call a virtuous circle.  Look for more of these as time goes on.

Now that cost side.  These growth rates are not predictable.  Nobody would have guessed that either business would get so big so fast.  In fact, many guessed just the opposite.  Even if you did guess it could happen, it would only be a guess that it could, not that it would.  A prudent business would not invest in infrastructure built to the level and assumption that it would happen.  That means there will be painful outages from time to time.  Hopefully, the infrastructure owners will take those outages as signs that its time to double down and extend their projections of what might happen much further up and to the right.  Those that succeed in keeping hold of the Tiger by the Tail will survive and prosper.

When Do The SaaS Acquisition Games Begin? (A Primer on Cloud Computing Market Segments)

The Yahoo/Microsoft business has turned to utter farce.  Michael Arrington’s line left me in stitches:

Wait. Yahoo and AOL? I Was Looking Forward To Something More…Fierce.

Mathew Ingram calls it “desperation squared.”  We have now moved from the factual to the sublime: a sure signal to Yahoo that they need to get on with being acquired.  When most of the world is laughing at you, and you are a huge company, it means you’ve lost it.  You’re way past the point of return.  But this is not why we’re here, for the Giants are thinking of dipping into another branch of the Cloud Computing Tree.

Tom Foremski says that Oracle recently approached Salesforce.com to gauge their interest in a possible $75/share offer.  Duncan Riley at Techcrunch finds the rumor plausible, as do I.  I won’t spend a lot more time on this particular scenario.  It will be a question of Oracle’s resolve to buy versus Salesforce’s resolve to remain independent.  But I will say this.  Oracle typically spends 7-8x maintenance revenue to buy companies.  If the rumor is true, they’re offering 13x trailing twelve months total revenue for Salesforce.  It just goes to show the awesome financial power of a good SaaS business.  It’s likely worth that much.  After all, if Oracle is ever going to get started on the road to SaaS (yes, I know, they have a SaaS business already, yada, yada, but not really), starting from a seed as close to $1B a year as possible would help accelerate things.  That’s a real problem, BTW: there just aren’t all that many SaaS properties out there yet for acquirers to choose from.  The space isn’t very far along, and is still very young.

And yet there are machinations going on as various players try to position themselves for the coming battles.  Some of these manuevers are visible, some are just off the edge where the light is pretty dim.  It’s important to segment the Cloud Computing and SaaS market to gain a better understanding of the terrain.  We’ll leave aside the Web 2.0 world of Facebook et al, though the infrastructure at the bottom of the market segmentation model I present is the same for the Consumer/Web 2.0 world.  Markets tend to consolidate from the bottom of the technology stack up.  The reason is that the bottom layers have been around a lot longer, there are more big players, and momentum there has often slowed.  These are sure signs that a consolidation is in order.  It’s important to know where you are in the stack because it equates to where you are in the M&A food chain.  Consequently, VC’s often try to evaluate how near the bottom an idea is versus how late in the day it’s getting.  Being too low in the stack when the market is very mature is usually a bad thing.  Being high up early is oddly almost never a bad thing.  The very top of the stack is apps, and it takes apps to propel the other layers forward.

All things considered, if you have a killer idea for an app, that’s where you should place your bets.  That would be another reason for Oracle to pay a premium for Salesforce.  The other thing to keep in mind is that the line of safety keeps moving upward.  The snapshot I’ll portray today has that line hovering at the Value Added Hoster level.  It won’t be long before it moves up a notch to encompass the Virtualizers.

The Battle for SaaS Hosting and Platform Dominance

At the very bottom of the SaaS stack are the hosters and platform builders.  There are several armies on the battlefield jockeying already.  There are roughly three market segments:

 

First are the old-school hosters that basically offer raw machines and Internet connectivity: “A Cage and a Pipe.”  These guys are very long in the tooth for the current Cloud Computing era.  The trouble is they are experts on the physical plant but don’t add much value otherwise, and their expertise is now heavily commoditized.  If they don’t learn to offer more value soon, their days are numbered, hence they’re in the “red” zone.

Next up are the value added hosters.  Start with a Cage and a Pipe and add Some Service.  Perhaps that’s as simple as providing system administrators and DBA’s.  Service can become more elaborate.  This group is currently a very popular choice for SaaS startups I talk to.  Very few of these companies are considering the Red Zone.  But the Value Added Hosters need to move upstream as fast as they can, lest they start to go red too.  The services they offer are not hard for the Cage and Pipe crowd to bring on.  There is so far minimal proprietary technology adding value.  Aside from the problem that others can add services, it creates a secondary problem that the cost to deliver the service is higher.  We’ve talked before about how much more efficient SaaS players have to be than conventional users of Enteprise Software.  The Yellow Zone is borderline in that respect.

It shouldn’t be surprising, therefore, when we read things like OpSource’s acquisition of billing company LeCayla.  It gives them technology and a new service to inch them closer to the Green Zone.

This brings us to the Green Zone, which I have dubbed “The Virtualizers.”  Virtualization is their chief technology differentiator, although there is often a whole lot more.  These players want to bring on as many generic components as they can to complete a full Platform as a Service offering.  This is the most interesting and vigorous space, and I predict it represents the future.  If the Red and Yellow Zones can’t find a way to get there, they’ll find themselves increasingly commoditized and marginalized, making their segments very tough businesses indeed.  The Green Zone brings a number of essential advantages, although every player doesn’t offer every advantage. 

One of the big advantages is true On-demand computing.  With Amazon and many others you can buy servers buy the hour as needed to deal with load spikes of various kinds.  This leads to a tremendous savings for most organizations, and makes it possible for startups to pay the big bucks only if they’re successful and have the big bucks.  It’s a radical reduction in friction, and that almost always leads to radical growth.  So it is here.  Amazon recently reported more web traffic going to Amazon Web Services than the rest of Amazon’s properties combined. 

Companies like 3Tera (check out my 3Tera interview posts) and Q-Layer offer such virtulized data centers in the form of software.  Buy their software and you can create a virtual datacenter.  Or you can buy the hosting as well from these companies and their partners.  They’re very important players because they represent the means by which the Red and Yellow Zones can become Green.

Sun deserves special mention after their purchase of MySQL.  If I were being completely objective, Sun is still very much in the Yellow Zone.  I’m giving Sun and Jonathan Schwartz the benefit of the doubt in terms of where they’re going.  They do offer Sun Grid, and they certainly have the wherewithal.  Whether the organization can really pull together and get it done remains to be seen, but MySQL is a very promising new jewel in that crown.

SaaS Tools

The level above the platform consists of Tools.  First thing to note about this category is that “Tool” is a dirty word among the VC’s and other money mongering intelligentsia.  The story goes that nobody ever got rich on tools, the world now expects tools to be given away, yada, yada.  BTW, I disagree with that sentiment.  There have been lots of very successful tools companies.  I think the real issue is that it’s hard for the Money Men to evaluate tools.  Everyone promises to be able to turn a noobie programmer into a powerhouse of productivity that can single handedly reproduce SAP’s entire suite over the weekend.  Unless you are extremely technical and immersed continuously in the world of Tools, it’s very hard to separate the hype from the reality and the religion from the irrelevant.  Nevertheless, this is a real category, and there’s actually a lot going on here. 

I break this market into three segments:

 

At the bottom, just above the Virtualizers from the prior diagram, we have Systems Software, which I’m classifying here as Databases and App Servers.  Normally we would include operating systems, but they’re spread all around and largely play in the Virtualizer category.  In other words, what’s interesting about Operating Systems vis a vis SaaS and Cloud Computing is virtualization features.  This area is dangerously close to the Platforms where most of the Giants are.  Sun has already set a big foot down here with MySQL.  Amazon is trying to change the game entirely with SimpleDB.  There are some players, such as Elastra, that are trying to skate between Amazon and the rest of the world by offering MySQL on Amazon.  My take is that such plays need to get big really fast or diversify into other services because the window here has to be closing.  There is already so much traffic on Amazon, and so many folks using MySQL there, that it seems likely a single solution will emerge and Amazon is in a good position to dictate what that will be.  I can hear Amazon on the phone call now:

Really, you don’t want to sell to us?  Well, we’re going to deliver your product on AWS in about 6 months and it will be the preferred solution for the platform.

Or that call could be to a MySQL competitor.  There are several, and some say products like PostgresSQL are better for various reasons such as scalability.  What would it mean to Sun if Amazon acquired one and built it into their fabric?  What does it mean to others lower in the stack if all the good DB’s get bought and incorporated into the fabric of Giants?  Definite strategic manuevering possibilities here.

Next up are the Languages.  Since the dawn of computing, there have been Language Wars.  A lot of this is about separating the religion from the irrelevant, BTW.  Nevertheless, we have the new school of scripting languages circling the castle of traditional curly braced languages like Java and C++ (not that the new guys are bereft of curly braces!).  Their battering rams are pummeling the iron doors of performance ceaselessly with the promise of productivity.  Cheap among these are PHP, Python, and Ruby on Rails.  There are successes and failures to point to for all of them.  PHP is largely what powers Yahoo and many older web properties.  Python, while Open Source, seems to be the one championed by Google.  After all, they got Guido.  Ruby on Rails is one that I find interesting, because it doesn’t yet have a big power partner.  It’s Open Source, but without the partner, it remains something of a Free Spirit.  Perhaps that makes it an ideal nucleus for an upstart wanting to take on the Cloud Computing Giants.  Heroku would be one such possibility.  I’ve seen a demo, and it surely did seem pretty cool.  The Ruby brand is still strong, and could propel the right offering far.  Zend is working hard to have a go at PHP as well.  BTW, I would put Force squarely in the language category.  Yes, it is all of the layers below too, but there is a rich set of functionality that adds language and framework, not to mention you must use their proprietary langauge.

I can’t move on from Languages without mentioning Salesforce’s Force either.   They view it as a Platform-as-a-Service, but it offers so much more than something like Amazon (so far at least) that it deserves a spot higher in the stack.  Force includes a language that is Java-like, but proprietary to Salesforce.  Most developers these days have a problem with proprietary.  They prefer Open Source.  But that’s not even the real Achilles Heel.  Force is currently way overpriced to make it practical for ISV’s.  As I’ve discussed many times, your Cost of Service needs to be as far below 50% as you can get.  With Force starting out at $50 a seat month, customers must charge $100-200 a seat month to achieve reasonable margins.  That’s largely not possible for ISV’s, so Force is mostly an IT pheonomenon.  That makes it less strategic, but perhaps a better cash cow for Salesforce.

What’s this Enterprise Tools category?

Enterprise IT is used to having a rich ecosystem that fills in the gaps.  When you think about it, purchasing the software application is just a small piece of the overall organism that is created when that app goes into production.  There are many products bolstering and augmenting the application’s functionality.  Don’t like the reporting provided out of the box?  Plug in a Business Intelligence Tool.  Need to integrate the application with other applications without writing too much custom code?  There’s everything from ETL tools ala Informatica to shift data between tables to complex messaging systems from companies like Tibco.  Need help managing logon information and implementing single sign on (SSO)?  There’s LDAP, Active Directory, and a ton of other products out there. 

Almost all of that is gone with Cloud Computing.  As someone quipped, “It isn’t that the data is in THE cloud, it just isn’t in MY data center anymore.”  And in fact, THE cloud is really many clouds: one for each data center of each provider you’re doing business with.  Even more interesting, a lot of the Old School providers of this stuff have technology that isn’t real relevant to the Cloud Computing Era, and many of them have been bought so they can be milked.  Witness all the BI vendors that have been absorbed.  Their time of innovation is done.

That’s actually great news.  The SaaS Enterprise Tools category is the lowest true Green Field opportunity in this model.  Nobody owns it.  The Giants are mostly absent.  And there are even surprisingly few startups about.  Perhaps it just doesn’t seem sexy enough, but there are real problems here that need solving.  I had lunch the other day with Mike Hoskins of Pervasive.  Among many other areas, they do a good business out of software that pumps data out of Salesforce and into your local data center so you can apply your BI tools to it.  I’ve interviewed Ken Rudin of LucidEra for this blog.  They provide BI solutions in the Saas model, largely based on data from Salesforce again.  Another great example is EMC’s recent acquisition of SaaS backup vendor Mozy.

These are good opportunities in this segment.  There are customers with real pain and minimal competition so far.  The Giants are ill-positioned to jump in because of the disruptive business model that is SaaS.  I would expect to see a lot more action here before it’s over, but there is a very interesting move that just took place that seems to have largely been ignored.  Workday, Duffield’s Peoplesoft Version Two, has just acquired SOA integration tool vendor Cape Clear.  I think this is really an interesting move.  Yes, I’m sure they needed to be able to easily integrate a lot of systems outside Workday to sell their application, but I wonder if there is more going on here?  For example, at some point, I expect to see fine grain network effects emerge from the topology of the clouds.  These will be a function of the need to shift data between applications to integrate them.  There’s a real speeds and feeds issue there that has to be addressed.  It will be advantageous to run your software in the same cloud as what it integrates with.   This will favor really big clouds like Amazon’s.  I could also see it triggering partnerships bolstered by high speed dedicated links between data centers.  One example is Joyent’s dedicated link to the Facebook data center, which gives them a real advantage hosting Facebook applets.

Is Workday trying to lock in a part of that future integration pie?  Not clear, but there sure isn’t much else beyond Cape Clear in the space right now and Workday’s application is the kind that wants to be the system of record nexus for everything else.  Dana Gardner discusses how increasingly, it is the Service and not the Software that drives acquisitions like this.  After the merger, you won’t be able to buy Cape Clear except as a Service (now dubbed “Integration as a Service”).  Given that it was a very high quality offering, Cape Clear gives Workday an interesting and valuable differentiator, if nothing else.  One of the big puzzles of SaaS is how to get the more complex domains installed much more cheaply than conventional Enterprise Software.  Integrating with a bunch of Legacy systems can make that really hard unless you have a toolset like Cape Clear to simplify the job.  To the extent the tool is bought to integrate other SaaS vendors, it can serve as valuable lead generation to go sell the primary Workday Suite into Enterprises that clearly have SaaS underway.  All in all, I would rate this as a canny and highly strategic move that Workday has made.

SaaS Enterprise and Desktop Applications

This brings us finally to the topmost slices of the layer cake, applications.  I include here both desktop and Enterprise applications, so it’s everything from spreadsheets and word processors in the cloud to Salesforce.com.  That’s a lot of ground to cover, and it has barely been penetrated.  There are numerous application categories for which there are not yet any SaaS offerings, and many of the offerings that are available are still in their early days yet.  Most of the application companies I talk to are seeing unbridled demand.  It seems likely that for early markets there are enough customers out there in the SaaS early adopter crowd that you can go pretty far just because your offering is SaaS, assuming it works, of course.

What’s Strategic and Who’s Being Left Out?

First, there is an overall megatrend at work here, and that is the move from proprietary to open.  Companies will over time be less and less inclined to run datacenters.  Giant Cloud Centers like Amazon Web Services will be the new black and the New Open for that world.  That Openness will drive throughout the stack in an expanding wavefront, because Open wants to connect to Open.  That makes All Things Open strategic in this Cloud Computing Era.

Second, let’s talk briefly about acquisition strategy.  If your goal is to acquire SaaS market share and scale, there isn’t much available.  Salesforce is the largest pure SaaS vendor and they’re still under a billion in annual revenues, although they’re closing in on it.  That means acquisitions at this stage in the market should be more focused on capturing Strategic Choke Points than cubic dollars.

Let’s review potential choke points:

- Hosting and Platforms:  Look at the 3Tera and Q-Layer offerings as a means of supercharging data centers into the Cloud Era.  There are probably other players I’ve missed, but these guys give a flavor.  Be aware that virtualization is all the rage.  I personally have met 2 different Entrepreneurs in Residence at major Silicon Valley VC’s in just the last month who are focused on virtualization.  There’s a lot of attention here, and we can’t forget VMWare, nor the fact that the OS makers all want to build it into the OS.  The nice thing about something like a 3Tera is that its a lot more than just virtualization.  The real answer is to recast virtualization as a solution, and thereby move up the stack.  Simply Continuous, for example, offers a Disaster Recovery solution based on virtualization.  Those EIRs I mention are also interested in solutions more than generic virtualization.

- Systems Software:  Sun’s purchase of MySQL signalled that consolidation has begun here.  We’re going to see the clash of the Relational DB’s versus the new era SimpleDB-style systems.  I have to expect that all the action over at Amazon will flush others out of the woodwork some time this year, especially Microsoft and Google.  The former may be overly preoccupied with Yahoo and therefore delayed.  As for App Servers, look for Dark Horses specific to the new languages.  Someone who does something really great for Cloud Computing may have a leg up, but I’m not sure how long it will last.  If you want to hang out in this layer, be focused outside the limelight.  LucidEra took over an open source column store DB and focused it around SaaS BI needs.  That’s safely out of the line of fire between MySQL and the SimpleDB’s of the world.  In fact, there are likely more opportunities in the BI-specific space.  Certainly this was very late in maturation for conventional On-premises.  I wonder if someone will build a Teradata equivalent in the Cloud, for example?

- Languages:  This is as low in the stack as I’d want to be innovating unless I had a serious niche picked out.  The world seems to be clamoring for new languages at the moment, so maybe there’s a good shot here.  And so far, nobody is very far along at packaging any of the new languages so they’re easy to use for Cloud Computing.  Stay away from the crowded niche of proprietary “non-programmer” languages.  These are the Bugees, Cogheads, and the like.  They’re really more like dBase or Access in the Cloud than they are Languages in the Cloud.  If one of these players can really hijack a major language and get a big enough lead, it will be interesting.  It’s very hard though, with Open Source.  It levels the playing field unless you’re very careful about how you add value.

- Enterprise Tools:  Huge opportunity here.  There is no compelling generic BI offering for SaaS.  Workday just bought arguably the best SOA offering in Cape Clear.  Yet many application domains require these tools and a whole lot more.  If you are a startup looking to be acquired, think about what services your company could add to the Amazon umbrella.  What are the things that would spread like wildfire among the couple hundred thousand developers who have accounts on Amazon?  Build your solution so it scales well and takes advantage of Amazon’s pricing for communication within their cloud and you could go far.  One thing I think is glaringly apparent and needed, for example, is an OpenID service for Amazon.  There are many many others.  Deconstruct the current On-premises IT ecosystem and see what makes sense for SaaS.

-  Applications:  If you want a strategic choke point, you want to own a system of record.  They’re the blue chip properties in the Enterprise Suites.  That’s because everything else gets its data from some system of record or another.  Let’s not be totally focused on the past though.  The Cloud is ideal for collaboration.  How can you combine a system of record domain with serious collaboration to build a new killer category?  Worth thinking about.

I think I’ve provided a decent framework for thinking about the SaaS world in terms of where the action is, what makes sense for M&A, and where the opportunities may be.  If there’s one thing I’m certain of, it’s that we’re early days on Cloud Computing and there is a lot more opportunity out there than I’ve portrayed in this brief article.  There will also be a lot more change, and market segmentation could be viewed along many more dimensions than the one I’ve portrayed here. 

Food for thought.

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Just noticed Cote refers to the folks at the bottom of my stack as the “Morlocks”.  Remember the nasty troglodytes from H.G. Wells the Time Machine?  I don’t think the Morlocks are all that likely to eat the “Blond People” who are apparently the SaaS applications, but stranger things have happened!

I just watched the Google App Engine announcement.  It places them at the language level, which is a big leap up the stack I’ve drawn in this post.  It really raises the stakes for those playing at the lower levels!  See my post for more.

Wither Kindle?

As I was commuting today, I found myself wondering what had become of the Kindle?  As I’ve written, I love the idea.  I didn’t ultimately pull the trigger over the holiday season, largely because I was a subscriber to the theory that it was really a paid beta test and the real Kindle would be version 2.0, a much better product benefiting from all that feedback.  I keep checking in every 3 weeks or so on the Amazon site, and Kindle seems perpetually out of stock as well.  Is that because:

A)  It’s doing fabulously well and they can’t make enough.

B)  They don’t want inventory of 1.0 with 2.0 on the way.

C)  The device is a dud, Amazon is losing their shirt on it, and they just haven’t cancelled it yet, but they sure don’t want to sell any more.

Along comes an article from Compete to pique my interest.  What they had to say is that at least the search interest in Kindle remains steady, that it has completely knocked the Sony reader (which I actually noticed at a bookstore the other day) off the map, and that the demographics are skewed older and richer than normal gadget-buyer demographics.  That still doesn’t tell me whether I’d better wait for 2.0, but it suggests the device won’t be cancelled. 

Meanwhile, they’re still out of stock.  I just checked.

IBM Trying to Keep Up With the Cloud Jones’s

Can you tell that the whole cloud computing thing is ratcheting up a few notches in intensity?  I blame Amazon, who’ve rolled out a ton of initiatives and gotten lots of traction among startups.  But we ain’t seen nothin’ yet, friends.

Already there are signs that others are feeling like the train is leaving the station.  One of the more interesting is that IBM is bringing on CouchDB’s Damien Katz to work on the project full time.  It seems to me that IBM is making this move to ensure that they have an answer for Amazon’s SimpleDB in the form of CouchDB.  Thanks to Patrick Logan for pointing this out in his own blog post.

We’re going to see this pace continue to accelerate, and we’re going to see those who want to be players jockeying to make sure that they have all the elements in their Cloud Platform Suite.  It’s still to early to tell what the exact combination of ingredients for success will be, but so far it looks like Amazon is the head chef when we see others trying to emulate what they’ve done.

Meanwhile this is fantastic news for developers and startups that want to embrace these technologies.  The danger in things like Amazon’s Web Services is that they are so unique that you become utterly dependant on them.  The more others offer the same sort of services, the more competition can work its magic and make the whole scene more vibrant, cheaper, and innovative.

Viva les Cloud Computing!

Coté’s Excellent Description of the Microsoft Web Rift

Coté’s latest RedMonk post perfectly captures my reservations about Microsoft, which I refer to as their “rift with the web”.  Here are the relevant passages:

Microsoft frameworks are plagued by lock-in fears. That is, you’re either a 100% Microsoft coder or a 0% Microsoft coder. Sure, that’s an exaggeration, but the more nuanced consequences are that something intriguing like Astoria will play best with Microsoft coders, unlike Amazon’s web services which will play well with any coder.

This thing he calles “lock-in fear” and the extreme polarization (encouraged by Microsoft’s rhetoric, tactics, and track record) that you’re either all-Microsoft or no-Microsoft is my “web rift”.  I’ve written about this a couple of times before, and it never fails to raise the ire of some Microsoft fan or other.

This particular RedMonk post is chiefly concerned, it seems to me, with making sure that Microsoft’s Astoria doesn’t disappear under the continuous din of innovation Amazon is putting up for us lately around their cloud computing services.  The essential new thing about Astoria in Coté’s mind is that it is a RESTful framework rather than a .NET framework:

If you’re just coding to a URL, that’s not quit so bad as coding to a .Net library and all the Microsoft baggage and tool-chain needed to support that.

I agree, but I think Coté has obfuscated two issues together that don’t have to be: the issue of how software components communicate versus whether a solution is hosted/SaaS or not.  One can imagine components communicating RESTfully without any need to have them be hosted in SaaS fashion.  My own bias would be to go ahead and host, but it’s not a requirement and to put the two together as one is conflating the issue (don’t you love that word “conflate” that has drifted into common use here in the valley?).  Coté’s contention that hosting itself will reduce fears of lock-in is also pretty hard to swallow.  While I am again a whole-hearted advocate, giving your software over to a hosted environment and all of its attendant API’s (RESTful or not) is a big step towards lock-in, no matter how you look at it.  This is again an area where Microsoft’s old school monopolist behavior won’t serve it well.  There will be fear, perhaps unreasonable, that Microsoft will take unfair advantage if handed the keys to your kingdom by hosting on their cloud infrastructure.  The problem is that they’ve failed to conduct themselves as the Swiss do in matters of banking.  They are voracious competitors and seemingly always will be.  It isn’t enough for them to win, others must lose.

There are several other interesting points made in the post.  For example, on the issue of hosting, Coté wonders why big companies are so slow to launch.  It’s very true, we’ve seen it for all the big players.  The answer is perhaps that they have more to lose and are more likely to reach the win-lose decision point too quickly and with too much momentum to gracefully correct the problems.  Startups have a distinct advantage in this.  It’s not clear to me why more big companies don’t fund startups expressly to deal with the issue with the intention of acquiring them later if things work out.

Coté also makes a hugely important point about the value of self-service:

My sense is that unless it’s all delivered as a URL with dead-simple docs and pricing (check out the page for SimpleDB), any given technology won’t work out at web-scale.

Put another way, these new technologies need to be completely self-service. If a developer has to ever talk with a human from the company or team offering the project, something has gone wrong.

Self-service is a crucial part of viral growth potential in today’s world.  Any company that releases a product without at least a semblance of a plan for how to make it self-service at some point down the road is laying the foundations for failure.

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Latest Microsoft Office service packs decommits support for Older File Formats: Especially Competitors

This is typical of Microsoft’s “we don’t have to be nice, we’re the phone company” (appologies to Lily Tomlyn) behavior.  To access your old files requires you to delve into the registry.  Microsoft claims these old files are a security risk.  It’s tacky, it’s more lock-in, and it’s more evidence that MSFT is up to their same old tricks.

Amazon Raises the Cloud Platform Bar Again With DevPay

Wow, what an exciting time to be watching the Amazon Cloud Platform evolve.  We’re just beginning to think through the recent SimpleDB announcement when Amazon launches DevPay.  Lucid Era CEO Ken Rudin says land grabs are all about a race to the top of the mountain to plant your flag there first.  It seems like Amazon has hired a helicopter in the quest to get there first.  Google, Yahoo, and others are barely talking about their cloud platforms and here is Amazon with new developments piling up on each other.  And unlike some of the developments announced by companies like Google, this stuff is ready to go.  They’re not just talking about it.

What’s DevPay all about, anyway?  Simply put, Amazon are providing a service to automate your billing.  If you use their web services to offer a service of your own, it gives you the ability to let Amazon deal with billing for you.  It’s based off the pricing model for the rest of the Amazon Web Services like EC2 and S3, but you can use any combination of one-time charges, recurring monthly charges, and metered Amazon Web Service usage. You have total flexibility to price your applications either higher or lower than your AWS usage.  In addition, they’re promising to put everything they know about how to do e-commerce (and who knows more than Amazon?) behind making the user experience great for your customers and you.

It’s not a tremendous big step forward, but it’s useful.  It’s another brick in the wall.  There are companies out there providing SaaS infrastructure for whom billing is a big piece of their offering, so obviously it is a problem that people care about having solved.  What are the pros and cons of this particular approach?

Let’s start with the pros.  If you are going to use Amazon Web Services anyway, DevPay makes the process dead simple for you to get paid for your service.  It’s ideal for microISV’s as a way to monetize their creations.  The potential is there for interesting revenue that’s tied to usage in the classic SaaS way.

What about the cons?  Here there are many, depending on what sort of business you are in and how you want to be percieved by customers.  I break it down into two major concerns: flexibility and branding.  Let’s start with branding, which I think is the more important concern.  It’s not clear to me from the announcement how you would go about disassociating your offering from Amazon so that it becomes your stand alone brand.  You and your customers are going to have to acknowledge and accept that the offering you provide is part of the Amazon collective.  Resistance is futile.  This is the moral equivalent of not being able to accept a credit card directly, and instead having to refer customers to PayPal.  It works, but it detracts a from your “big time” image.  If having a big time stand-alone image is important for you, DevPay is a non-starter at this stage.  It’s not clear to me that Amazon would have to keep it that way for all time, but perhaps they need to protect their own image as well, and would insist on it.

Second major problem is flexibility.  Yes, Amazon says you can “use any combination of one-time charges, recurring monthly charges, and metered Amazon Web Service usage”.  That sounds flexible, but it casts your business in light of what resources it consumes on Amazon.  Suppose you want a completely different metric?  Perhaps you have another expense that is not well correlated with Amazon of some kind that has to be built in, for example.  Perhaps you need to do something completely arbitrary.  It doesn’t look to me like Amazon can facilitate that at the present.

Both of these limitations are things Amazon could choose to clean up.  So far, the impression one gets is that Amazon is just putting a pretty face on the considerable internal resources they’ve developed for their primary business and making them available.  What will be interesting is to see what happens when (and if) Amazon is prepared to add value in ways that never mattered to their core business.  Meanwhile, they’re doing a great job stealing a march on potential competition.  As a SaaS business, they should be quite sticky.  Anyone that writes for their platform will have a fair amount of work to back out and try another platform.  DevPay is another example.  It will create network lock-in by tying your customer’s business relationship in terms of billing and payment to Amazon, and in turn tying that to your use of Amazon Web Services.  For example, that same lack of flexibility might prevent you from migrating your S3 or EC2 usages to, say, Google.  There doesn’t look to be a way for you to build the Google costs into your billing in  a flexible way.

We’ll see the next 5 to 10 years be a rich period of innovation and transition to Cloud Computing Platforms.  Just as many of the original PC OS platforms disappeared (CP/M anyone?) after an initial flurry of activity, and others have changed radically in importance (it no longers matters whether you run PC or Mac does it?), so too will there be dramatic changes here.  The beneficiaries will be users as well as the platform vendors, but it’s going to take nimbleness and prescient thinking to place all your bets exactly right.  The good news is the cost of making a mistake is far less than it had been in the era of building your own datacenters!

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Coté’s Excellent Description of the Microsoft Web Rift