Big Shift to Enterprise Cloud Software

One of the big shifts happening in the enterprise software business is the adoption of the Cloud. This is already the dominant model for the consumer Internet space (e.g. Google, Facebook). The overall myth was that large companies are so concerned about security and privacy of data that they will be reluctant to let go of running these applications in-house. Then about 3 years back, Oracle’s CEO ridiculed the cloud as vapor. But the landscape has surely changed and will change even faster going into 2012. Why do I say that?

Recently SAP bought Success Factors at a very high valuation and many saw that as a desperate move to get into the Cloud. Oracle also bought RightNow in the same vain and there is a strong possibility that Oracle will acquire NetSuite in the next twelve months (NetSuite addresses mostly the SMB market). SalesForce.com (SFDC) has been growing and its valuation has gone quite high. The new entrant Workday (founded by the founders of Peoplesoft) has been doing very well. Someone said it is valued at almost $2B with yearly booking rate of $300M. Not bad for a five year old company. Workday addresses the HR space, but is moving to financial applications as well. It wants to be known as an “ERP Replacement” company, not just an “HR Company”.

Most of Workday customers are the large enterprises such as Tyco, AIG, Flextronics, etc. These customers are replacing legacy applications from SAP and Oracle with Workday’s SaaS suite offered through the Cloud. The advantages are obvious for the customers – same version always, new functions added more frequently, vendor takes care of upgrades, less cost paid to SI’s. The traditional applications typically require a 5 to 6 times expense (over product license cost) on consultants (SI’s) who keep customizing the apps. Workday claims their customers have a 90% reduction on SI cost, which is a big deal.

The challenge for the enterprise Cloud vendors is the revenue model, where they do not get the hefty license dollars up front. Hence their investment (both capex and opex) is quite high. For example, Workday has taken investment of $250M to date, counting the last round. But if they can sustain like SFDC, then there is a thriving growth business. By the way, Google has a growing enterprise business and currently brings $1B revenue which is not bad at all. They clearly are focused to make this part grow faster in future.

This is not good news for legacy enterprise application companies like SAP and Oracle. They have to re-invent (or acquisitions like Success Factors and RightNow) quickly to catch up with this shift to the Cloud by large enterprises. Oracle is more likely to ride this bandwagon sooner than SAP. As per the SI’s, they need to re-invent also to at least keep their current clients happy. That means they have to shift from “customization” of code to more reconfiguration of business processes.

The Next Web Architecture

I was listening to Roger McNamee’s predictions of technology investment trends and came across two new terms – Hypernet and Hyperweb. The first term is where the Internet is overlaid with smartphones. He says that smartphones are now 50% of the web devices and growing. The second term refers to the software infrastructure for the Hypernet. The current infrastructure of mostly “index search” (read Google) is not going to work for the Hypernet. We need HTML5. Here are his ten hypotheses for tech investing.

1. Next Web Architecture = Hypernet + Hyperweb

2. The decline and fall of Windows unlocks revenue. Software development on Windows is declining. The new focus is the Web, Apple OS, and open source. In 2011, Windows devices will be less that 50% of the Internet, down from 95% four years ago.

3. Index search is peaking. Google search on mobile and tablets is much lower than on PC and Android does not fix that. New search is content-focused, such as Twitter (real time search), Wikipedia (facts), Linked-In (business people), or Facebook (social, taste,..).

4.  Apple’s model threatens the Web. Web is more flexible, but Roger calls it Digital Detroit and one gets mugged easily. Apple’s iOS App model simplifies access to information on the Internet. HTML5 can be a threat to Apple when every content-provider starts using it.

5. HTML5 is game changer for publishers. Developers can embed audio and video easily replacing Adobe’s Flash. It will be disruptive. Content producers will redesign their sites to reduce power of Google and ad networks.

6. Tablets are hugely disruptive. iPad has replaced DVD as the most actively adapted tech product ever. So far, Apple dominates this market. The number 2 (Kindle Fire?) is yet to emerge.

7. First wave of “Social Web” is over. Facebook has won the platform war as the new Windows. But going forward, social will be a feature of every product.

8. Smartphones in the US = Apple + 7 Dwarfs. Android has more units but Apple gets almost all profits. Also Android has some serious security issues.

9. Wireless Infrastructure is competitive threat to the US. US has the least capable wireless infrastructure in the developed world. This will impact productivity and competitiveness  in a big way.

10. Integration of TV and Internet could be disruptive. The convergence of Web and Television has the potential to disrupt cable and satellite, but it may not happen.

These are interesting and thoughtful hypotheses and like any predictions they are unknown in terms of velocity (when would it all happen), but certainly we see several of these at play even now.

Netflix’s management of Data

Netflix is familiar to all of us. It is trying to switch to mostly video streaming, away from physical DVD business and the recent cost increase is a reflection of that strategy. What we don’t realize is the back-end data management and its complexity and challenges.

Let us look at the load factor. Approximately 15% of the US households, roughly  20 million plus are its paying subscribers yielding about $2B revenue in 2010.  Each subscriber and household members see 100 movies a month. So 20m times 100 is 2 billion instances. Therefore, its database must manage billions of records.

What is the nature of the data? It’s all video-centric such as critics and users review, video metadata like directors, actors, title, year made, etc.  Then it has to track users video queue, watch history, video rating, video playback metadata, etc. They also have to collect all the client’s “streaming device” information such as XBox, Blue-ray video player,etc. Critical customer information such as name, address, rental-package, credit card info are part of the highly secure data.

Netflix started with a traditional Oracle RDBMS handling its data during its early low-subscriber days. Given the load factor increase, it started to focus on a cloud strategy (to reduce its capex) and picked Amazon’s AWS for capacity planning and scale-out. It has been working for last couple of years to this cloud migration. The PII (personal Identifiable Information) and PCI data which demands greater privacy and security is kept at its own data center under Oracle. The rest of its data (in Terabytes) goes to the cloud (e.g. movie recommendation, movie metadata,..). The cloud data-store is SimpleDB from Amazon, although they have been looking at Cassandra and DataStax. So billions of records are moved to the cloud.

The nature of their data yields naturally to a key-value data store such as SimpleDB for extreme scale and performance. They did have several challenges to translate RDBMS concepts to a KV store. For example, “null” (value unknown at this time) concept of a RDBMS is not handled very well in SimpleDB. The system just does not return those records containing nulls.  Nor does it provide backup/recovery. There are no native data types. Again, Netflix can forfeit consistency (to eventually consistent) in favor of high Availability and Partitioning or distributability (AP out of the CAP). The video data plus streaming device activity log are all kept in Amazon S3 storage at a very low cost.

Netflix is a great example of a hybrid deployment of traditional data center and cloud computing. Technical challenges are there, but they have learnt the art of “pick and adjust the most optimal solution” for high scalability and performance.

The Gang of Four

Yesterday at the Wall Street Journal’s “All Things Digital (D9) conference” in Rancho Palos Verdes, Eric Schmidt, the ex-CEO of Google was the first to be interviewed by Walt Mossberg and Kara Swisher. He made some interesting points which made it clear that Facebook is Google’s number 1 competition now. He admitted that he made a mistake by not taking the Facebook threat seriously four years ago.

He talked about the “Gang of Four” meaning – Google, Facebook, Amazon, and Apple (hey, no mention of Microsoft). These four have common characteristics in that they are all exploring platform strategies, and they all focus on a consumer brand with aggressive scaling and globalization as key themes. The unique part of Facebook is their hold over the consumer “identity” by connecting to friends and relatives.

Eric  acknowledged that he and other executives failed to take Facebook seriously four years ago when the social networking site had around 20m active users. Today, with more than 500 million users and growing, Facebook has become a magnet for online advertising, and continues to stunt Google’s financial growth.

Mr Schmidt said that Google, with co-founder Larry Page now at the helm, is pushing to develop more ways to connect people with their friends and family. “I think the industry as a whole would benefit from an alternative [to Facebook],” Mr Schmidt said.

He added that attempts by Google to negotiate a partnership with Facebook were repeatedly turned down, with the networking site preferring to partner up with rival Microsoft, which owns a 1.6pc stake in the company. Google also has ties to Facebook. One of its former executives, Sheryl Sandberg, is Facebook’s chief operating officer.

Facebook poses another problem to Google, as much of the information on Facebook’s website cannot be indexed by Google’s search engine. This restriction threatens to make Google less useful as more people form social circles online which could make it more difficult for it to understand a user’s personal preferences, which benefits advertisers.

Apple’s platform tends to be more proprietary, but it has built a huge franchise of developers for its iPad and iPhone applications. Google’s Android is much more open and is rapidly building a huge developer community for tablet applications. Amazon pioneered  the cloud computing infrastructure and hence provides the elaborate AWS (Amazon Web Services) platform for ts infrastructure.

The lack of mention of Microsoft in the Gang of Four is  interesting, as it lags the consumer brand of internet and seems to move more towards enterprise computing. I am sure the leaders at Microsoft would disagree with this characterization.

Cloud Tone like Dial Tone

I like the new phrase Cloud Tone, meaning uninterrupted application availability from the cloud. For those of us from the old school of OLTP, the importance of five nines (99.999% availability) is well-known. That suggests that the maximum outage of a system over one year will be less than 5.26 minutes. How do you guarantee that in the world of cloud computing? You have to find a balance between convenience and reliability. The mobile phone or smart phone is less reliable than the land line phone. The land line phones were paragons of five nines, but they do not give you flexibility of the smart phones. Hence users live with the annoyance of less availability for the convenience.

I read this interview with Urs Hölzle, Google’s infrastructure czar, whose current responsibilities include the design and operation of the servers, networks and data centers that power Google. It would be an understatement to say that he is amongst the folks who have shaped the modern web-infrastructure and cloud-related standards. Let me quote what he said about cloud computing – “As a person, you don’t have to worry about backups and viruses, Hölzle says. You don’t have to worry about changing machines, reconfiguring your machine or worry about installing software. On the cloud, there is no concept of scheduled downtime, because the cloud is supposed to work all the time. In other words, cloud-based computing helps you just actually do the work that your company was founded for, instead of focusing on the technology behind the tools that you’re using.”

Hölzle emphasizes that changes to application can cause interruptions and down time. Make no changes and the systems run well. The land line phone did not have any changes, hence the dial tone was always there. The current smartphones have so many applications which change all the time. He said that outages at Gmail need 30 people to manage. But the cloud infrastructure on which Gmail runs, also supports many other cloud apps. Google is a provider of PaaS (Platform as a Service) via its Google App. Engine platform. Microsoft is offering Azure Cloud platform for the same.

When web services were introduced few years back, we used the phrase “application dial tone” to describe their functions, since they provided the much-needed connections between heterogeneous applications. Cloud computing  absorbs web services as one of many component pieces. It must address the reliability and availability aspects extremely well, so that the Cloud Tone (application availability) is available to users all the time.

The New Amazon

Amazon is quite a company. Talk about metamorphosis and re-inventing itself, Amazon gets the highest marks.Why do I say that?

Well, it started as a e-commerce book-selling site. It survived the dotcom crash while many other B2C companies went under. The clever strategy to morph itself to a broader player started just after the dotcom crash, around the year 2000.  Now, Amazon has three key businesses, each doing well as growth engines.

First, the core business of selling books got enhanced by strengthening many aspects of the consumer retail business. With tens of millions of customers in eight countries, it created the “customer intimacy” further. Examples like recommending books based on your past purchases added to the customer stickiness. This business continues stronger than ever and has caused the demise of brick-and-mortar book stores like Borders.

Second, leveraging its web infrastructure and massive fulfillment network, Amazon invited other merchants to sell their goods. Hence there grew a massive seller business which brought an additional revenue stream. Now we can buy any goods from the Amazon website at better price points. They have even introduced an annual subscription of $79 for unlimited shipping through the year. Here Amazon competes with eBay and with its seller-partner’s own website.

Third, around the year 2000, Jeff Bezos realized the potential of monetizing the massive computing power it has in the data center. Typically such data centers are underutilized by as much as 50-70%. Amazon started the Amazon Web Service (AWS) and the first service was storage rental. Instead of buying expensive hard disks, start-up companies could use “storage in the cloud”, called S3 (Simple Shared Storage) for a fraction of the cost. Then they introduced EC2 (Elastic Computing Cloud) where computing power can be rented for much cheaper price. It is elastic because you can use as much as you need and then release EC2 instances not needed anymore. It is only configuration and takes very little time (no expensive programming needed). This was the pre-curser to the notion of cloud computing and Amazon, rightfully, is given the credit of pioneering the cloud computing concept.  AWS has added many more cloud services in content delivery (CloudFront), data (SimpleDB or RDS), monitoring, messaging, etc. This part of Amazon is a fast growth segment. Well known web companies like Zynga, and Netflix run 100% on AWS.  The savings on CapEx for these companies are significant.

All this has brought rich dividends. Amazon’s stock price has gone up significantly over last five years. It’s revenue and market capitalization has also sky-rocketed.

Amazon is a good example of a company which has re-invented itself to stay with market dynamics. This is a must to survive in our industry, as the mortality rate is so high.

Centripetal & Centrifugal Forces, end of Wintel

In one recent Economist article the discussion was the end of Wintel (Windows+Intel) and I liked the start of the article – “They were the Macbeths of information technology (IT): a wicked couple who seized power and abused it in bloody and avaricious ways.”

In the article, I liked the new trends captured as both centripetal and centrifugal forces. Back to high school physics. Centripetal forces are those that push things to a central core – this is to symbolize the push of computing power into data centers (huge warehouses full of servers). Centrifugal forces are those that push things out with great force – this is to symbolize the rapid proliferation of mobile devices, businesses that Microsoft and Intel do no dominate. If you imagine that the PC (Personal Computer, lots of little) era never happened, then this was more or less how computing looked during the good old days with one big difference and that is the absence of the Internet as a key oxygen for inexpensive communication. Since then, two things changed the landscape – physics (computing power) and bandwidth (cheaper and faster).

With the Wintel duopoly declining rapidly in this new era, we see that Apple is the new leader in mobile device with its enormously successful iPhone. Amazon has emerged as the  pioneer in cloud computing with its AWS (Amazon Web Services) components such as EC2, S3, etc. Google is showing great leadership in cloud computing via its Google Applications. The need for your C disk seems so antiquated now! Given such new forces, both Microsoft and Intel are moving in separate directions.

Here is how the article concludes – “As the Wintel pair splits, computing will start to look different. Instead of being dominated by two monopolists, the market will be fought over by eight or nine more or less vertically integrated giants. Oracle, Cisco, and IBM will vie for corporate customers; Apple and Google will scramble for individuals. IT, like the world, is becoming multipolar.”

There was vertical integration (provide the entire stack) 3 decades ago – IBM, DEC, Univac,. . Then came the “democratization” or horizontal structure (many players in each layer).

Now we are back to the future again!

Cloud Fears

Cloud computing has entered the mainstream vocabulary in Information Technology. Every day the decibel level keeps going up.  Yesterday’s SaaS vendors like Salesforce.com have become the cheer-leaders of the Cloud mantra. Then the arguably godfather role of cloud goes to Jeff Bezos of Amazon. His huge investment in Amazon data center with 30% utilization prompted him to seek new avenues of monetization. Thus came AWS (Amazon Web Services) and its component pieces such as S3, EC2, etc. In the new cloud lexicon, this can be termed as IaaS (Infrastructure as a Service) or PaaS (Platform as a Service).

The cloud model makes sense from an economic and convenience point of view. But fears remain, specially in areas like security, data and control.  Dan Woods of Evolved Technologies wrote this piece on such fears. He explains how such fears of losing control or data security are not meaningful, since the providers of cloud infrastructure have a bigger stake in not guaranteeing such functions. Their survival depends on securing customer’s data and users, and providing uninterrupted service.

I like his conclusion:

But the biggest fear IT people should have about the cloud is failing to understand its true business value. The cloud right now is a technology phenomenon, but to make the biggest impact, its power must be reflected in business terms. Migration of server assets to the cloud or taking advantage of elastic capacity may save a few dollars, but the big money will come when business models of entire industries are reshaped because of the flexibility the cloud offers. The IT person who figures that out will not have to worry about losing his job or losing data. He will be the CEO before too long.

Cloud is here to stay. Larry Dignan of ZDnet wrote this piece about Microsoft’s views on Cloud computing. Microsoft at its financial analyst meeting made the case for being a cloud computing leader and argued that its economic prospects will improve as information technology shifts to an on-demand model.

There you go folks. Even Microsoft, the doyen of “private computing” now sings the cloud song!

Extraordinary Scale

Current websites like Facebook, Google, Twitter see unprecedented growth in number of concurrent active users and volumes of data in the guise of photos and videos. This level of scalability-demand defies our collective experiences from the past.

For example, Facebook in January of 2009 had 150 million active users. On September of the same year, it reached 300m and currently it is over 400m. Back in 2006, they had one data center in the bay area. In 2008, they added a new one in Virginia. Pretty soon, they are adding a third one in Oregon. Users download 3 billion photos a month, part of 200 Terabytes of live data. They do have over 60,000 servers doing the service for this rapidly growing community. All this was described by their engineer Tom Cook at Velocity 2010 last week in a talk titled “A day in the life of Facebook Operation”.

Sometimes, operational aspects are invisible to the user community. The belief is that somehow it all works until some breakdown or failure makes headlines. It takes a huge amount of innovation and discipline to run these operations. Boring stuff like configuration management, version control, early optimization, failure management, instrumentation, and automated tools require tremendous focus. Google spends a lot of money and talent to keep its operation efficient. So does Facebook. At the same conference, my friend James Hamilton (we were at IBM years back) gave an interesting talk on “Datacenter Infrastructure Innovation”. James is currently at Amazon as a VP and distinguished engineer after working at Microsoft for a number of years. He identifies top cost components and where some innovations can yield significant savings.

As more and more cloud service providers face these challenges, they better check how these pioneers at Facebook, Amazon, and Google are charting new courses for extreme scalability.

The new buzz – Cloud Computing

It’s almost deafening! There is so much noise these days on the hottest buzzword – Cloud Computing. Larry Ellison derided that phrase by saying – it’s all water vapor. Marc Benioff brags about it incessantly via his Facebook posts, his new book Behind The Cloud, and at his annual user’s meeting last month called DreamForce.  Jeff Bezos of Amazon is given the default title of being the “Father of the Cloud”. Why? Well, he started the AWS (Amazon Web Services) way back in 2002 and quickly followed that with AWS – S3 (Simple Shared Storage – storage offered as a service),  AWS – EC2 (Elastic Computing Cloud – CPU power offered as a service), AWS – SQS  (Queuing as a service), and AWS – SimpleDB (Database as a service).

When asked about how he beat the big iron suppliers in offering Cloud infrastructure so early, this is what he said, -  “we had enough complexity inside Amazon that we were finding we were spending too much time on fine-grained coordination between our network engineering group and our application programming group. Basically what we decided to do is to build a (set of API’s) between those two layers so that you could just do coarse-grained coordination between those two groups. Amazon is, as you know, just a web-scale application.” Very insightful. Amazon decided to monetize their excess capacity in the data center and lo and behold, came Cloud Computing.

Someone else has said – just like banks became a safe place to keep your money away from your safe-box in your grandfather’s home, the Cloud will become the default place to keep your data in the future.

The three key elements of Cloud Computing are – scalability in a programmatic way (no labor needed to configure), the way software is developed and delivered (composed), on-demand usage and metering (pay per usage). The three layers of Cloud are being termed as SaaS, PaaS, and IaaS referring to the Application (SaaS), Platform (PaaS), and Infrastructure like hardware, storage, and networking (IaaS).

Eric Schmidt said, “there will be a small number of big players and a large number of small players in the cloud computing space.” This is all following the model for electricity – “you buy electricity, you don’t buy a generator” model.

While the excitement builds, there is still debate on how to define the term without lots of ambiguity. There are 22 definitions for Cloud computing and terms like “cloud computing” and “cloud services” are all intermixed in the marketing hype. Some vendors are re-purposing their old stuff as cloud whatever. Hence Gartner Group is showing Cloud computing at the peak of their “hype cycle”. It will get sorted out as we pass the euphoria stage over the next year or so.