Is cloud a turkey for IT vendors? Thinking through its impact on end user IT spending

Amid preparations for Thanksgiving feasts here in the U.S., a couple recent predictions from IT industry experts could leave vendors with much less to be thankful for this year. I’ve seen more than one pundit say that even though cloud computing is the Next Big Thing for IT, it will, in the end, mean that less money is being spent on IT.

Is cloud computing really going to mean doing more with less?

Matt Asay, for example, recently noted a new Goldman Sachs report called “A Paradigm Shift for IT: The Cloud” found that even though CIOs may be “loosening the purse strings on IT spending, IT vendors may want to hold off their celebrations.” Why? “Much of this spending appears to be headed for deflationary forces like cloud computing [and] virtualization.”

At SYS-CON’s Cloud Computing Expo earlier this month, I heard GoGrid’s CEO John Keagey announce an IT vendor’s moment of triumph and death knell in one breath. “The dream of utility computing has arrived,” he said, followed quickly with: “I believe we’re at the height of IT spending right now. You’ll see the IT economy shrink to half its current size.”

And, finally, during a panel at Interop last week reported by Joe McKendrick, AT&T’s Joe Weinman, raised doubts about the sustainability of cloud computing economics, describing a scenario in which they break down as enterprise management requirements come into play. “I’m not sure there are any unit-cost advantages that are sustainable among large enterprises,” he said. He expects adoption of external cloud computing in some areas, and private capabilities for others.

Now that’s not the kind of market that the purveyors of cloud computing hype were likely hoping for. In fact, it looks to be a bit of a, um, turkey. “An economic rebound never looked so dire,” noted Asay. “That’s unless you’re an IT buyer, of course.”

More on Matt’s last comment in a moment. First, where are these comments coming from?

Goldman Sachs expects a big bump from cloud computing…

The dire remarks Asay picked up are interspersed in that pretty straightforward Goldman Sachs report he mentioned that covers the basics of cloud computing. (In fact, a big section of the report is itself entitled “Cloud Computing 101: definition, drivers and challenges,” so you shouldn’t expect big leaps forward in analysis.)

However, there are a couple of interesting observations from the report about the importance of cloud computing and its relation to the IT spending environment:

· Cloud computing is “similar in importance to the transition from mainframes to client-server computing in the 1980s.”
· The new data center approaches and architectures required for cloud computing “are coming at an auspicious time: they are likely to coincide with a meaningful cyclical upturn in IT spending over the next couple of years.” One underlying reason for the uptick: the underinvestment that the bad economy has caused in the past 18 months or so.
· “Our checks suggest that enterprise IT demand has hit an inflection point and is now beginning to improve.”

Hang on, that all sounded a bit positive, at least to my ears. They expect growth from re-architecting systems “upon a foundation of virtualization and increased automation.” Goldman (and Asay) note the typical (read: big) players that will be taking advantage of that.

So this sounds rosy for 2010 and the years just beyond. Goldman says “we expect a meaningful increase in demand in the technologies that enable virtualization and increase the availability and security of external Clouds.”

…and now the “but”:

· But, longer term, cloud computing could actually “drive some headwinds for the IT industry” because they see virtualization (one of the interesting components that can be involved in cloud computing) as a “deflationary technology.” Goldman sees IT spending concentrating into the hands of fewer buyers: mainly cloud providers, hosting vendors, and large enterprises. They think better utilization will mean less pressure to spend, and when they do, it’ll be a buyer’s market.

For SaaS, however, there was less uncertainty. SaaS offerings were seen to be expanding rapidly and leading other “external” cloud services. In fact, it is now an “unstoppable shift” from on-premise to on-demand delivery. Evangelos Simoudis, managing director of Trident Capital, posted his thoughts from the Goldman event that linked with the report, which underscored their SaaS discussion: “Two years ago,” wrote Simoudis, “the discussion was whether the enterprise will adopt any SaaS applications. Today the conversation is about which on-premise applications will be replaced by their SaaS equivalent.”

As always, baby steps to start

For areas of cloud computing other than SaaS, however, two themes emerged from the Goldman report that matched what other reputable reports have been saying. First, “for large enterprises, Cloud Computing is still very early.” And, second, “most industry participants we spoke with expect large enterprises to take baby steps in their adoption of Cloud Computing resources, especially for business-critical activities.”

Goldman highlights cloud management

Additional comments from Simoudis are relevant here in helping analyze what Goldman’s thoughts might mean. “Infrastructure-as-a-Service (IaaS) requires management skills that most IT shops today don’t have,” he said. As a result, it’s easy to see why Goldman also noted that “systems management [is] likely to become a key component of the platform over time.” Allan Leinwand of Panorama Capital, also speaking during the Interop panel I mentioned previously, underscored this management gap. “There’s a gap between what the enterprise is used to doing behind the firewall and what the cloud providers can do.”

Goldman sees traditional systems management players (BMC and CA being two they call out) going to market with more IT automation capabilities for provisioning workloads in both physical and virtual environments, as well as extending capabilities to the public cloud. But hang on to your hats, they also predict an eventual battle for where these capabilities go between systems management and platform vendors such as VMWare and Microsoft. Something to watch, for sure.

“CIOs don’t want a single, ubiquitous stack for cloud computing,” predicts Simoudis, “but the ability to work simultaneously with multiple stacks coming from different vendors.” CA’s certainly betting on that approach. Goldman’s published take on CA is that it (along with others) has cloud computing as a “potential new growth vector.” That’s a comment I agree with, or (obviously) I wouldn’t still be here.

The opposite of deflationary: Cloud as another channel for growth?

So back to the question. Is IT spending headed for a permanent downshift? As enterprises find their way to the cloud, using baby steps or otherwise, we’ll certainly see if this deflationary impact is for real.

Now, I know that this whole cloud computing revolution is supposed to first and foremost be an economic one. As in, good for the economics of running IT. No one said anything about it being good for the IT vendors. Unless, of course, they figure out how to get on the side of the customers (always a good idea, if you ask me).

And if they do figure out how to side with the customers, maybe the cloud is in fact another channel for growth. Someone recently reminded me how early e-commerce over the Internet looked back in 1999 (Black Friday was much different back then – and there wasn’t even a Cyber Monday). At that time, many analysts predicted the demise of the brick-and-mortar retail store. Instead, the Web has become another channel to sell goods; it has given people another channel to sell and buy.

Is that a good way to look at what will happen with cloud computing as well? Or maybe that’s the wrong metaphor.

Well, it’s at least worth a thought between slices of pumpkin pie. Gobble, gobble.