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Cloud Market Crosses the Chasm: Wins, Sign Posts, and Deals

You need to be able to move applications in and out and around all things Cloud

Nothing says fun like a hurricane party, a bottle of "Jack," and a little game theory debate as lights begin to flicker across New England. And speaking of "Jack," what can possibly explain the handlers at HP letting Leo Apotheker get off the reservation long enough to proclaim the obvious market shift brought on by the iPad?

Note to Leo: Never tell the world your business problems right before you put up the "for sale" sign. Never.

Note to Larry: Please put Leo, the board and shareholders out of their misery.  Can you imagine?

Ahhhhh.  I feel better.  Now .... turning to the chasm-crossing cloud market ...  I am fascinated by how the maturing of this market changes the competitive landscape as players reposition where they'll compete and investors ask, "Where is the smart money?"

So, with a nod to Geoffrey Moore's iconic taxonomy, here's my cut at a bare-bones outline of Cloud computing's rise from evolution to revolution.

2006/07 - Innovators:  Launch initial offering

Key milestone: Packaging server virtualization into a solution called "Cloud"

Amazon announced a limited public beta of EC2 on August 25, 2006, just six months after the launch of Twitter.  This move is a Cloud Computing equivalent of shipping the iPad. New idea has been funded, team built, 1.0 product is "good enough."  The race has begun and hardly anyone has noticed it yet.

2008 - Innovators: Get proof and "traction"

Key milestone: Amazon (AWS) does $100M in revenue

Zero to $100M in 2 years is proof enough. Early adopters -- technology enthusiasts -- flock to Amazon AWS and would-be competitors hastily plot their entry into this new market. The debate begins:  what is cloud computing and what are posers (a.k.a. "cloudwashing").  These questions consume the blogosphere and keep early twitter users off the streets.

2009 - Early adopters Part I:  Cloud breakthrough defined, validated, and gaining a foothold

Key milestone: Gartner issues their 1st cloud computing vendor list

Cloud computing is recognized as a generational epoch on par with Mainframe, Minis, PC and Web.  Amazon AWS does $250M in revenue. Traditional IT vendors stop asking "What is it?" and put on their acquisitional hats to answer, "How do I get into the game?"

2010 - Early adopters Part II: Cloud love fest in full swing

Key milestone:  Acquisitions, open source initiatives, and (drum roll) Microsoft is "all in"

The seriousness of the game is now completely clear to anyone who is paying attention. Game changing events (time will tell) add fuel to the cloud computing buzz:  CA acquires 3 companies in the space; HP and Dell duke it out for 3Para in a sky's-the-limit arms/price race.  In July 2010, Rackspace Hosting and NASA jointly launched a new open source cloud initiative known as OpenStack and, in March 2010, Steve Ballmer gives a speech declaring: "Microsoft, for the cloud, we're all in."  Apple released the first iPad in April 2010, selling 3 million of the devices in 80 days. Amazon AWS does $500M in revenue. The movement is clearly a juggernaut.

2011 - Early majority: The US government pushes hard to the cloud; enough said

Key milestone:  Acquisitions move up the stack

The year starts out with many transactions around owning a cloud ("Look ma, I'm just like Amazon too, no hands ...").  Terramark, Savvis, and Navisite all get gobbled up as PC era's transition to Cloud becomes a done deal. iPad will sell close to 50 million units this year. Amazon AWS is on track to do $1,000M in revenue.

Then there is the matter of both Cloud.com and CloudSwitch going for something like 100 - 150 times trailing twelve month revenue.  (If Apple Cloud were to get that kind of valuation it would be worth 15 trillion dollars -- enough to pay off the entire US debt.)  These 2 deals are outliers that tell us something important about what is now required to win.  They signal a new game with a higher ante.

Look at the CloudSwitch Verizon deal, in light of Verizon's recent $2B purchase of Terremark. Terremark is one of the most advanced Clouds available and Verizon just spent another $140M to protect that initial investment -- and provide a capability that other clouds cannot.

Lessons learned: It is no longer sufficient to have an advanced Cloud. You need something more in order to compete. You need to be able to move applications in and out and around all things Cloud.

2012 and beyond: We all agree that Cloud is the next generational computing epoch. So what will the market do? It has already moved from the Wild West to early settlement times. Companies are settling down for the long haul, building stonewalls to stake their claims. As the market shifts, leaders will look to add capabilities that broaden and differentiate their solutions (CloudSwitch/Verizon redux).

I expect the next 12 months to show a lot of Cloud related action in management tools, gateways/connectivity, and Platform as a Service (PaaS). And, unless the Mayan calendar turns out to be right, Cloud is likely to dominate the next decade, throwing some innovative curves along the way.

Note:  Now seems like a good time for the next installment of GregO's cloud valuation exit/acquisition score-card.

Time

Company

Valuation*

Q1 2010

3Tera /CA

$90M   @ 30  EV/R(ttm)

Q2 2010

3Para/HP

$2.4B   @ 12  EV/R(ttm)

Q1 2011

Facebook/Private IPO (GS)

$50 B   @ 25  EV/R(ttm)

Q1 2011

Terremark/Verizon

$1.9B   @ 5.4 EV/R(ttm)

Q2 2011

Navisite

$230M @ 2.1 EV/R(ttm)

Q2 2011

Savvis

$2.9B   @3.0 EV/R(ttm)

Q3 2011

Cloud.com

$218M   @100 EV/R(ttm)

Q3 2011

CloudSwitch

$140M   @125 EV/R(ttm)

*Valuation - includes debt

EV - Enterprise value or market cap + cash + debit

R(ttm) - Revenue for trailing twelve months

I am always looking for a way to communicate better and cut to the heart of any discussion. So, if you have thoughts on this subject drop me a line at GregO {@} Appzero {dot} com or tweet me at http://twitter.com/gregoryjoconnor.

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More Stories By Greg O'Connor

Greg O'Connor is President & CEO of AppZero. Pioneering the Virtual Application Appliance approach to simplifying application-lifecycle management, he is responsible for translating Appzero's vision into strategic business objectives and financial results.

O'Connor has over 25 years of management and technical experience in the computer industry. He was founder and president of Sonic Software, acquired in 2005 by Progress Software (PRGS). There he grew the company from concept to over $40 million in revenue.

At Sonic, he evangelized and created the Enterprise Service Bus (ESB) product category, which is generally accepted today as the foundation for Service Oriented Architecture (SOA). Follow him on Twitter @gregoryjoconnor.

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