When Will the Cloud Bubble Burst?When Will the Cloud Bubble Burst?
We're officially in the cloud bubble. Plenty of money continues to flow into the cloud market. Some businesses will succeed. Many will fail. We -- many readers and the media -- are forgetting the lessons of the dot-com and ASP (application service provider) bubbles. It's time to get back to discussions about profits, earnings and financial fundamentals. Fast. Here's why.
February 4, 2010
cloud bubble burstWe’re officially in the cloud bubble. Plenty of money continues to flow into the cloud market. Some businesses will succeed. Many will fail. We — many readers and the media — are forgetting the lessons of the dot-com and ASP (application service provider) bubbles. It’s time to get back to discussions about profits, earnings and financial fundamentals. Fast. Here’s why.
First, let’s rewind to the 1998-2000 time frame. I remember sitting down with Exodus Communications CEO Ellen Hancock. She described how Exodus, a fast-growing data center provider, was marching toward positive EBITDA (earnings before interest, taxes, depreciation and amortization) amid exponential growth. I was caught up in the hype. Exodus had a strong IPO. Magazines like The Industry Standard and Fast Company, filled with dot-com and ASP ads, were fatter than the Yellow Pages.
Nobody bothered to ask the difficult questions: Where were the profits? Earnings per share? Positive cash flow? We (including myself) were so busy trying to grab Internet dollars, we forgot to do basic, fundamental financial research.
Eventually the market burst.
Now, the Cloud Bubble
About a year ago, I mentioned that the SaaS market had already undergone a financial correction. But I think the hype cycle has greatly outpaced SaaS and cloud realities since that time.
In the past month or two, the cloud market has moved from exciting to irrational exuberance. Our blogger team has received a tidal wave of SaaS and cloud announcements, many of which involve storage services that tie into Amazon Simple Storage Service (S3), RackSpace Cloud and so on. Some SaaS storage providers will make handsome profits. And MSPs need to test the online backup market. It’s an undeniable trend.
Meanwhile, small businesses — including our own company — have standardized on a range of cloud and SaaS applications, from Google Apps to WordPress to Salesforce.com and NetSuite.
Still, the hype is getting out of hand. I was skeptical when I saw EverythingChannel’s 100 Coolest Cloud Computing Vendors list. I love lists as much as the next reader. But did anybody bother to ask if these companies have real revenues? Does the world need more slide shows about cool companies — or more factual information?
These are tricky times. I’ve taken my share of lumps. A few readers sent me private emails, alleging that I hyped the recent ConnectWise Capital announcement. Others wondered why I put the spotlight on the forthcoming ChannelCloud launch when so few details about the launch are available.
Keep the questions coming. I’ll try to reply privately or online to all of the inquiries. I’ll eat crow from time to time.
The bottom line: Let’s all stay focused on business fundamentals. As you sort out cloud and SaaS strategies, ask potential partners about their cash flow, net income, debt, growth (in hard dollars), executive experience and financial viability…
… because the cloud bubble is here.
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