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.
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.
Joe –
True there is a hype factor around cloud… it’s at the peak of the Gartner Hype Cycle this year.
But the stock market – which is guided at least a bit by financials, is definitely adding a premium (bubble?) to hosting companies – and especially to those who have a cloud offering: http://bit.ly/bZge8c
Ken: Some interesting stats… Our own SaaS 20 Stock Index fell about 50 percent in 2008, but rose 60+ percent in 2009. This year it’s been pretty darn volatile so far.
-jp
I am definately onboard the cloud hype train. I personally see things coming out that will change the I.T. landscape, especially in the storage market. I don’t know anything about the financials behind these companies, but I know that many of the products are cheap. I’m convinced that five years from now, it will seem absurd for a 5 person office (or even a 30 user office) to run an SBS and managing their own Exchange Server, Sharepoint, Active Directory, and so on.
Bubble? Not sure, but there is a lot of opportunity out there for cloud hosted services, and cloud entrepreneurs are just starting to tap into the cool creations that will help small businesses.
Once cloud/SaaS becomes more of a standard way of doing things, the next big shift will be all of the legacy line of business programs migrating into the cloud.
-dd
Wise post, Joe.
I agree that around any paradigm shift in technology, or in any business for that matter, there is going to be the potential for hype to get out of control. Looking for real revenues is a good discipline to develop when looking for vendors and partners.
I also think that a good MSP will help their clients parse the hype and take a critical view rather then just feeding them the latest offer.
At Newmind, our strategy to hedge against the risks of a bubble is pretty simple and old fashioned.
1. Make money ourselves. We have been cashflow positive for years. In practice this means growing a little bit slower then we might like in some markets.
2. Keep cash reserves. We try to predict market cycles but at the end of the day we know that we can be surprised sometimes. Cash on hand allows us to respond to those surprises.
3. Prefer vendors that are making money. This does not mean that we never do business with a vendor or partner that is not cashflow positive. But we recognize the risk and weigh the corresponding rewards.
All that said, we feel that cloud computing, SaaS, and browser-as-OS are a legitimate sea changes and when the hype subsides some MSPs will have taken advantage of that change and some will have been hurt by it.
Best Regards,
Daniel Jefferies
Newmind Group, Inc.
http://www.twitter.com/newmindgroup
Most bubbles are based on a solid underlying value proposition that eventually becomes entrenched in the market.
From an investor perspective its a bubble as the market sorts out winners and losers. From a technology perspective it is an unstoppable market megatrend that MSPs need to incorporate into their business strategies.
In the SMB market MSPs managing the total IT environment absolutely need to be able to monitor the health and availability of Cloud applications just as they do local infrastructure today. For example Level Platforms Partners using our BPOS monitoring policies were able to stay completely on top of the significant outages BPOS suffered last week.
A good piece of the SMB IT budget is on its way to the cloud. While not all SaaS cloud vendors fully recognize it yet, these technologies will need to be sold and supported by the MSP channel or they are going nowhere. MSPs that are planning for this will dominate their markets over the next five years.
Peter
http://www.levelplatforms.com
Peter nails it. Even though the cloud hype is deafening, the fact remains that there are cloud operational models that make sense – today. Monitoring public cloud services for customers is one of those. The need is there. The technology is there. Companies are buying.
I just received a Cloud 2.0 story pitch in my inbox. Isn’t 2.0 circa 2008-2009?
-jp
JP…you coined the expression that I am betting my career on SEO. Maybe it is more on “the cloud”. I really can’t see this bubble bursting. We have infrastructure now to support it. Bandwidth is everywhere, making it accessible and a generation who is using “the cloud” without even thinking. How can this bubble burst? Reset, maybe, but burst? I can’t see it.
Look at how we connect. I am wireless on a cloud solution right now, your blog. I just spoke with my wife on wireless through skype.
I do agree with the model on revenues and profits. I don’t believe it is no secret Google makes money but Twitter doesn’t or isn’t designed to make money. Maybe it does and I just don’t know it yet.
How much influence does social capital have? Facebook didn’t make a cent until it had critical mass and then rolled out their ad strategy. Brain child in my opinion, get a few million users and now sell advertising and be part of a strategy which is crippling the old ways.
This cloud is here to stay and I see real money raining from it soon.
Stuart Crawford
ULISTIC
http://www.ulistic.com
Stuart:
Remember how many PC companies burst onto the scene in the 1980s? At least they were offering real products. The number of cloud “pitches” I receive daily from vaporware companies is alarming. But I agree with your ultimate thesis: Cloud is here to stay. But many aspiring cloud companies are going to disappear.
-jp
Joe,
You have made a great point here. I agree that the hype on Cloud Computing is at an irrational exuberance point now. The parallels to the late 90’s bubble are uncanny. Tons of companies pitching “cloud” products/services, often selling them at a loss.
Remember all those companies in the Internet bubble that were going to “make it up in volume?” Turns out that selling at a loss to more customers just means you are losing more money. Eventually it ends badly.
For an MSP, when looking at potential vendors to partner with to provide underlying services that the MSP will be betting their customer base on, it it imperative that they look at the vendor not just on a price basis, but also on the likelihood that vendor will continue to be around for them. Extracting a cloud vendor to switch to a new vendor is more difficult than changing who provides your hardware, and you better believe that company will be there for you in a year.
Any MSP selecting a cloud technology vendor, especially one that is selling at prices substantially below general market, owes it to themselves to get financials and validate that the company has a financial future.
Shane Arnold
VaultLogix
http://www.dataprotection.com
This isn’t a hype, nor is it like the dot.com bubble, when investors bought into artificial demand. They believed that overnight the world would stop buying from brick and mortar shops and buy everything from cars to groceries online.
Businesses have been hosting their own IT infrastructure out of necessity not because of desire or because it’s the best solution.
Hosting in datacenters is not a new concept but cloud computing represents something bigger than just hosting. It’s the necessary technology, cost efficiencies, and bandwidth finally coming together to present businesses, for the first time, an environment suitable for moving from the client/server model to an IT as a service model.
It offers businesses and IT service providers substantial advantages;
– Quality Control, MSPs lack the ability to effectively manage IT unless they control the investments in infrastructure. I can’t guarantee Joe that his new Aston Martin DB9 will have zero issues or breakdowns if I don’t control how he drives the car, how he maintains it, and when he trades it in for a new one.
– ROI, compare the cost of buying, maintaining, and managing a new IT infrastructure every 3-5 years vs. a cloud computing solution that will eliminate capital expenditures and provide a business with enterprise class techonology that would be extremely cost prohibitive for the business to deploy and maintain on its own.
– Scalability, cloud computing allows businesses to scale up or down based on demand. If your headcount goes up by 50% in one year, you don’t have to run out and buy a new server or additional storage, similarly if you headcount goes down by 50%, your investments haven’t gone to waste.
So why hasn’t cloud computing exploded yet? Ignorance…
Most companies are unaware of what’s available, lack the technical expertise to make the transition themselves, or are scared into believing their data is better off in their closet than a multi-million dollar datacenter.
Unfortunately, their local IT service provider probably isn’t interested in educating or helping unless they have hosting operations themselves. They have too much to gain from perpetuating the old model of build it yourself and pay us to manage it.
They won’t last though, the market will catch up, hosting providers will spend billions educating businesses on the benefits of the model, and successful service providers will adapt.
That’s way I say this isn’t a bubble, it’s a revolution. 😉
Nick: I agree that the cloud is real. And I respect the solid points you’ve mad above. But here’s my concern: Plenty of flawed, broken, money-losing technology companies are scrambling to reposition themselves as cloud experts right now. Navigating through the real players vs. the pretenders is going to take time, and we’ll see somewhat of a pop in the bubble as thousands of aspiring cloud players disappear.
-jp
There is a huge amount of opportunity with cloud, as the current global economy has pushed every business into trying to squeeze more value out of every dollar, which is what cloud computing has brought to the table.
I agree that a lot of people are skeptical of the cloud, but cloud is bringing change to the market. We are at the first true cycle of computing. We are now at a point where we have new and improved mainframe and dummy terminal environments, which are now just server and thin clients. In a nutshell, we are back to server side computing on steroids.
Everyone should be cautious that cloud isn’t the next buzz word, but it is truly the evolution of technology. Improving the delivery of technology, standardizing the user experience, improving support efficiencies, and increasing productivity, all leads to what every MSP wants, increasing profits.
The biggest issue with cloud is the lack of understanding its true potential, and how it can benefit both the MSP and their clients. This year is truly a time every MSP should take time to dive into understanding cloud, and start implementing cloud products with clients that have the need for new hardware and software.
Michael Fraser
Director
gCLOUD3
I too believe that opportunity lies in distributed “Cloud” computing platforms. Like most bubbles, I also believe that the landscape will vastly differ in two years. It will take alot more than fancy tradeshow booths, glossy marketing material, and hyperbolic sales pitches to change the way businesses operate. It is true that IT tends to be early adopters, but businesses change slowly.
I see the same technology vendors owning this space. Dell, Microsoft, Symantec, amp; Seagate are already positioning themselves for this fight. Google will most likely arrive as the champion, given their insight and ability to execute ahead of the curve. At the end of the day, he he owns the infrastructure owns the industry. Deregulation created a zillion phone providers, yet ATamp;T still owns and charges all of them for using the copper.
MSPs can leverage this paradigm shift by doing their diligence just as any smart business would. Create a value proposition by providing stellar service that incorporates the “Cloud” where it complements your offering. If you truly believe that every church, contruction company, law firm, manufacturer, clinic, and service company is going to trust their backoffice systems to a DC 1,000 miles away please share what your smoking.
Justin Thomas
I agree.. Justin you made a very good point. Cloud computing is here to complement our existing infrastructure, not to replace it. I believe that we need to be rational about this new trend instead of being over-optimistic. Right now, we need a e-security infrastructure that gives us control over the security of our data stored in cloud and minimize our relience on the service provider in this regard..
Humzah: Please keep us posted as you analyze potential security considerations.
-jp
joe.. thanks for taking my concern seriously. I will keep you updated. secondly i wish to seek the same favour from all you guys out there.
regards
hfk