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AWS 2Q14 and why the sky is not falling

Amazon posted weaker 2Q 2014 results for Amazon Web Services, leading some to speculate about competitive pressures despite continued enormous growth in usage.

Investors are asking, probably reasonably, what’s going on here. Is the overall market for cloud computing weakening? Are competitors taking more market share? Or is this largely the result of the price cuts that went into effect at the beginning of 2Q? And if it’s the price cuts, are these price cuts temporary, or are they part of a larger trend that eventually drives the price to zero?

The TL;DR version: No, cloud growth remains tremendous. No, AWS’s market share likely continues to grow despite the fact that they’re already the dominant player. Yes, this is a result of the price cuts. No, the price cuts are permanent, and yes, cuts will eventually likely drive prices down to near-cost, but this is nevertheless not a commodity market.

The deep dive follows. Note that when I use the term “market share”, I do not mean revenue; I mean revenue-generating capacity-in-use, which controls for the fact that prices vary significantly across providers.

What’s with these price drops?

I have said repeatedly in the past that the dynamics of the cloud IaaS market (which is increasingly also convergent with the high-control PaaS market) are fundamentally those of a software market. It is a market in which customers are ultimately buying IT operations management software as a service, and as they go up-stack, middleware as a service. Yes, they are also getting the underlying compute, storage, and networking resources, but the major value is the actually in all the software that automates this stuff and delivers it as an easy-to-consume, less-effort-to-manage solution. The automation reduces a customer’s labor costs, which is where the customer sees cost-savings in services over doing it themselves.

You’ll note that in other SaaS markets, the infrastructure is effectively delivered at cost. That’s extremely likely to be true of the IaaS market over time, as well. Furthermore, like other software markets, the largest vendors with the greatest breadth and depth of capabilities are the winners, and they’re made extra-sticky by their ecosystems. (Think Oracle.) Over time, the IaaS providers will make most of their margin off higher-level services rather than the raw resources; think about the difference between what a customer pays for Redshift data warehousing, versus raw EC2 compute plus EBS storage.

The magnitude of the price drops is scaring away many rival providers. So is the pace of innovation. Few competitors have the deep pockets or willpower to pour money into engineering and data centers in order to compete at this level. Most are now scurrying to stake out a niche of the market where they believe they can differentiate.

Lowering the price expands the addressable market, as well. The cheaper it is to do it in the cloud, the more difficult it is to make a business case to do an on-premises solution, especially a private cloud. Many of Gartner’s clients tell us that even if they have a financially viable case to build a private cloud right now, their costs will be essentially static over the amortization period of 3 to 5 years — versus their expectation that the major IaaS providers will drop prices 30% every year. Time-to-value for private cloud is generally 18 to 24 months, and it typically delivers a much more limited set of features, especially where developer enablement is concerned. It’s tough for internal IT to compete, especially when the major IT vendors aren’t delivering software that allows IT to create equivalent capabilities at the speed of an AWS, Microsoft, or Google.

The size of the price cut certainly had a negative impact on AWS’s revenues this past quarter. The price cut is likely larger than AWS would have done without pressure from Google. At the same time, the slight dip in revenue, versus the magnitude of the cuts, makes it clear that AWS is still growing at a staggeringly fast pace.

The Impact of Microsoft Azure

Microsoft has certainly been on an aggressive tear in the market over the last year, especially since September 2013, and Azure has been growing impressively. Microsoft has been extremely generous with both discounts and with free credits, which has helped fuel the growth of Azure usage. But interestingly, Microsoft’s proactive evangelism to their customers has helped expand the market, particularly because Microsoft has been good at convincing mainstream adopters that they’re actually late adopters, spurring companies to action. Microsoft’s comprehensive hybrid story, which spans applications and platforms as well as infrastructure, is highly attractive to many companies, drawing them towards the cloud in general.

Some customers who have been pitched Azure will actually go to Azure. But for many, this is a trigger to look at several providers. It’s not unusual for customers to then choose AWS over Azure as the primary provider, due to AWS’s better feature set, greater maturity, and better ecosystem; those customers will probably also do things in Azure, although they may be earlier-stage and smaller projects. Of course, many existing AWS customers are also adding Azure as a secondary provider. But it may well be that Microsoft’s serious entry into this market has actually helped AWS, in terms of absolute usage gains, more than it has hurt it — for the time being, of course. Over time, Microsoft’s share gains will come at AWS’s expense.

The Impact of Google

Google has been delivering technology at an impressive pace, but there is an enormous gulf between its technology capabilities and its go-to-market prowess. They also have to overcome the perception problem that people aren’t sure if Google is serious about this market, and are therefore reluctant to commit to the platform.

While everyone is super-interested in what Google is doing, at the moment they do not seem to be winning significant customers from AWS. They’re doing reasonably well in batch-computing scenarios (more as a rival to AWS spot instances), and in scenarios where all of Google Cloud Platform, including App Engine, is of interest. But they do not seem to have really gotten market momentum, yet.

However, in this market and in many other markets, a competitor does not need to win over the market leader in order to hurt them. They merely need to change customer expectations of what the price should be — and AWS has allowed Google to set the price. As long as Google seems like a credible threat, AWS will likely continue to be competitive on price, at least for those things that Google also offers. Microsoft has already publicly pledged to be price-competitive with AWS, so that pretty much guarantees that the three providers will move in lockstep on pricing.

The Impact of Smaller Providers

Digital Ocean, in particular, is making a lot of noise in the market. They’ve clearly established themselves as a VPS provider to watch. (VPS: virtual private server, a form of mass-market hosting.) However, my expectation is that Digital Ocean’s growth comes primarily at the expense of providers like Rackspace and Media Temple (owned by GoDaddy), rather than at the expense of AWS et.al. A Digital Ocean droplet (VM) is half the price of an AWS t2.micro (the cheapest thing you can get from AWS), and they’ve been generous with free-service coupons.

VPS providers have friendly control panels, services that are simple and thus easy to use, and super-low prices; they tend to have a huge customer base, but each customer is, on the average, tiny (usually just a single VM). These days, VPS is looking more and more like cloud IaaS, but the orientation of the providers tends to be quite different, both from a technology and a go-to-market perspective. There’s increasing fluidity between the VPS and cloud IaaS market, but the impact on AWS is almost certainly minimal. (I imagine that some not-insignificant percentage of AWS’s free tier would be on VPS instead if not for the free service, though.)

There’s plenty of other noise out there. IBM is aggressively pitching SoftLayer to its customer base, but the deals I’ve seen have generally been bare metal on long-term contracts, usually as a replatform of an IBM data center outsourcing deal. Rackspace’s return to its managed hosting roots is revitalizing. CenturyLink continues to have persuasive sales. VMware customers remain curious about vCHS. And so on. But none of these providers are growing the way that AWS and Microsoft Azure are, and both providers are gaining overall market share at the expense of pretty much everyone else.

The sky is not falling

With Microsoft and Google apparently now serious about this market, AWS finally has credible competitors. Having aggressive, innovative rivals are helping to push this market forward even faster, to the detriment of most other providers in the market, as well as the IT vendors selling do-it-yourself on-premises private cloud. AWS is likely to continue to dominate this market for years, but the market direction is no longer as thoroughly in its control.

The 2014 Cloud IaaS Magic Quadrant

Gartner’s Magic Quadrant for Cloud Infrastructure as a Service, 2014, has just been released (see the client-only interactive version, or the free reprint). If you’re a Gartner client, you can also view the related charts, which summarize the offerings, features, and data center locations in a convenient table format. (The charts are unfortunately less readable than they could be, as our publication system doesn’t allow comments in Excel spreadsheets. Sorry.)

We’re continuing to update this Magic Quadrant every nine months, since the market is moving so quickly. There have been significant changes in vendor positions since the August 2013 Magic Quadrant (the free reprint has expired, but the graphic is floating around, and Gartner clients can use the “History” tab in the online Magic Quadrant tool, which allows you to compare 2012, 2013, and 2014 interactively).

We’ve observed, over the last nine months, a major shift in Gartner’s client base — the desire to make strategic bets on cloud IaaS providers. In general, this reduces the number of significant suppliers to an organization to just one or two (whereas many organizations had as many as four), with the overwhelming bulk of the workloads going to one provider. It also means that clients are interested in knowing not just who is winning right now, but who is going to be the winner in five or even ten years. That’s really the lens that this Magic Quadrant should be viewed through: Who has what it takes to convince the customer that they can serve both current needs and will sustain market leadership over the long term?

Our clients have, since September of 2013 (which seemed to mark a change in Microsoft’s go-to-market approach for Azure), consistently viewed this as an AWS vs. Microsoft battle, with AWS continuing to win the vast majority of business but Microsoft winning significant inroads, especially with later-adopter customers. In recent weeks since the big price drops, lots of clients have been asking about the future of Google, as well, and there are a lot of curiosity questions about IBM (SoftLayer) also, although the IBM questions tend to be more outsourcing and broader-strategy in orientation. Of course, prospects consider other vendors, especially their existing incumbent vendors, as well, but AWS and Microsoft are overwhelmingly the top contenders.

What’s interesting about this year’s Visionaries is that they all have new platforms — CenturyLink with the Tier 3 acquisition, CSC with the ServiceMesh acquisition coupled with the AWS partnership, Google with Google Compute Engine, IBM with the SoftLayer acquisition, and Verizon Terremark with the still-beta Verizon Cloud. (Arguably VMware falls into this bucket as well, despite being a Niche Player this year.) These providers are in the middle of reinventing themselves, most with the idea of battling it out for the #3 spot in the market.

This is not a market for the faint of heart. (I recently asked a large vendor if they intended to compete seriously in the IaaS space, and was told, “Only an idiot takes on Amazon, Microsoft, and Google simultaneously.”) For that matter, this is not a market for the shallow of pocket. You can’t spend your way to success here, but you need engineers, intellectual property, and to be a real #3, substantial capital investment in infrastructure.

There’s also a clear convergence with the PaaS market that’s taking place here. AWS has long offered an array of services that are PaaS elements, as well as many things that sit on the spectrum between pure IaaS and pure PaaS. Microsoft and Google started as PaaS providers and then launched IaaS offerings. The distintions will blur and increasingly become less relevant, as providers fight it out on features and capabilities.

Gartner continues to separate our evaluation of related managed and professional services from the core cloud IaaS platform, because we believe that clients are increasingly choosing a platform, and then choosing consultants and managed services providers (or alternatively, turning to a trusted integrator who helps them choose the right platforms for their needs). I’ll be writing on this more in the future, but keep an eye out for the upcoming regional Magic Quadrants for Cloud-Enabled Managed Hosting for a managed services-oriented view.

Reflections on the OpenStack Atlanta summit

When I wrote a research note called Don’t Let OpenStack Hype Distort Your Selection of a Cloud Management Platform in 2012, in September 2012, I took quite a bit of flak in public for my statements about OpenStack’s maturity. At the time, I felt that the industry was about 18 to 24 months from the point where real commercial adoption of OpenStack would begin. It now looks like I made the right call — 20 months have passed since I wrote that note, and indeed, OpenStack seems to be on the cusp of that tipping point. OpenStack is truly becoming a business. Last year’s Portland summit was a developer summit. This year’s summit has the feel of a trade show, although of course it’s still a set of working meetings as well as a user conference.

There’s much work to be done still, but things are grinding onwards in an encouraging fashion. The will to solve the common problems of installs, upgrades, and networking seems to have permeated the community sufficiently that these basic elements of usability and stability are getting into the core. The involvement of larger vendors has created a collective determination to do what it takes to make enterprise adoption of OpenStack possible, in due time.

In March of this year, I wrote a new document called An Overview of OpenStack, 2014. It contains the updated Gartner positions on OpenStack — along with practical information for users, like use cases, vendors, and how to select a distro. (No vendor has done a free reprint of the note, so it’s behind the paywall, sorry.) I have no updates to that position after this summit; it has been largely what I expected it to be. However, I did want to comment on what I see as one of the key questions now facing the OpenStack Foundation and contributing vendors.

One of the positions taken in my recent note is a re-iteration of a 2012 position — we believe that OpenStack “will eventually mature into a solid open-source core at the heart of multiple commercial products and services.” One of the key questions that seems to be at hand now is how large that core should be — a fundamental controversy for OpenStack Foundation members, each of whom has a position based on where their company adds value.

At one pole of the spectrum are the vendors who want to maximize the capabilities in OpenStack that are fully open-source — I’ll call them the “more open” camp. (End-users, of course, also all want this.) These vendors typically differentiate in some way that is not the software itself. They do consulting, they are managed services providers, they are cloud IaaS providers, or they are selling some kind of product or service that uses OpenStack under the covers but delivers some other kind of value (NFV, SaaS, and so on). They want the maximum capabilities delivered in the software, and they’re willing to contribute their own work towards this end.

At the other pole of the spectrum are the vendors who intend to sell a cloud management platform (CMP) and need to be able to differentiate — I’ll call them the “more proprietary” camp. That means that there’s the question of “how does a distro differentiate”. It has already been previously argued that installation and upgrades should be left to commercial distributions. At long last it seems to be agreed that for the good of the community at least some of these capabilities need to be decent in the core. The next controversial one seems to be an HA control plane. But it also gets into the broader question of how deep the functionality of OpenStack as a whole should go. Vendors that sell OpenStack software really fall into two broad categories — those that intend to supportively wrap what is essentially vanilla OpenStack (like the Linux vendors), and those who are building a full-fledged CMP (or CMP suite) into which OpenStack may essentially disappear near-invisibly (except for maybe an exposed API), surrounded by a rich fudgy layer of proprietary software (like HP and IBM). Most of these vendors want just enough in the OpenStack open-source to make OpenStack overall successful.

There are nuances here, of course, and many vendors fall somewhere between these two poles, but I think that summarizes the two camps pretty well. Each camp has its own beliefs about what is best for their own companies and what is best for OpenStack. These are legitimate debates about what is “just enough” functionality in OpenStack (and how that “just enough” changes over time), even amongst vendors who occupy the “more proprietary” camp — and whether that “just enough” is sufficient to satisfy the “more open” camp. Indeed, the “more open” camp may find that they cannot get their contributions accepted because the “more proprietary” camp is gatekeeping.

It is critical to note that no vendor I’ve ever spoken to thinks that OpenStack interoperability means that you should be able to easily switch between distributions or OpenStack-based service providers. Rather, the desire is to ensure that there’s enough of an interoperability construct that there can be a viable OpenStack ecosystem — it’s about the ability of ecosystem vendors to interoperate with a variety of OpenStack-based vendors, far more than it is about the user’s ability to interoperate between OpenStack-based solutions. To reiterate another point from my previous research notes: Customers should expect to be no less locked into an OpenStack-based vendor/provider than they would into any other CMP or cloud IaaS provider.

Impressions of IBM Pulse

Once upon a time, IBM Pulse was a systems management conference. But this year, IBM has marketed it as a “cloud” conference. The first day of keynotes was largely devoted to IBM’s cloud efforts, although the second day keynote went back to the systems management roots (if still with a cloudy spin). IBM has done a good job of presenting a coherent vision of how it intends to go forward into the world of cloud, which is explicitly a world of changing business demands and an altered relationship between business and IT.

Notably absent amidst all of this has been any mention of IBM’s traditional services business (strategic outsourcing et.al.), but the theme of “IBM as a service” has resonated strongly throughout. IBM possesses a deep portfolio of assets, and exposing those assets as services is key to its strategy. This is going to require radical changes in the way that IBM goes to market, with a much greater emphasis on marketing-driven online sign-up and self-service. (IBM, like other large tech vendors, is largely sales-driven today.)

Some serious brand-building for IBM’s SoftLayer acquisition is being done here, although IBM seems to be trying to redefine everything that SoftLayer does as cloud, although SoftLayer’s business is almost all dedicated hosting (bare metal, sold month-to-month), not cloud IaaS in the usual sense of the word. There’s abundant confusion as a result; the cloudwashing is to IBM’s benefit, though, at least for now.

IBM has an enormous installed base, across its broad portfolio, and for a large percentage of that base, it is a strategic vendor. IBM has to figure out how to get that customer base to buy into its cloud vision, and to make the bet that IBM is the right strategic partner for that cloud journey. IBM looks to be taking a highly neutral stance on the balance of cloud (services) versus internal IT; arguably, much like Microsoft, its strength lies in the ostensible ability to blend on-premises do-it-yourself IT with services in the cloud, extending the lifetime of existing technology stacks.

Much like Microsoft, IBM has an existing legacy of enterprise software — specifically, software built for single-tenant, on-premise, bespoke environments. Such software tends not to scale, and it tends not to be easily retrofitted into a services model. Again like Microsoft, IBM is on a journey towards “cloud first” architecture. IBM’s acquisition of Cloudant isn’t just the acquisition of a nice bit of technology — it’s also the acquisition of the know-how of how to build a service at scale, a crucial bit of engineering expertise that it needs to absorb and teach within IBM, as IBM’s engineers embark on turning its software into services.

Again like Microsoft, IBM has the advantage of an existing developer ecosystem and middleware that’s proven to be sticky for that ecosystem — and consequently IBM has the potential to turn itself into a compelling cloud platform (in the broadest of senses, integrated across the IaaS, PaaS, and SaaS boundaries). Since cloud is in many ways about the empowerment of the line-of-business and developers, this is decidedly helpful for IBM’s future ambitions in the cloud.

So another juggernaut is on the move. Things should get interesting, especially when it comes to platforms, which is arguably where the real war for the cloud will be fought.

The end of the beginning of cloud computing

As my colleague Daryl Plummer has put it: We’re at the end of the beginning phase of cloud computing.

As 2014 dawns, we’re moving into an era of truly mainstream adoption of cloud IaaS. While many organizations have already been using cloud IaaS for several years, gradually moving from development to production, with an ever-expanding range of use cases and applications, the shift to truly strategic adoption is just getting underway. Increasingly, organizations are asking what can’t go to the cloud, rather than what can.

Organizations that haven’t done at least a cloud IaaS pilot by now, however informal (“informal” includes that one crazy developer who decided to give his credit card to Amazon) are at the trailing edge of adoption. The larger the business, the more likely it is to be doing things in cloud IaaS; this is a trend that starts from enterprises and works its way down. (Technology companies of all sizes, of course, are comfortably ensconced in the cloud.)

Gartner’s clients with multiple years of cloud IaaS under their belts are now comfortably going towards more strategic adoption. What’s interesting, though, is that later adopters are also going towards strategic adoption — they’re skipping the years of early getting-their-feet-wet, and immediately jumping in with more significant projects, with more ambitious goals. That makes a great deal of sense, though — by this point, the market is more mature, and there are immediate and clear answers to practical issues like, “How do I connect my enterprise network?” (That one question, by the way, continues to benefit Amazon, which has a precise answer, versus the often-fuzzy or complex answers of other competitors who have less industrialized processes for doing so.)

I’ve said before that developers are the key to cloud IaaS adoption in most organizations. It’s also becoming clear that the most successful strategic efforts will be developer-led, usually with an enterprise architect as the lead for the organization-wide effort. It is the developers that have the strategic vision for the future of application development and operations, and that care about things like faster delivery (i.e., business agility), continuous integration, continuous deployment, application lifecycle management, and infrastructure as code. IT operations seems to almost inevitably be mired in thinking about solely their own domain, which tends to be focused on a data center view that effectively reduces to “how do we keep the lights on, at a lower cost?” This has a high probability of leading to solutions that might be right for IT operations, but wrong for the business.

At the moment, I’m writing research focused on best practices — the lessons learned from the trenches, from organizations who have adopted cloud IaaS over the last seven years of the market. I’m always interested in hearing your stories.

Recommended reading for 2014 Cloud IaaS and Managed Hosting Magic Quadrants

If you’re a service provider interested in participating in the research process for Gartner’s Magic Quadrant for Cloud IaaS (see the call for vendors), or the regional Magic Quadrants for Cloud-Enabled Managed Hosting (see that call for vendors), you will probably want to read some of my previous blog posts.

The Magic Quadrant Process Itself

AR contacts for a Magic Quadrant should read everything. An explanation of why it’s critical to read every word of every communication received during the MQ process.

The process of a Magic Quadrant. Understanding a little bit about how MQs get put together.

Vendors, Magic Quadrants, and client status. Appropriate use of communications channels during the MQ process.

General tips for Magic Quadrant briefings and Specific tips for Magic Quadrant briefings. Information on how to conduct an effective and concise Magic Quadrant briefing.

The art of the customer reference. Tips on how to choose reference customers.

Gartner’s Understanding of the Market

Foundational Gartner research notes on cloud IaaS and managed hosting, 2014. Recommended reading to understand our thinking on the markets.

Having cloud-enabled technology != Having a cloud. Critical for understanding what we do and don’t consider cloud IaaS to be.

Infrastructure resilience, fast VM restart, and Google Compute Engine. An explanation of why infrastructure resilience still matters in the cloud, and what we mean by the term.

No World of Two Clouds. Why we do not believe that there will be a separation of the cloud IaaS offerings that target the enterprise, from those that target cloud-native organizations.

Cloud IaaS market share and the developer-centric world. How developers, rather than IT operations admins, drive spend in the cloud IaaS market.

Foundational Gartner research notes for cloud IaaS and managed hosting, 2014

With the refresh of the Magic Quadrant for Cloud IaaS, and the evolution of the regional Magic Quadrants for Managed Hosting into Magic Quadrants for Cloud-Enabled Managed Hosting, I am following my annual tradition of highlighting researching that myself and others have published that’s important in the context of these MQs. These notes lay out how we see the market, and consequently, the lens that we’re going to be evaluating the service providers through.

As always, I want to stress that service providers do not need to agree with our perspective in order to rate well. We admire those who march to their own particular beat, as long as it results in true differentiation and more importantly, customer wins and happy customers — a different perspective can allow a service provider to serve their particular segments of the market more effectively. However, such providers need to be able to clearly articulate that vision and to back it up with data that supports their world-view.

This updates a previous list of foundational research. Please note that those older notes still remain relevant, and you are encouraged to read them. You might also be interested in a previous research round-up (clients only).

If you are a service provider, these are the research notes that it might be helpful to be familiar with (sorry, links are behind client-only paywall):

Magic Quadrant for Cloud IaaS, 2013. Last year’s Magic Quadrant is full of deep-dive information about the market and the providers. Also check out the Critical Capabilities for Public Cloud IaaS, 2013 for a deeper dive into specific public cloud IaaS offerings (Critical Capabilities is almost solely focused on feature set for particular use cases, whereas a Magic Quadrant positions a vendor in a market as a whole).

Magic Quadrant for Managed Hosting, North America and Magic Quadrant for European Managed Hosting. Last year’s managed hosting Magic Quadrants are likely the last MQs we’ll publish for traditional managed hosting. They still make interesting reading even though these MQs are evolving this year.

Pricing and Buyer’s Guide for Web Hosting and Cloud Infrastructure, 2013. Our market definitions are described here.

Evaluation Criteria for Public Cloud IaaS Providers. Our Technical Professionals research provides extremely detailed criteria for large enterprises that are evaluating providers. While the customer requirements are somewhat different in other segments, like the mid-market, these criteria should give you an extremely strong idea of the kinds of things that we think are important to customers. The cloud IaaS MQ evaluation criteria are not identical (because it is broader than just large-enterprise), but they are very similar — we do coordinate our research.

Technology Overview for Cloud-Enabled System Infrastructure. If you’re wondering what cloud-enabled system infrastructure (CESI) is, this will explain it to you. Cloud-enabled managed hosting is the combination of a CESI with managed services, so it’s important to understand.

Don’t Be Fooled By Offerings Falsely Masquerading as Cloud IaaS. This note was written for our end-user clients, to help them sort out an increasingly “cloudwashed” service provider landscape. It’s very important for understanding what constitutes a cloud service and why the technical and business benefits of “cloud” matter.

Service Providers Must Understand the Real Needs of Prospective Customers of Cloud IaaS. Customers are often confused about what they want to buy when they claim to want “cloud”. This provides structured guidance for figuring this out, and it’s important for understanding service provider value propositions.

How Customers Purchase Cloud IaaS, 2012. A lifecycle exploration of how customers adopt and expand their use of cloud IaaS. Important for understanding our perspective on sales and marketing. (It’s dated 2012, but it’s actually a 2013 note, and still fully current.)

Market Trends: Managed Cloud Infrastructure, 2013. Our view of the evolution of data center outsourcing, managed hosting, and cloud IaaS, and broadly, the “managed cloud”. Critical for understanding the future of cloud-enabled managed hosting.

Managed Services Providers Must Adapt to the Needs of DevOps-Oriented Customers. As DevOps increases in popularity, managed services increasingly want their infrastructure to be managed with a DevOps philosophy. This represents a radical change for service providers. This note explores the customer requirements and market implications.

If you are not a Gartner client, please note that many of these topics have been covered in my blog in the past, if at a higher level (and generally in a mode where I am still working out my thinking, as opposed to a polished research position).

Last call for vendors for 2014 Cloud IaaS Magic Quadrant

We began the call-for-vendors process for Gartner’s 2014 Magic Quadrant for Cloud Infrastructure as a Service, as well as the regional Magic Quadrants for Cloud-Enabled Managed Hosting, in December. (See Doug Toombs’s call for vendors for the latter.)

The pre-qualification survey, which is intended to gather quantitative metrics and information about each provider’s service, is going out imminently. We sent out contact confirmations on December 26th to all service providers who are currently on our list to receive the survey. If you haven’t received a contact confirmation and you want to receive the survey, please contact Michele Severance (Michele dot Severance at Gartner dot com), who is providing administrative support for this Magic Quadrant. You must be authorized to speak for your company. Please note we cannot work with PR firms for the Magic Quadrant; if you are a PR agency and you think that your client should be participating, you should get in touch with your client and have your client contact Michele.

This year, we are doing an integrated survey process for multiple Magic Quadrants. The cloud IaaS MQ is, in many ways, foundational. Cloud-enabled managed hosting is the delivery of managed services on top of cloud IaaS and, more broadly, cloud-enabled system infrastructure. Consequently, this year’s survey asks about your platforms, your managed services levels, and how those things combine into service offerings. Because the survey is longer, we’re starting the survey process earlier than usual.

The survey is an important part of our data collection efforts on the markets, not just for the Magic Quadrants. We use the survey data to recommend providers throughout the year, particularly since we try to find providers that can exactly fit a client’s needs — including small niche providers. Far from everything fits into the one-size-fits-all mold of the largest providers.

The Cloud IaaS MQ continues to be updated on a 9-month cycle, reflecting the continued fast pace of the market. It will have similar scope to last year, with a very strong emphasis on self-service capabilities.

The best guide to this year’s Magic Quadrant is last year’s Magic Quadrant. Read the interactive MQ if you’re a client, or the free reprint if you’re not.

Please note that receiving a survey does not in any way indicate that we believe that your company is likely to qualify; we simply allow surveys to go to all interested parties (assuming that theyâre not obviously wrong fits, like software companies without an IaaS offering).

The status for this Magic Quadrant will be periodically updated on its status page.

Google Compute Engine goes GA

Google Compute Engine (GCE) — Google’s cloud IaaS offering — is now in general availability, an announcement accompanied by a 10% price drop, new persistent disk (which should now pretty much always be used instead of scratch disk), and expanded OS support (though no Microsoft Windows yet). The announcement also highlights two things I wrote about GCE recently, in posts about its infrastructure resilience features — live migration and fast VM restart.

Amazon Web Services (AWS) remains the king of this space and is unlikely to be dethroned anytime soon, although Microsoft Windows Azure is clearly an up-and-coming competitor due to Microsoft’s deep established relationships with business customers. GCE is more likely to target the cloud-natives that are going to AWS right now — companies doing things that the cloud is uniquely well-suited to serve. But I think the barriers to Google moving into mainstream businesses are more of a matter of go-to-market execution, along with trust, track record, and an enterprise-friendly way of doing business — Google’s competitive issues are unlikely to be technology.

In fact, I think that Google is likely to push the market forward in terms of innovation in a way that Azure will not; AWS and Google will hopefully goad each other into one-upsmanship, creating a virtuous cycle of introducing things that customers discover they love, thus creating user demand that pushes the market forward. Google has a tremendous wealth of technological capabilities in-house that it likely can externalize over time. Most organizations can’t do things the way that Google does them, but Google can certainly start making the attempt to make it easier for other organizations to adopt the Google approach to the world, by exposing their tools in an easily-consumable way.

GCE still lags AWS tremendously in terms of breadth and depth of feature set, of course, but it also has aspects that are immediately more attractive for some workloads. However, it’s now at the point where it’s a viable alternative to AWS for organizations who are looking to do cloud-native applications, whether they’re start-ups or long-established companies. I think the GA of GCE is a demarcation of market eras — we’re now moving into a second phase of this market, and things only get more interesting from here onwards.

CenturyLink (Savvis) acquires Tier 3

If you’re an investment banker or a vendor, and you’ve asked me in the last year, “Who should we buy?”, I’ve often pointed at enStratius (bought by Dell), ServiceMesh (bought by CSC last week), and Tier 3.

So now I’m three for three, because CenturyLink just bought Tier 3, continuing its acquisition activity. CenturyLink is a US-based carrier (pushed to prominence when they acquired Qwest in 2011). They got into the hosting business (in a meaningful way) when they bought Savvis in 2011; Savvis has long been a global leader in colocation and managed hosting. (It’s something of a pity that CenturyLink is in the midst of killing the Savvis brand, which has recently gotten a lot of press because of their partnership with VMware for vCHS, and is far better known outside the US than the CenturyLink brand, especially in the cloud and hosting space.)

Savvis has an existing cloud IaaS business and a very large number of offerings that have the “cloud” label, generally under the Symphony brand — I like to say of Savvis that they never seem to have a use case that they don’t think needs another product, rather than having a unified but flexible platform for everything.

The most significant of Savvis’s cloud offerings are Symphony VPDC (recently rebranded to Cloud Data Center), SavvisDirect, and their vCHS franchise. VPDC is a vCloud-Powered public cloud offering (although Savvis has done a more user-friendly portal than vCloud Director provides); Savvis often combines it with managed services in lightweight data center outsourcing deals. (Savvis also has private cloud offerings.) SavvisDirect is an offering developed together with CA, and is intended to be a pay-as-you-go, credit-card-based offering, targeted at small businesses (apparently intended to be competitive with AWS, but whose structure seems to illustrate a failure to grasp the appeal of cloud as opposed to just mass-market VPS).

Savvis is the first franchise partner for vCHS; back at the time of VMworld (September) they were offering indications that over the long term that they thought that vCHS would win and that Savvis only needed to build its own IaaS platform until vCHS could fully meet customer requirements. (But continuing to have their own platform is certainly necessary to hedge their bets.)

Now CenturyLink’s acquisition of Tier 3 seems to indicate that they’re going to more than hedge their bets. Tier 3 is an innovative small IaaS provider (with fingers in the PaaS world through a Cloud Foundry-based PaaS, and they added .NET support to Cloud Foundry as “Iron Foundry”). Their offering is vCloud-Powered public cloud IaaS, but they entirely hide vCloud Director under their own tooling (and it doesn’t seem vCloud-ish from either the front-end or the implementation of the back-end), and they have a pile of interesting additional capabilities built into their platform. They’ve made a hypervisor-neutral push, as well They’ve got a nice blend between capabilities that appeal to the traditional enterprise, and forward-looking capabilities that appeal to a DevOps orientation. Tier 3 has some blue-chip enterprise names as customers, and it has historically scored well on Gartner evaluations, and they’re strongly liked by our enterprise clients who have evaluated them — but people have always worried about their size. (Tier 3 has made it easy to white-label the offering, which has given them more success from its partners, like Peer 1.) The acquisition by CenturyLink neatly solves that size problem.

Indeed, CenturyLink seems to have placed a strong vote of confidence in their IaaS offering, because Tier 3 is being immediately rebranded, and immediately offered as the CenturyLink Cloud. (Current outstanding quotes for Symphony VPDC will likely be requoted, and new VPDC orders are unlikely to be taken.) CenturyLink will offer existing VPDC customers a free migration to the Tier 3 cloud (since it’s vCD-to-vCD, presumably this isn’t difficult, and it represents an upgrade in capabilities for customers). CenturyLink is also immediately discontinuing selling the SavvisDirect offering (although the existing platform will continue to run for the time being); customers will be directed to purchase the Tier 3 cloud instead. (Or, I should say, the CenturyLink Cloud, since the Tier 3 brand is being killed.) CenturyLink is also doing a broad international expansion of data center locations for this cloud.

CenturyLink has been surprisingly forward-thinking to date about the way the cloud converges infrastructure capabilities (including networking) and applications, and how application development and operations changes as a result. (They bought AppFog back in June to get a PaaS offering, too.) Their vision of how these things fit together is, I think, much more interesting than either AT&T or Verizon’s (or for that matter, any other major global carrier). I expect the Tier 3 acquisition to help accelerate their development of capabilities.

Savvis’s managed and professional services combined with the Tier 3 platform should provide them some immediate advantages in the cloud-enabled managed hosting and data center outsourcing markets. It’s more competition for the likes of CSC and IBM in this space, as well as providers like Verizon Terremark and Rackspace. I think the broad scope of the CenturyLink portfolio will mesh nicely not just with existing Tier 3 capabilities, but also capabilities that Tier 3 hasn’t had the resources to be able to develop previously.

Even though I believe that the hyperscale providers are likely to have the dominant market share in cloud IaaS, there’s still a decent market opportunity for everyone else, especially when the service is combined with managed and professional services. But I believe that managed and professional services need to change with the advent of the cloud — they need to become cloud-native and in many cases, DevOps-oriented. (Gartner clients only: see my research note, “Managed Service Providers Must Adapt to the Needs of DevOps-Oriented Customers“.) Tier 3 should be a good push for CenturyLink along this path, particularly since CenturyLink will make Tier 3’s Seattle offices the center of their cloud business, and they’re retaining Jared Wray (Tier 3’s founder) as their cloud CTO.

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