If you think Converged Infrastructure & Fabrics are niche, guess again

A few weeks ago, I Tweeted about an analyst conversation where it was looking like the market for Fabric Computing / Unified Computing would be growing rapidly in the foreseeable future.

Another analyst friend of mine quickly commented back – sarcastically – that the market was sure to be in the billions of dollars.

I was feeling a little unsure about this market until a few weeks later when I was shown a technology report from Thomas Weisel Partners. Although the market definition for converged infrastructure (also known as Unified Computing) was still forming, TWP felt that sales of Converged Infrastructure solutions could rise as high as $15 billion by the end of 2014.  Billion with a “b”?  Right-on…

Then there is a report by Gartner Research on fabric-based computing… which estimated that by the end of 2012, roughly 30% of the world’s top 2000 companies would have some form of fabric-based computing architecture. (Under the heading of “fabric” falls Unified Computing as well as Converged Infrastructure).

So, why is the market (for fabric computing, converged infrastructure, unified computing) still considered so new in the market, yet forecast to be so booming in 2-4 years?

First of all, what we’re talking about here are systems like Cisco UCS, Egenera PAN Manager, HP VirtualConnect, IBM Open Fabric Manager, and a few others. At the heart of each system is technology (sometimes HW, sometimes SW, sometimes mixed) that virtualizes I/O and leverages converged networking.

And why are vendors all chasing this approach? For a number of reasons --

1. It’s incredibly complementary to virtualization: in the same way that the hypervisor changed how SW is abstracted, provisioned, managed and migrated, Converged Infrastructure changes how IO/networking/connectivity is assembled and managed. This gives vendors a valuable set of new offerings, and can tie management of infrastructure to management of VMs – yielding end-to-end abstraction of the entire data center. Roughly as much $ is spent managing infrastructure as it is managing software… to the TAM is huge here.
2. It changes how availability is delivered: By manipulating IO addressing, networking and connectivity, Converged Infrastructure Management can re-provision failed hardware – either in the form of physical servers, or indeed, entire environments. Thus, Converged Infrastructure has the potential to displace a big chunk of traditional clustering software… (nearly a $ billion, if you follow IDC’s estimates)
3. It changes how networks are physically wired and managed: Converged Infrastructure uses fewer IO components (either a single LOM or a single CNA), converged network protocols, fewer cables, and generally fewer switches. This yields a lower CapEx investment, and a commensurate lower OpEx to manage. The opportunity to sell alternative approaches to each of these technologies is immense.
4. Converged Infrastructure is highly complementary to shared storage: the pervasiveness of SAN storage is a major enabler of a more virtual/flexible data center. As physical/virtual servers move, migrate and scale, storage simply follows.  An increasing ratio of servers – especially blades – are being shipped with HBAs, indicating that SAN use is on the upswing.
   

As to evidence that this market is shaping-up, we need only look to the magnitude of investment that Cisco, Egenera, HP, IBM – and even Emulex and Qlogic – are pouring into this market. Methinks we’ll see the hockey-stick shortly.

Hosting & Cloud Computing market index: Update

Last month I proposed that another way to measure adoption of cloud computing (or, at least, expectations of adoption) was to look at the stock market performance of a bundle of publicly-traded service provider companies.

Since then, I've expanded the list, and carried the range back 24 months.

The total list (the "broad hosting index") consists of: Digital Realty Trust, DuPont Fabros, Equinix, Internap, Iomart, Macquarie Telecom, Navisite, Rackspace, Savvis, Switch & Data, Telecity, and Terremark.  I also baselined my "virtual" fund against the NASDAQ index. I created another virtual fund (a subset list of the above) consisting of Equinix, Navisite, Rackspace, Savvis and Terremark - representing service providers with substantial businesses in the Cloud hosting space as well.

Here are some interesting observations of the value change of US$100 invested equally across each index:

Since Jan 2008:

• Nasdaq:  + ~14%
  
• Broad Hosting index: + ~90%
  
• Cloud Subset: + ~50%

But, I also looked at the change since the market bottomed-out in March of 2009. Since then, the picture is a tad different:

• Nasdaq: + ~ 55%
  
• Broad Hosting index:  + ~135%
  
• Cloud Subset:  +~ 115%

These numbers tell me that the performance (or at least, expectations of performance) in the hosting space far exceeds the broader NASDAQ technology sector.  Interestingly, the "cloud index" under-performs the broader index. No explanation here other than the fact that we're dealing here with a statistically low number of companies, and a few "high performers" in the broader index seem to be lifting it above the cloud index.

I'll plan on updating this periodically. Comments, additions, etc. welcome!

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Hosting & Cloud Computing: Numbers Don't Lie

There's lots of chatter in the market today regarding the value of using outside data centers, hosting services and cloud computing.  But listening to pundits/analysts trying to objectively predict true value left me hollow.

While I'm not an investment professional, I do know that the stock market doesn't lie.... so instead, I thought I'd look at a bundle of stocks from publicly-traded data center companies in the data center space, and compare against a market benchmark.

I chose companies on publicly-traded markets in both the US as well as in Europe. My criteria were somewhat subjective, but basically the companies had to have a primary business operating data centers. I also excluded Telcos because it is difficult to separate their carrier revenues relative to hosting revenues. So, my initial "virtual fund" consists of 12 companies: Digital Realty Trust; DuPont Fabros; Equinix; Internap; Iomart; Macquarie Telecom; Navisite; Rackspace; Savvis; Switch & Data; Telecity; Terremark.

I also took a 5-company subset of these public companies that had significant offerings in the cloud computing space (Equinix; Navisite; Rackspace; Savvis; Terremark). I labeled this "virtual fund" a cloud-only index.

The chart at right is my best attempt to (a) tabulate historic end-of-month closing price of each stock; (b) calculate month-to-month percentage gains for each; (c) create "virtual funds" where $100 would be invested equally across each vehicle (initially $8.33 in each of the 12 hosting stocks, and initially $20 in each of the 5 cloud-related stocks). The benchmark I used is the Nasdaq index, also assuming an initial $100 investment.

Not surprisingly (for me, anyway) both "indexes" are outperforming the Nasdaq -- perhaps proving the thesis that datacenter operation and application outsourcing is indeed a growth market (or at least a speculative growth market?) as compared to the general technology market. What would be equally useful (but not an analysis I've done) is to chart gross revenues for the Index companies. This would be a telling barometer of actual business.

I'll continue to update this index at the end of each month. Comments, additions and suggestions welcome!

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