One of the Biggest Tech Shifts of Our Lifetimes, Part II
By Rob Fannon, editor, Phase 1 Investor
January 15, 2010
Last week, I introduced you to "data utilities," which will soon be as ubiquitous as electric and water utilities are today.
Right now, most major corporations include enormous IT departments dedicated to storing and sharing mountains of data. But most corporations don't know the first thing about computer networking... Data utilities will allow companies (and eventually private individuals) to outsource all that to a third-party.
The trend is just getting started. And I think there's a mint to be made for early investors. Let me explain...
Right now, more than 15 million computer servers are operating worldwide. Yet, 80% remain idle every day. You see, every organization has to build its network for its peak demand.
For example, let's say Hallmark distributes 10 times the number of e-cards on a handful of holidays than it does every other day of the year. Hallmark cannot afford for its system to crash on its most important five or six days, so it has to build a system that can handle that one-day crush, even if the capacity is wasted 300-plus days of the year.
Why not establish a system to capitalize on that? Wouldn't it be cheaper for me to simply plug into a server network on the cloud? Let the third-party experts come up with enough capacity for Hallmark on Valentine's Day, then reallocate it to, say, CNN on election night.
The thing is: It's already happening. Here are a few examples of data utilities in action today:
- I subscribe to an online backup service called Carbonite. Every time I go online, the company's software scans my laptop and backs up any new or altered files. The $4 monthly service virtually eliminated my need for external hard drives.
- Every time you share photos through services like Facebook, Snapfish, Shutterfly, Kodak, or Flickr, you're operating in the cloud.
- The online software suite from Google Apps allows me to generate and access documents and spreadsheets exclusively online. I can create, edit, and share all sorts of files from any computer with Internet access.
Really, any kind of storage need can be met by a data utility... If you try to imagine how much data is stored on computers today, you can understand why I say the potential is virtually infinite.
Eric Schmidt, CEO of Google, estimates the Internet contains 5 million terabytes of data. (A terabyte is 1,000 gigabytes. Compare that with the average desktop computer hard drive, which can hold 80–120 gigabytes.) That's just a starting point. Ongoing innovation will only drive storage demands higher.
From centralizing software applications to outsourcing entire data centers, these companies will radically change the way businesses approach IT. It's the unification of computing power, data storage, software applications, and other IT needs through a global network. The movement allows businesses to focus on what to offer rather than technical know-how for how to offer the service.
The recent economic downturn has only accelerated the cloud-computing/data utility trend. IT decisions are increasingly made from an economic rationale rather than a technical standpoint. Companies can avoid costly capital expenditures on racks of computer servers, piles of software, and other physical IT infrastructure by outsourcing computing needs to third-party vendors. Resources are deployed on demand – and paid for – only when needed. Otherwise, the meter's off.
Leading IT research firm Gartner estimates cloud computing-related revenue is upward of $56 billion this year, representing a 21% growth rate from 2008. By 2013, the firm expects the industry to top $150 billion, a 25% annual growth rate. And it isn't just the early adopters moving toward cloud computing. Even the stodgy U.S. government is jumping in. It's budgeted $45 billion over the next three years to develop in-house government clouds.
Fortunes can be made by catching a massive, long-term trend like this as it migrates from concept to reality. But timing is critical. The full reality of cloud computing is at least a decade in the making. The transition of cost and operational burdens of IT into the cloud will happen slowly and incrementally.
The safest way to jump in this trend today is through the service providers, the one-stop-shop vendors that run the cloud. Using the public utility analogy, the service provider companies are equivalent to centralized electricity generators – the folks that provide the actual electrical grid and generate the power to run through it.
Businesses need two things in order to outsource their servers, network, and data storage to the cloud: physical server space and a means to communicate with them. I like the handful of "infrastructure as a service" players like Equinix (EQIX), Rackspace (RAX), and Terremark Worldwide (TMRK). These shops offer data-center real estate, as well as hosting services on a "pay as you go" basis.
To be honest, I don't expect any of the above names to be independent companies in five years. Just as the budding electricity utility industry underwent massive consolidation in the 1920's, I believe the pioneers in the cloud computing space will be gobbled up by the biggest tech firms as a cheap way to gain a foothold in this revolutionary trend.
Good investing,
Rob
P.S. I dedicated my most recent Phase 1 issue to cloud computing. Longtime readers know I rarely pursue opportunities outside of the health care and biotech space. I only venture out when three-, five-, even 10-bagger returns are possible. I've lined up two cloud computing names that fit the bill. To learn more about Phase 1, click here. |
