There was a time in the mid-2000s that every quarter had an established ritual: Apple would announce its numbers, and they would be amazing: huge revenue growth, amazing profitability, magic products.
Of course, it all played out against a magnificent story: a Phoenix-like rise from near-bankruptcy, the return of a now-wiser prodigal son visionary, and products that, once announced, immediately became can’t-live-without items.
Steve Jobs has gone to his reward, and Apple has settled into a still-magnificent maturity (although, if Warren Buffett is to believed, the company still is the best investment opportunity around).
Today, the quarterly ritual of announcing amazing numbers has transitioned to AMG — the big three of cloud computing. Over the past two weeks, each of the companies announced their quarterly numbers, and, just like before, they are amazing. Boffo. Really, really big.
But there’s something dangerous about the steady drumbeat of great quarters. We get inured to what those numbers really represent: massive disruption. For those of us who work somewhere in the IT industry, whether at a vendor or in an end user organization, these numbers are an augur of a profoundly different future.
Three things stand out about this quarter’s results, and they are critical to understand if you want to know where the entire IT industry, both vendors and users, is heading. Or where your future is heading.
The AWS quarterly growth rate is the most important number in IT, because it is a proxy for overall cloud adoption and the ongoing shift in infrastructure consumption patterns.
After “bottoming out” at 42% in mid-2017, AWS’s growth rate has climbed the past two quarters and increased to 48% in Q1.
To point out the obvious, that’s a big growth rate. There’s never been another IT vendor of this size and this growth rate. Never. In the 70 year history of the industry. Until now.
So it’s obvious that AWS’s 48% growth rate is a big deal. It represents the rewards AWS is reaping from pioneering a new category of computing. A decade ago the industry’s conventional wisdom was AWS was fine for startups and the SMB market, but that it would never crack the enterprise market, i.e., it would never hit the big time and achieve the big numbers.
Even four years ago, when I appeared on CNBC to discuss Amazon earnings, my fellow pundits guffawed at my statement that Amazon was executing in perfect alignment with its business strategy, and that AWS was going to be a big part of its future going forward. Their position was that Amazon didn’t know how to make money, and AWS was an unimportant part of the business (the stock has quadrupled since that day, making my fellow pundits look pretty clueless, and me, ahem, pretty insightful).
Today, it’s obvious that AWS is a major force in the technology industry. It’s benefiting from cloud computing becoming the default deployment environment for applications; if ever AWS was the province of startups and the SMB sector, it is now embraced by every kind of organization: cloud-native, vertical specialists, and uber-large enterprises.
As I said, AWS is sui generis — there’s never been another IT vendor of this size growing at these rates. And this illustrates another factor that will fuel its future growth: platform effects.
In the past, vendor growth always stalled because it required linear headcount increases — more revenue required more bodies, as business was conducted, as they say, in the meatspace. Inevitably, as companies got larger, the complexities of organizational management increased until, eventually, the entire mess got so complicated that more effort was directed at internal processes than customer adoption. The net result: company growth rates slowed and then plateaued.
AWS, by contrast, is a platform that requires no human interaction to adopt or use. And, once a customer is on the platform, it can increase consumption by the mere call of an API. There’s no friction between customer desire and fulfillment.
That’s not to mention how much less expensive AWS is. Much. less. expensive.
Adding ease of use to reduced cost is a formula for explosive ongoing growth. I wrote about this several years ago in a blog about two economists: Jevons and Coase.
Jevons’ study of coal consumption in 19th century Britain showed that as a good gets cheaper, people consume more, contradicting the common sense that savings would be applied elsewhere.
So it’s entirely plausible that AWS’s growth rate may increase further. And just to restate the message: There has never been another IT vendor like AWS. It’s at a $20 billion run rate and growing at near 50%. To quote the great Senator Everett Dirksen, “A billion here, a billion there, and pretty soon you’re talking real money.”
So AWS is seeing an unprecedented growth rate. Remarkable.
More remarkable is that its growth rate isn’t the highest of the big three. In fact, it’s the lowest, as can be seen from this table. Microsoft is growing at 90%+. Google continues to grow even faster.
In a period of slow-to-no IT vendor growth, AMG are seeing enormous growth. This reflects the seachange in IT practices. Put simply, cloud computing is now the default computing substrate for enterprise IT. And we’re only in the early stages of the shift from traditional infrastructure to cloud computing.
Looking at the chart below, I believe we’ve just passed the inflection point that represents the transition from early adopters to mainstream use, and are moving into what’s commonly referred to as the ascent phase — as in climbing rapidly. As in exponential growth. As in years of 60% CAGR.
Humans aren’t very good at visualizing large, disruptive change, so I’ve prepared the chart below to show just how big AMG will be in a few years’ time.
Just as striking is what this means for the legacy players. As Gartner put it a couple of years ago, cloud computing will affect a trillion dollars of IT spend.
One trillion dollars is an interesting number. I’ve often heard it put forward as to why AMG aren’t really that important. To this way of thinking, there’s so much money spent on traditional infrastructure that whatever’s spent on cloud is more or less rounding error.
Gartner’s view is that the “rounding error” is important because it disrupts the entire pool of legacy spend. The corollary of this is the complete disruption of the legacy vendor ecosystem.
We’re not far from the tipping point in which it becomes clear that AMG are the new kings of enterprise IT. And every other vendor will be a vassal, jostling for a seat near the king, terrified of being placed below the salt.
Of course, there will be those who prosper in this new environment. Intel, for example, is benefiting from the shift to cloud computing, because, as I wrote a few weeks ago, AMG are pouring money into new data centers, which requires servers, which in turn require chips.
Where does this leave us? OK, AWS is killing it. As are its rivals Microsoft and Google. This is bad news for almost everyone else in the infrastructure business.
What about end users? After all, most of the spend in IT happens there — in enterprise IT, where millions of people work, keeping things humming in the applications that power parent company business operations.
The wave of change is about to wash over them.
That ease of use and low cost mentioned above mean expectations of what can be done in IT are changing rapidly. Traditional IT processes planned for yearly application updates, which was OK in a time of lengthy infrastructure deployment.
Today infrastructure takes minutes, which exposes yearly update processes for what they are: a roadblock in delivering applications. And applications are the raison d’etre of enterprise IT. Everything else plays a supporting role. Applications are how companies deliver value.
So traditional processes have to change. Any IT organization that doesn’t have a plan to accelerate its application lifecycle by a factor of ten is just asking to be bypassed.
Another thing that has to change?
Application architectures. The pace of improvement required for tomorrow’s applications can’t occur in an architecture that stuffs the entire application code base into a single executable. The logic of speed will force IT organizations to adopt microservice architectures. Not to mention container executables. Or serverless.
Essentially, every enterprise IT organization will need to become cloud-native, or wither into irrelevance.
You may take the view that this is apocalyptic.
But it’s really just the logical extension of the revolution in infrastructure. Once that bottleneck is gone, the next bottleneck is applications — the way they’re designed, developed, and managed. Those companies that embrace becoming cloud-native will succeed; those that treat cloud computing as a data center at the end of a wire and pour old wine into new bottles (or, perhaps I should say, containers) will experience pain — business pain. IT groups that fail to emnbrace cloud-native will undoubtedly experience internal pain, but that will pale in comparison to the misery their parent companies undergo as more nimble, more tech-capable rivals outrun them.
This quarter brought yet more evidence that cloud computing is transforming — and disrupting — the IT industry. A new set of industry leaders is coming to the fore, and the pain in the IT vendor sector will be profound.
But not as profound as the disruption that will occur in the digital economy as company results will rise and fall based on how their IT organizations respond to the cloud era.