VMWare, Inc. (NYSE:VMW) and Amazon.com Inc. (NASDAQ:AMZN) announced an alliance on Oct. 13 aimed at something called “hybrid cloud” that may have left investors who are not technologists scratching their heads.
What does it mean?
It means the death of the data center, as it existed in previous decades. It means the cloud architecture of Amazon Web Services is becoming a standard for all of corporate computing, and for those companies that dominated the data center business in the past, big revenue streams are about to end.
Corporate computing companies like Oracle Corporation (NYSE:ORCL), International Business Machines Corp. (NYSE:IBM) and Microsoft Corporation (NASDAQ:MSFT) are not denying this. They all have their own cloud strategies.
But the cash flows that let them fund those strategies are now drying up, and those strategies are going to have to start showing profits on their own, soon, while the companies continue to sunset old technologies and the people working on them.
The VMW-AMZN Link
VMWare stock, which is controlled by Dell through EMC but which remains publicly traded, will deliver a new cloud service for enterprises this spring that also runs on Amazon’s AWS. The idea is that companies can build cloud data centers that continue to hold the corporate crown jewels, but those systems will be compatible with what Amazon offers in the public cloud.
The main target here is Microsoft, which has been promoting its own Azure cloud as the ultimate hybrid cloud solution.
VMWare, which tried but failed to compete in public cloud on its own, has since turned its attention toward corporate data centers, offering software and an operating environment for what it calls “private cloud,” a cloud operating environment that customers can build in-house.
Amazon’s support, in theory, means that the scale of jobs in a private cloud can become unlimited. The data, and the computing, can be switched to Amazon as needed, while security is maintained by keeping key data and results inside the corporate system.
Who Loses
There are losers here.
IBM is a big loser, because they had been running VMware in their own public cloud since February and their customers now have a less-expensive alternative.
Alphabet Inc (NASDAQ:GOOGL, NASDAQ:GOOG), the parent of Google, is another big loser, as it now faces an even-stronger alliance in public and private cloud after losing the VMware deal to IBM earlier this year. There is irony here in that Diane Greene, who now heads Google’s cloud efforts, was a founder of VMware.
Another loser could be Red Hat Inc (NYSE:RHT), which has an alliance with Google and will now face a stronger rival for corporate contracts in the Amazon-VMware combination.
And then there is Hewlett Packard Enterprise Co (NYSE:HPE), which has a hybrid cloud strategy called Synergy. They risk being left behind.
The Market Knows
It remains unclear which hybrid cloud strategy will win, and it’s possible that multiple hybrid cloud companies will gain significant market share. I would not dump Alphabet, Red Hat or Microsoft on this news, as all have clear hybrid cloud strategies that can compete in the new market.
But companies relying on corporate data center contracts are going to see declining revenues in that area, revenues that can’t possibly be made up in cloud because cloud is designed to cost less than the old data center model.
The market is aware of this even if you are not. Oracle shares are down almost 8% since the start of July, and IBM shares are down as well. HPE shares have only been on a downward slide since Sept. 22, but in that time they are down 6% in value.
Meanwhile, Microsoft is 4%, on the year so far, VMware stock is up 29% and Amazon 23%. The latest alliance mainly confirms things the market already knows.
For corporate computing, the fat lady has sung, and when she sings again she will be a much, much slimmer gal.
Dana Blankenhorn is a financial journalist who dabbles in fiction, his latest being The Reluctant Detective Travels in Time. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in MSFT, GOOGL, and AMZN.
