Cloud and Fabs – 3 Years Later (Its AWS and VMware)

In 2017, I posted Cloud and Fabs here. I grew up in the semiconductor world so the comparison was obvious, but little did I know that my assertion would come true – i.e. a 2 player game as in semis (TSMC and Intel) will be played out in the cloud. I assumed the 2nd player was going to be Azure or GCP. Now it looks more like AWS(Intel) and TSMC(VMware) by way of analogy (fabless vs vertically integrated models).

Since January 2017, a lot has happened. Google Cloud has seen management shuffles, AWS continues it growth and Azure picking up steam. The industry pundits have written off on premise and I like many drank the Kool-aid that cloud first is the way to go. Cloud first as a developer makes total sense, but cloud first as a deployment model is evolving starting with 2019. I went to a few Google Nexts and was awed by the investment ($30B+) and technologies (ML). I went to AWS invent and was amazed as to see how Andy Jassy spout out technology and features like a CTO and if Jeff Bezos blinks could become Amazon CEO as well. The litany of features they throw at the customers has been shocking to the extent most silicon valley VCs ran to the hills when Amazon announces products. Startups could not compete with Amazon. That has not happened in Silicon Valley. Twice I started on version 2 of this blog and never completed thankfully as 2019 is the inflection point for a tectonic shift. Industry analyst after industry analyst predicted that the march to the cloud will consummate by 2025 and there will be no on-premise or only 20% of the cloud will be on-prem. I did too.

I predict by 2025, the private cloud (on-prem) / public cloud ratio will be a healthy 60/40 or 40/60 depending on whom you believe. That is a radical statement i.e .going against the tide? Why the shift or change of viewpoint?

Around the same time in 2017, I was introduced to Nutanix. Nutanix addressed two things that cloud infrastructure did from the start. Make storage invisible and ease of use or consumption just a few clicks away. Since 2017, Nutanix has seen another company creep up. Enter VMware. With the recent announcements with their project pacific and the re-tooling of the Day 0, 1 and 2 automation in VMware stack, both VMware and Nutanix have addressed key value propositions that the public cloud infrastructure companies provided . It’s cost / VM and ease of consuming a VM. If all you need is a commoditized VM the distraction of Openstack clouded the closing of the gap by Nutanix and VMware.

In 2019, any enterprise or private cloud that has a need to consume say 500 – 50K physical machines (10K to 1M VMs) of sustained use, doing the TCO analyses will show you, your private instance is significantly cheaper and the value prop of ease of VM creation and its life cycle. Here’s a simple visual of the shift in the value proposition. It’s not capex depreciation as the cost of sourcing server, storage and network is within 10-20% of hyperscalers if you are at moderate scale. Its the Opex – the total # of people deployed to run the infrastructure. That is the change event visually described below.

This is a qualitative chart, but its an attempt to make the point that the value to the end user was cost/VM (low) for entire life cycle of a VM (fast startup time, no operational overhead). The solid lines are for VMware and Nutanix and the dotted lines are for AWS, GCP, Azure. Sure, the big three have some form of a private cloud option – the usage of hyerpscaler stack for on-prem will be challenged by the complexity of the deployment and management!! Its different. The same reason why EMC won the storage business in the 1990s (most enterprises wanted to buy storage from a vendor independent from the server OEM). Same rationale applies.

VMware is pulling further ahead with their recent announcement at VMworld 2019 with tight integration of Kubernetes, GKE like a small light weight linux kernel embedded in the hypervisor to provide close to bare metal performance. The gap between the hyperscalers and these private cloud stacks (VMware and Nutanix) have closed with the cost advantage going to the VMware or Nutanix on a per VM basis. This implies for a range of enterprise users (mid size – 500 to 50K phyical machines) the reasons to go to public cloud for cost or ease of consumption is disappearing fast. Attraction to using public cloud depends on location, Opex vs Capex, simplified procurement and availability of other services (ML, lamdbda etc) – but for a vast majority of applications (by some count there are 150M VMs running on-prem while only 30-40M VMs are running in public cloud), I think we will see the stemming of the tide to move to the public cloud (hyperscalers).

VMware due to the market footprint is going to be a dominant player to serve the private or on-premise space. Would not be surprised this becomes an AWS vs VMWare game by 2022? What are the implications of this shift?

  1. Its going to be harder for Google to compete with VMware emerging as an option to stem the tide to move to public cloud. To recap, there are big three (AWS, Azure, Google) and Medium two (VMware and Nutanix) private cloud stacks.
  2. VMware is big enough to enhance its portfolio to include PaaS layers and other cloud native services and orchestrators including functions, lambda like serverless, NoSQL DB etc.
  3. This cements the death of OpenStack (as it has at SAP) for the enterprise. Might live in the Telco segments.
  4. The last 5 years, we saw the death of open source, as the public cloud companies (notably AWS) just resold open source via AWS EC2 compute cycles. They made more money than all the open source developers combined.
  5. The last 5-8 years we saw the infrastructure investors run to the hills. Most VCs feared to compete with AWS and except for a few tuck-ins, the big three basically wiped out significant portion of the VC investments in infrastructure technology.

All that is poised for a change. VMware is now emerging a strong alternative to hyperscalers. Kubernetes integrated in their stack, immediatey their customer base gets it, which is huge. 150M VMs in the wild have no reason to move. IT jobs (some) are preserved. Not all. The ‘edge’ loosely defined is emerging as another big category of its own. The interesting aspects of this shift are

  1. Rate of innovation in infrastructure has slowed down in the cloud due to their sheer size. One cannot introduce a new tech (memory, FPGA, GPU) fast enough in the public cloud as their hurdle rate is high. The byte sized enablement of new tech is easier or more economically viable with the on-prem. VMware (or Nutanix) can enable that faster than a public cloud can.
  2. That means a rich eco-system of Infrastructure startups now have a friend in VMware (or Nutanix). They can find a way to fit into that eco-system as the needs of the customers are varied. Hopefully VMware will recognize. In some sense VMware can enable hardware from different vendors today. So a new technology platform could be fast tracked with the VMware eco-system (if VMware desires so) than a public cloud channel.
  3. The perfect storm of new memory (3D Xpoint), new compute in ML (GPU, FPGA, TPU) and the new networks (200G/400G that addresses the micro-second transaction system) will find a faster path to market via this eco-system than the Public cloud. This implies VCs can bet once more on infrastructure startups.
  4. Distributed computing as we know is ripe for change. Its become too hard for the average programmer to build a distributed application. At the core its the assumption that infrastructure is fragile and networks are broken. If you change those assumptions (some startups are rethinking the fundamental assumptions), it will make disrributed systems simpler. The challenge of the killer microseconds very well explained by Google (Barroso, Partha et. all) is going to turn the infrastructure on its head. Will that innovation happen first in the hyperscalers or in byte sized chunks on-prem. The latter while not capitalized has a better chance as diversity of ideas (startups) will win over centralized innovation inside hyperscalers. This is a contrarian view – but I think its a bet I am willing to propose.

Three Final points.

  1. If there was a ‘Cloud first stack’ the past 15 years, there is emerging an ‘edge first stack’. Edge first means one has to solve a federated system that is constrained in space, power and new compute and data management paradigms.
  2. Infrastructure is back – i.e. innovation in infrastructure that can be channeled to on-prem enterprise customers via VMware (or Nutanix) will be a significant option for entrepreneurs, VCs , customers and traditional OEM players and to semiconductor companies like intel, Micron and Broadcom.
  3. TSMC is a fabless semiconductor company contrasted with a vertically integrated company (Intel). Today both have a market cap of $225B. 10 years, back it would have been unthinkable of TSMC achieving this status.
Image result for TSMC vs Intel market growth comparison

I think the same might happen in the cloud. AWS (and thus Azure and Google) are becoming more vertically integrated. AWS is doing a lot better than other two to serve a wide range of customers, but with nitro and other silicon efforts, they are getting deeper into owning the infrastructure stack. Here comes VMware like TSMC as a infrastructure-less cloud company?

The shift: Just when you thought the world has ended, it opens up again. 3 years back, I thought VMware dead on its track with the industry move to containers and Kubernetes. I was wrong. Keeping fingers crossed as the innovation of startups need a friend to channel their output.