The Big Story

Margin call

Compared to the firebrands behind its cryptocurrency and social media investments, Andreessen Horowitz's enterprise-sector investors have quietly built a well-respected practice over the last decade backing some of the cloud era's most prominent companies, including Asana, Databricks and Slack. That's partly why a provocative post from a16z's Sarah Wang and Martin Casado, aimed directly at Big Cloud, got everyone's attention.

In a post entitled "The Cost of Cloud, a Trillion Dollar Paradox," Wang and Casado argued that it's time for newly public companies running on cloud infrastructure services to think very hard about their continued use of the cloud. Here's a snippet, emphasis theirs:

• "[As] industry experience with the cloud matures — and we see a more complete picture of cloud lifecycle on a company's economics — it's becoming evident that while cloud clearly delivers on its promise early on in a company's journey, the pressure it puts on margins can start to outweigh the benefits, as a company scales and growth slows."

Those comments provoked a flood of discussion from people who should have been barbecuing or relaxing on the beach over a holiday weekend — it clearly struck a nerve among the cloud computing community.

• It's no secret that cloud infrastructure providers enjoy healthy profit margins, with AWS leading the pack.
• For a lot of public SaaS companies, cloud spending is the single largest component of their cost of revenue calculation, which impacts their own margins.
• Wang and Casado argued that SaaS companies should think much more carefully about how much they depend on cloud services to generate revenue, and look for areas of their business that they might be able to serve with their own infrastructure.
• Dropbox is the canonical example of this shift in thinking: Built around AWS, Dropbox saved roughly $75 million over two years by building its own infrastructure, which improved its margins right as it was about to go public.

There are lots of easy counterarguments to the notion of rolling your own infrastructure, and Casado acknowledged Wednesday in a Twitter thread that many of them have merit.

• Investing in your own infrastructure means maintaining your own infrastructure, forcing you to hire lower-level engineers to maintain servers and storage equipment and to upgrade that equipment on a regular basis.
• And running infrastructure as resilient and performant as the cloud providers requires significant investment in higher-level engineers who understand the complexity of modern enterprise tech.
• Cloud providers upgrade the equipment, patch security flaws and improve their underlying services without disrupting their customers. Over the last couple of years AWS upgraded the consistency of its flagship S3 storage service with no downtime and at no extra cost.
• And both Wang and Casado acknowledge that it makes little sense to grow a startup anywhere but on one of the cloud providers. Once you've made that investment around cloud services, moving is not easy.

But cloud computing is no longer revolutionary, which explains why the post caught fire. It's an increasingly understood technology dominated by three enormous tech conglomerates that exercise a substantial amount of power over the modern economy.

• That's one reason why cloud providers have spent so much time and energy on hybrid cloud and multicloud services; their customers want more flexibility to run workloads and applications where it makes the most sense.
• That's another reason why Dell Chief Operating Officer Jeff Clarke told financial analysts last week that the largest server vendor, after years of flat-to-tepid growth, is seeing "an improving demand environment for compute."

One thing to always remember about this little corner of the world: No two applications are exactly alike, and different companies make different decisions about where and how to run those applications for different reasons. So it makes a lot of sense to think carefully about those decisions, and skepticism of anything on offer from any enterprise tech vendor is healthy.

Judging by the reaction to the post, however, maybe it's time for a good old-fashioned cloud price war.

—Tom Krazit

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Five Questions For...

Mike Sullivan, CEO, Acquia

What was your first tech job?

I started in tech as a software developer at Raytheon. I wrote code, built networks, worked with hardware and software, and was a database administrator for a while.

What's your favorite pastime that doesn't involve a screen?

Music: I play the piano whenever I can find the time. I used to play at piano bars, but now you're more likely to find me playing for employees and customers at our sales and marketing kickoff or user conferences.

How can enterprise tech improve its current status around diversity, equity and inclusion?

The most direct approach is to hire diverse managers. They immediately stretch the company's network and help us find candidates in places we've previously not known to look.

What will be the greatest challenge for enterprise tech over the coming decade?

The talent pool will continue to be a challenge, especially for enterprise companies. It takes a long time to develop talent in enterprise software. New technologies like low-code/no-code make it easier to build and deploy, but we still need a higher percentage of the population to develop the technical skills required for software companies to flourish.

Will AWS end the decade as the market leader in infrastructure cloud computing?

AWS continues to innovate at a very fast pace and their unique culture allows them to stay laser-focused on innovation. I think they will be less dominant, but I do believe they will stay ahead of the competition.

Around the Enterprise

• Box and Dropbox are often lumped together, and now they have something else in common: an activist investor has taken a big stake in Dropbox.
• AWS released its Amazon Location Services productfor developers to embed location services in their applications. It was first announced at re:Invent last December.
• Even Nvidia wants to get into the "as-a-service" business: It announced plans this week to offer its DGX SuperPod supercomputers as a cloud service hosted by Equinix for artificial intelligence applications.
• Alibaba is embracing chip agnosticism. It plans to allow its cloud operating system to run on x86, Arm and RISC-V processors — a big deal, given it's one of the largest server buyers in the world.
• Cisco hired Stephen Augustus, most recently of VMware and a key contributor to Kubernetes, as its first head of open-source activity.
• Zoom continued to rake in the money during its first quarter even as the U.S. began to think about going back to its offices, recording a 191% increase in revenue.
• Stack Overflow was sold to Prosus, a Dutch internet conglomerate, for $1.8 billion.
• TSMC broke ground on a new 5 nm chip factory in Arizona this week, which won't begin helping to ease the chip shortage until 2024.
• FireEye sold the cybersecurity products division of its company to Symphony Technology Group, a private-equity deal that will allow it to focus on its Mandiant incident-response business that helped uncover the SolarWinds attack.
• Ransomware promises to be one of the biggest problems for enterprise companies over the next several years. But if you can hire Kurtis Minder, you might limit the damage.

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Tune in to Security Connect 2021 to gain valuable best practices in simplifying and strengthening your security. Hear from experts from VMware, IDC and the US armed forces about how you can put power back in the hands of your IT defenders.

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