Utility Players

In previous issues we’ve discussed how the current build-out of the Internet is analogous to the construction of the National Highway System during the economic “long wave” of the mid-twentieth century.  In this issue we will explain further what that means, and what it portends for the tech sector over the next couple of decades.

When the internal combustion engine took root as the core technology of the prior tech wave, it rebuilt all existing industries while also creating new ones. Few realize that the electric utilities that existed at that time were often owned by private companies. 

Henry Ford started construction in 1917 on the massive River Rouge auto manufacturing plant. It was so large that it would not be finished until 1928! Upon completion it was the largest integrated manufacturing plant in the world, with its own electricity plant.

The River Rouge plant measured a whopping one and half miles wide by one mile long, included 93 buildings with nearly 16 million square feet of factory floor space. The plant received raw materials like iron ore and turned them into running vehicles within this single complex. Over 100,000 workers were employed there in the 1930s.

Everything about the Rouge plant was enormous because that was the only way autos could be mass produced. No utility infrastructure existed which could support America’s demand for cars.

The story with General Motors was a bit different. Billy Durant, with the help of investment banks and Pierre DuPont, bought many of the car companies that became the backbone of General Motors. Durant was such a speculator that within a few years he was pushed out in favor in Alfred Sloan. Sloan brought business management skills to General Motors and wound up surpassing Ford Motor Company, which had continued building Model T’s far longer than the market had remained interested in them.

General Motors was a story of integration management and therefore did not have a centralized plant such as Ford had. However, both companies faced the identical problem: No commercial utilities existed to power these large manufacturing facilities.     

The fledgling utilities which existed almost everywhere in America typically had a dynamo to produce power, and they mostly powered some stores downtown. However, as the auto industry continued to expand, trucks were built that increasingly enabled factories to move around much more material and substantially expand. Local governments invested in roads in order to grow local commerce.

Once it had become clear that the automotive industry was not only here to stay but that automotive industry was powering the economy, the federal government intervened and built better and larger highway systems for all these new cars and trucks to use. The highway system in turn created new industries and completely renovated the existing industries with the addition of new hotels, motels and malls.

Workers had to be able to get to their new places of work as well as their homes. But the story was not simply one of more cars that continued to grow as a result of new and better highways. The secondary impacts were seismic in their impact, as the cars and the new and remodeled industries were the build out of America’s utility infrastructure.

The utilities we know and love today were completely built out from a handful of city centers with enough population to support their use of electricity. It was in the second half of the prior tech wave that the national power grid came into existence.

Without that national grid, we could have driven our cars to new malls, motels and suburbs – but without the utilities to support them would anyone have shown up? No. The U.S. would have been big cities without suburbs existing almost entirely independently from rural areas lighting and running their farms without electricity.

In other words the U.S. economy would not have exploded in growth without the build-out of the new utilities resulting from what was then cutting edge technology.

The Data Deluge

That was the last tech boom. In the first half of the current tech wave we saw the same thing play out in the marketplace. Both Microsoft and Apple built products around their proprietary operating systems. Those operating systems, like the manufacturing facilities of General Motors and Ford during the prior tech wave, had to be built out by private companies.

The technologies of PCs and cell phones never existed before. However, once they came into existence it became clear that these new technologies created efficiencies never before seen on earth. PCs and cell phones were like the Ford Model T of the early 1900s, which was so successful because it had a very high wheel base and therefore did not require a road to go from town to town or farm to farm.

We have witnessed the PC and cell phone evolution up to the point where the federal government again stepped in and built out a new highway – this one being the information super highway. But again, if all that ever happened were workers being able to perform spreadsheet work and process email, the second half of this tech wave will be virtually nonexistent in terms of financial impact.

Instead, what we see is that employees and consumers are immensely more productive with additional freedom, but there are several core technologies which are giving birth to what will become the new utilities in the second half of this tech wave.

As a result of all the PC and Smartphones in the world, we are quadrupling our data volume every 18 months. Smartphones and Tablets are referred to as “Mobility Tech” due to how portable these technologies are, which is what is creating this mountain of data. Further, many people are using their computers and phones for “Social Media,” where they post pictures and stories about themselves onto the Internet, adding even more data to the deluge.

This surge of data is great for storage tech companies, as users are working to store all that data, and paying a lot for it. Yes, companies such as Terradata, EMC and other storage providers have the initial gains from additional storage sales; however, the winners of Big Data will be the companies which innograte the storage with analytics to create much more robust and powerful solutions. The current storage offerings will look as old to us today as looking at the first computer game Pong.

“Big Data” meets “the Cloud”

When analytics are applied to the data mountain, companies can find ways to sell and operate much more efficiently. This is the new tech trend within Big Data. In conjunction with Big Data is another major trend referred to as “Cloud Computing”. The combination of these two trends will create the next generation of new utilities for the information age.

With cloud computing, the hardware and software of large computer systems is used so much more efficiently that significantly fewer resources are required for businesses to run their operations.  When a business moves into a cloud they can provision their business much faster; what took up to three months not long ago can be accomplished in 15 minutes with just a few clicks of the mouse.

That’s great for businesses, but this ability to centralize computing in the network instead of on a few large servers has a significant future. Companies will begin to buy fewer servers and increasingly move more and more of their intellectual capital-based workload onto Clouds that other providers will host for them. In other words, we are on the way to servers inside of businesses becoming as scarce as Henry Ford constructing his own power plant within the massive River Rouge plant.

The confluence of Big Data and Cloud is the foundation for new computing utilities of the future. Every company we track is competing for their share and or domination of these future utility models. The winners will be much bigger than a Microsoft or an Oracle is today. Though no one can see the future we can see it beginning to take shape, so let’s walk through one example in order to illustrate the point.

Microsoft (NSDQ: MSFT) is primarily perceived as a consumer tech provider. It fits most easily into the Mobile computing category. For the most part that is true though Microsoft has a significant presence in providing businesses technology as well. They do this through their server operating system and data base products they have sold for decades now to businesses. As the trends of Big Data and Cloud are not lost on Microsoft they are seeking to innograte in order to remake their company to become one of the new utility providers for most businesses.

They are working to do this via their Cloud offering called Azure. Azure is what is referred to as a Public Cloud. A Public Cloud is one where a customer rents both the space and utilities that the Cloud provides instead of owning it themselves. Public Clouds are for workloads which companies consider like generic storage or “basic pens and pencils” types of computing (Human Resources, etc.). Other companies rent Public Cloud space in order to reduce their own capital expenditures (CAPEX). Microsoft buys the hardware and software, removing individual companies from CAPEX expenditures.

However, today most Clouds are still being erected behind private company firewalls. These Clouds are referred to as “private clouds.” Microsoft wants to sell companies the technology to host their own business Cloud internally with Microsoft’s server and database products. They are also offering them via their Azure product access to their Public Cloud.

Hybrid Clouds

The next progression for Clouds is projected to be “Hybrid Clouds,” where businesses have their own private Cloud for information which is deemed intellectual capital; therefore, they do not want any other company to be able to access their data. To further reduce the cost in computing Hybrid Clouds are projected to make up approximately half of all Clouds by 2017. The thinking is the strategic half will stay on Private Clouds and the other computing workloads will be moved to Public Clouds.

Microsoft, via Azure, wants to be the Cloud of choice for public business. Microsoft’s recently named CEO was their Cloud executive at Microsoft. Their strategic intent is pretty clear from his promotion as their top executive in charge of strategy.

But Microsoft is not winning the battle for the Cloud at this time. The leader in Cloud is currently Amazon’s Web Services. Amazon.com (NSDQ: AMZN) today leads this marketspace as they have been offering the proprietary infrastructure they were forced to create in order to scale out the largest online retail business on the Net today. Amazon has been growing these revenues for 10 years now and has more than half of the Private Cloud business on their own.

There are many companies which are vying for market share in this space because there is no larger market opportunity in the world today.

Next month, we will expand on the Cloud market space; however, for now the critical idea we are trying to convey is that the growth which the utilities experienced in powering the auto and mass production tech wave is actually considerably smaller than the requirements for the future Cloud and Big Data providers.

The Shape of Things to Come

It will be the combination of Big Data and Cloud that creates the new utilities winners for this tech wave. The reason is no different than the utility companies reporting on how much energy a company used on which day. Once the data is hosted on a Cloud, the Cloud providers will be able to differentiate their services not just through speed and up-time but through how good the analytic engines are which they will also provide.

In the future one will not see even the federal government creating websites for public consumption as we see today. The Federal government will purchase space in the public Cloud market in order to store non-critical data as inexpensively as possible. Adding the commercial and government market together is something we have not seen since World War 2.

The other parallel which exists between these tech waves are the byproducts that are pushing the utilities to scale ever higher – social media and mobile computing. Because mobile users can move so easily between social sites and banks, the amount of data they are producing is enormous.

This was the same in the creation of the roads and service stations which sprang into existence as a direct result of the cars.  It was not the car or the road which grew the economy so incredibly large but rather speed at which the economy could suddenly then move. In today’s tech boom it is not the Smartphones or the Internet which is the force of the coming economic impact; it is the speed and agility with which individuals and businesses can move.

Because their velocity is exponentially larger than the old “pen and pencil days”, so will the resulting economic impact and the payback to the shareholders holding the winning stocks of the future utilities. We at STI are in the business for you to analyze the integration and innovation strategies to determine who is on track to provide you that kind of payback.   

While we will continue to monitor the performance of giants like Microsoft and Google, our managing editor Tom Scarlett will also be keeping an eye on some smaller tech companies that are carving out highly profitable niches for themselves. In his first column, Tom looks at a subject as important as today’s headlines about the “Heartbleed” security bug – keeping data secure and fighting cyber-crime.