Amazon

Blink twice and “Can we get a puppy?” becomes “Can I take the car tonight?” Cloud computing took a little longer. By my calculation, it’s taken roughly 8 Cloud Expos to move from “Cloud what?” to “Cloud how?” -- I know because I’ve been at all but the first. So, returning from New York where last week 7,500 people attended the 8^th, I reflected on how much the questions being asked about “the cloud” have changed since the first Cloud Expo in 2008. 

2008 – What is cloud computing?

Translation:  Okay, what is it?  Does ‘The Cloud’ = Amazon Web Services or what?

What are the key capabilities of a cloud? What is AmazonWS?  How is cloud computing different from virtualization?  Self service, pay for what you use, SaaS … are hot topics. Amazon WS does $100M in revenue.

2009 – Is the cloud real?

Translation: Is this something I’m going to have to pay attention to?

Does cloud computing mark a generational epoch on a par with Mainframe, Minis, PC and Web? … or is it a fad that will pass?  Saving money, CapEx vs. OpEx, agility, and ‘why wait on IT?’ are core issues of the day.  AmazonWS does $250M in revenue.

2010 – How do we define the cloud?

Translation:  What’s going to be my best approach to clouding-up my organization?

Every presentation opens with the question: “What is the Cloud?”  Most speakers cite Wikipedia or Nist, others have man-on-the-street videos asking people what cloud computing is. Vendors define it in terms most favorable to their own offerings…. IaaS, PaaS, SaaS, what color is your cloud? Cloud company acquisitions begin.  AmazonWS does $500M in revenue.

2011 – Where do I go from here?

Translation:  How do I make this work?

Many have tried to leverage cloud with mixed results.  Cloud Roadmaps and solution presentation abound in attempts to fast forward through the experience curve, but the devil is in the detail.  Cloud company acquisitions accelerate.  AmazonWS on track to do $1,000M in revenue.

2011 and beyond:  It’s pretty clear that Cloud is the next generational computing epoch, likely to dominate the next decade plus, unless the Mayan calendar turns out to be right. Today, the market is moving from the Wild West to the beginnings of settlement – a time in which companies are building stonewalls to stake their claims.  

IT professionals also have moved past the obvious low hanging fruit of dev/test and brand new apps on to moving existing applications to a cloud. Companies want to be able to install, configure, clone, run and …. then …. move ….. multiple instances of an application unchanged. The reality of Amazon being down for a few days only reinforced the requirement to have multiple copies of any important application ready to go at a moment’s notice.

Mu$ic to my ears. 

I actually had fun manning the booth and walking the floor, telling the AppZero story, which is a great match to this generation of questions: We offer the fastest way to move existing applications to any cloud – letting companies change clouds and workloads to match evolving strategies.  Here’s the flexibility to learn, adopt and change cloud foundation rapidly, without lock-in.  This cloud agility is a differentiator that will separate the winners and losers in many markets.

On that note, now seems like a good time for the next installment of GregO's cloud valuation exit/acquisition score-card

Time             Company                                          Valuation*

Q1 2010        3Tera/CA                                           $90M   @ 30  EV/R(ttm)

Q2 2010        3Para/HP                                            $2.4B   @ 12  EV/R(ttm)

Q1 2011        Facebook/Private IPO (GS)               $50 B   @ 25  EV/R(ttm)

Q1 2011        Terremark/Verizon                             $1.9B   @ 5.4 EV/R(ttm)

Q2 2011        Navisite                                               $230M @ 2.1 EV/R(ttm)

Q2 2011        Savis                                                    $2.9B   @3.0 EV/R(ttm)

 *Valuation – includes debt

EV – Enterprise value or market cap + cash + debt

R(ttm) – Revenue for trailing twelve months

I am always looking for a way to communicate better and cut to the heart of any discussion. So, if you have thoughts on this subject drop me a line at GregO {@} Appzero {dot} com or tweet me at http://twitter.com/gregoryjoconnor.

Although I’m a sucker for short term prophecies, I’m pretty sure that no “Top Cloud Predictions for 2011”said anything about Terramark being sold for close to $2B when you factor in the $524M debt that comes along with the deal. 

In a press release that featured a 14 word title, with 30 word sub-title, telecom service provider Verizon announced that it will acquire the provider of IT infrastructure and cloud services to help speed up its strategy to offer “everything as a service” (their words, not mine) to enterprise and governmental clients.  But I have to wonder if the folks who crafted a 44 word headline for an announcement heralding the union, will be able to navigate a smooth path to cloud effectiveness.

The first logical question is, as a vassal state to a telco, will Terremark remain carrier neutral?  Lowell McAdam, president and CEO of Verizon thinks the answer is “yes” saying, “We have very specifically set Terramark up as a wholly owned subsidiary, and Manny [Manuel Media, Terremark chairman and CEO] and his team will be independent.”  He went on to say, “We’re not going to try to cramp their style at all.  There will be no moves to take certain customers out of play.”  (I also trust Mark Z with my home address on Facebook.)

Back to the deal.  A quick look at the financial metrics compared to Rackspace comes out like this:

Terremark Worldwide, Inc. (TMRK)

Revenue (ttm):320.70M

Qtrly Revenue Growth (yoy):23.00%

Price/Sales (ttm): 3.91

Enterprise Value (EV)/Revenue (ttm): 5.40

Enterprise Value(EV)/EBITDA (ttm): 23.14

Total Debt (mrq):524.14M

Rackspace Hosting, Inc (RAX)

Revenue (ttm):735.34M

Qtrly Revenue Growth (yoy):21.60%

Price/Sales (ttm): 5.79

Enterprise Value(EV)/Revenue (ttm):  5.81

Enterprise Value(EV)/EBITDA (ttm): 20.48

The numbers clearly show that Verizon is paying almost the identical ratio on an EV/Revenue and EV/EBITA for Terremark as the current valuation of Rackspace.  The Price/Sales ratios are not close because this ratio does not reflect the large debt that Terremark has compared to almost no debt for Rackspace.  Enterprise Value (EV) is a much better way of getting to real apples to apples comparison.  It’s interesting to see that on market prices alone, Rackspace is 2 times as large as the take out value of soon to be VeriMark (yes, I did make up the name).  Although the growth rate for the two companies are almost identical, Rackspace’s far greater top line makes their growth a higher degree of difficulty factor yielding much more revenue in total dollars.

If Geoffrey Moore were reissuing his chasm crossing work, he’d definitely need to identify a phase where companies throw vast amounts of money to stay competitive in a cloud economy.  Because that’s where we are now.  With apologies to Mr Moore, let’s say that Cloud Computing is in the Tornado phase.  In this phase, everything has a cloud label stuck on it whether the micro-burst fits or not. 

In Tornado times, winners and losers make visible moves on a chessboard-like market: 3Terra, 3Para, Terremark, and Steve Ballmer’s email to the troops firing sending Server and Tools Business Unit President Bob Muglia “to the cloud”.  (I hate that commercial of the women editing a family picture to the obnoxious repeated call “to the cloud”.  Talk about cloudwashing …..)

So who wins?  Who loses?  Here are Greg O’Connor’s top predictions on the topic:

• Verizon will make money with the acquisition.  But the distraction of integration and learning how to be agile within the Verizon conglomerate will consign VeriMark to the “me-too” cloud category in the long run.
• Unfettered, Amazon and Rackspace will be free to innovate.
• Rackspace will acquire 2-3 companies over the next 24 months to gain more competitive distance and market share.
• Amazon will spin out -- or report separately -- the Web Service business because the market can not adequately distinguish and value cloud revenue/profits from the retail business.  Both will prosper.  I will invest.
• Cloud provider leaders will remain independent for a long time because we are in the 2^nd inning of the ball game and we know that winners will be rewarded with Facebookesque valuations.
• Terremark shareholders ….. cachink.  Or as Manny put it, "This transaction, first and foremost, provides Terremark's stockholders with the opportunity for immediate, maximum value and liquidity for their investment in our common stock.”  As I said, “cachink”.
• The market will recognize and reward the genius of independent, cross-cloud tools …. For example, AppZero’s patented, OS-free, application virtualization, cloudification technology.

First installment of GregO’s cloud valuation exit/acquisition score-card:

Q1 2010        3Terra /CA                                          $90M @ 30  EV/R(ttm)

Q2 2010        3Para/HP                                             $2.4B @ 12  EV/R(ttm)

Q1 2011        Facebook/Private IPO (GS)          $50 B @ 25  EV/R(ttm)

Q1 2011        Teremark/Verizon                          $1.9B @ 5.4 EV/R(ttm)

Agile development and deployment workflow

This series describes a development and deployment process optimized for the needs of software-as-a-service in terms of cost structure, agility, staging and test requirements.  The resulting system will tolerate the failure of a local hard drive and crashes of a machine - physical or virtual.  Offering good performance / low cost via Amazon's EBS and EC2 services, the system will provide the ability to rollback changes both on the deployed and development system (independently or together) using Subversion.

You can enjoy instantaneous feedback when you are developing code without affecting existing users of your website by using a two machine development and deployment lifecycle.  Deployment can be a 5 second experience (as opposed to 5 minutes) using AppZero technology.

I have tried a number of lifecycle workflows for the development and deployment of Drupal websites. In this series, I will describe a two machine approach involving a local development and test machine and a deployment machine. Deployment of files will use the Subversion Version Control System; the local machine is Windows to make tools like Photoshop convenient to use; the deployment machine is a Windows machine from EC2; and we will use Apache, Drupal, and MySql.

The one-machine approach, topologically simplest, involves developing directly on the deployed machine on the Internet. I've found this approach, while seemingly simple, to have two serious deficiencies:

• developing a new feature for a site can often involve accidentally breaking existing functionality or look-and-feel. This topology makes it difficult to evolve a site without showing the public every intermediate change.

• tools like Photoshop  are not convenient to use on a remote basis and ftp'ing files back and forth is a cumbersome process. Even text editing on a remote machine incurs painful latencies.

For these two reasons, I advocate at least a two machine approach. This allows you to develop on your local machine, disconnected from the Internet if necessary, with all the tools you like, and deploying when you desire. Of course, in a two machine topology approach, deployment agility becomes paramount. The difference between 5 seconds to deploy and 5 minutes makes the difference between wonderful and painful.