A future worth renting
Perhaps the most important trend I've noticed over the past two years that affects the suppliers of computing or Internet infrastructure is one that slowly has crept up on us: computing as a utility.
Yes, I mean viewing computing like electricity or phone communications--a service that can be provided at low cost by a third-party provider and charged for on a usage basis.
It's been easy to note the changes in Internet service providers (ISPs). Their business has moved from solely providing access to the Internet to providing Web hosting and other shared Internet services, as do companies such as Exodus Communications and Verio.
Even more apparent has been the rise of outsourcing, or hiring other companies to run certain business services. Companies like IBM, for example, are signing long-term (and big-money) contracts to take over and run internal data centers, promising efficiency and higher quality of service.
What I believe will be a tremendous force influencing the industry is the rise of application service providers (ASPs) coupled with an emerging group of companies that provide storage.
ASPs, such as USinternetworking, provide applications "on tap," allowing customers to outsource software and the infrastructure behind it. Some ASPs are focused on particular applications, such as email, while others have long-term plans to provide any and all enterprise applications, from ERP (enterprise resource planning) to CRM (customer relationship management).
The missing piece of outsourcing has been storage, of which traditionally customers have been less willing to cede control. The data or information that a company stores online is often viewed as the firm's "family jewels," better kept in-house than anywhere else. Only in the past few years has storage demand outstripped MIPS (a proxy for compute demand) as data needs have skyrocketed, creating demand for better management, security and performance.
The time is right for companies to help customers outsource storage--hence the recent rise in storage service providers (SSPs). One such provider, privately held Storage Networks, is offering massive storage farms with sophisticated security and management facilities that enable companies to reliably "rent" storage on an as-needed basis.
So are we really headed toward a utility-based future?
One can look back in history to see that businesses had water towers on the roof and generators in the basement until the utility companies became both reliable and significantly more cost effective.
I believe the same is happening to the computing industry.
It is too difficult for a company to internally manage upgrading software functionality while managing burgeoning storage resources and still be competitive. Utilities not only solve this problem, and save customers significant money, but also allow small businesses to access (by means of sharing) what had been prohibitively expensive gear.
How to invest in this trend? Certainly a utility-based portfolio should contain the leading new breed of companies: ISPs, ASPs and SSPs. Consolidation is bound to happen, and many of these companies will enter each other's territory.
I would argue that winners also will emerge among the systems suppliers, companies that I cover closely.
Clearly, the providers to the new breed of service companies will be the large system providers, where the advantages of scale can be spread among many smaller companies. EMC, for example, is in a fantastic position to supply SSPs with infrastructure, and this opens a whole new customer set to the supplier: small businesses that previously couldn't afford the price of entry.
IBM, with its leadership in services and integration, is in the best position to help ASPs and end users migrate to this new era. Sun, with its idea of providing "Web tone"--analogous to always-available "dial tone"--also understands software infrastructure requirements behind this new utility-based model.
As with any massive infrastructure upgrade, it will take years, not months, to complete. But today, all the pieces are in place. Customers, both big and small, are realizing the benefits of outsourcing.
In the end, we will all have access to our application and infrastructure needs more readily and with more security, and today's big costs of supporting and maintaining this infrastructure will dissipate, creating an even more efficient computing environment.
Philip Rueppel is a research analyst with Deutsche Banc Alex. Brown. Mr. Rueppel's comments that appear herein are not a publication of Deutsche Banc Alex. Brown and may not represent Mr. Rueppel's complete or current opinion with respect to any company. Persons who want to make an investment decision with respect to any company mentioned by Mr. Rueppel should obtain a copy of Mr. Rueppel's current and complete opinion as contained in the most recent publication of Deutsche Banc Alex. Brown. Mr. Rueppel's opinions are not intended as an offer or solicitation, nor as the basis for any contract for the purchase or sale of any security, loan or other instrument.