Revolutions produce counterrevolutions when things have gone too far in one direction and balance must be restored.
There has been no greater revolution in technology since the advent of the World Wide Web than the rise of cloud computing, and somewhat of a backlash is under way. It goes by the name of edge computing.
With cloud computing, companies rent computing capacity from the likes of Microsoft (ticker: MSFT), Amazon.com (AMZN), and Google’s parent Alphabet (GOOGL). But with edge computing, corporations return to buying and operating their own hardware and software.
Edge is all about the old stuff, the gear sold for decades by Dell Technologies, which is privately held, and by IBM (IBM), HP Inc. (HPQ), Hewlett Packard Enterprise (HPE), NetApp (NTAP), and Cisco Systems (CSCO). These companies, which have been increasingly imperiled by the rise of the cloud, see new opportunities at the edge.
The Old Guard outfits have restructured themselves in the past few years after falling on hard times, and they do indeed have new opportunities. In a buoyant economy, there are increasing signs that corporations are again making capital investments in IT in a meaningful way, after holding off for some time, and these firms will get a chunk of it.
That could prop up Old Guard stocks for a time. Their returns have been quite mixed. NetApp, a turnaround story for a while now, has returned 44% this year, trouncing the S&P 500’s 3.4%. Hewlett’s 5.5% return also beat the market’s. But IBM has declined 5%.
The counterinsurgency is fragile: Edge computing coexists with cloud computing, which continues to pull in corporate converts. Cloud is the true revolution. And so Dell and Hewlett will at some point go chasing sources of growth again. They will probably return to methods they employed in past, principally buying young companies.
It’s no fluke of timing that Michael Dell last week said he would take his company public, after five years in the wilderness, by swapping his private shares for the public tracking stock DVMT, which represents Dell company’s 81% holding in software vendor VMware (VMW).
The chatter about edge computing has been building for a year or more, and Michael Dell finally has made progress. A year ago, he closed on the acquisition of storage-technology giant EMC. The most recent quarterly results for his company showed a 19% jump in revenue, to $21.4 billion. That’s a lot nicer than Dell Technologies’ 2% decline in revenue in the corresponding quarter two years earlier, when the company was half its present size.
My colleague Andrew Bary has the details on Dell’s deal in this week’s Streetwise column.
The counterrevolution began because customers who use Microsoft’s Azure cloud service, or who rented from Amazon’s AWS, have been hit with sticker shock. Renting computing power, with the meter running more and more, can add up. Buying stuff can sometimes scale back those costs.
Now a second component has emerged to fuel the backlash: Companies want to engage in machine learning, the technology du jour. They can use the cloud to do that, running on Google’s computers, but first they need to prepare the decades of data they have stored in their own computers about customers, facilities, historical pricing, sales, and myriad other details about the business. Then, they must move it to the cloud.
Because of its sensitivity, data wasn’t previously moved en masse to the cloud. And some companies still are very wary of doing that. Instead, they’d prefer to use edge computing.
Michael Dell sees this providing a big chance for companies like his, telling CNBC last week that there is a “tsunami of data” companies are gathering about their business, which is prompting a “technology-led boom in investment” among corporations.
Indeed, Morgan Stanley’s Katy Huberty wrote last week that some large corporations have told her 2018 will be “their strongest-ever year of IT spend.” And because there’s “a backlog of IT projects that can’t be addressed with only one year of elevated spend,” Huberty boldly predicts these outlays will rise by 5% annually over the next decade, compared with an average 2% over the past 10 years.
A rising tide lifts all ships, and a market in which there has been massive consolidation, with Dell buying EMC, for example, is a healthier environment for the Old Guard. That happy state of affairs could last for years.
But the long-term primacy of centralized, public cloud computing won’t end. Information technology is fueled by innovation, and innovation no longer lies with Dell or Hewlett or Cisco, as much as with the cloud giants Google, Amazon, and Microsoft.
For that reason, the Old Guard will seek to stay relevant by buying younger assets. Pure Storage and Nutanix are an obvious fit for either Dell/EMC or Hewlett. If these companies want to get more aggressive, they could buy Red Hat, which sells a piece of software that creates what are known as containers. Containers let software applications float freely from one computer to another, breaking the traditional connections among applications, computer hardware, and operating systems.
Whether such deals can rejuvenate any of the Old Guard is uncertain. They’re operating now in a better environment than they’ve seen in many years. But technology’s winners are always the innovators—a role that long ago passed from the grip of these aging behemoths.
Write to Tiernan Ray at email@example.com