In-Depth
The Year in Review, The Trends Ahead
It was a pretty good year, for IT spending at least.
If any single emotion characterized the year just past, it had to be that of uncertainty. From the first whispered warnings of economic unrest in August of 2007 -- when financial analysts started talking about trouble in the sub-prime segment -- to a growing conviction, which crystallized in the first quarter of this year, that businesses might be in for a rocky 2008 -- IT-related business spending, the engine which drives IT, has hung in the balance.
Overall, 2008 was a pretty good year, for IT expenditures at least. Big computing players such as Hewlett-Packard Co. (HP), IBM Corp., Microsoft Corp., and Oracle Corp. continued to grow their revenues, profits, and (in some cases) market shares. To be sure, some (such as Sun Microsystems Inc.) didn't exactly have stellar years -- whereas others (such as Cisco Systems Inc.) had something of a mixed year-- but that's less an issue of economic tumult and more a function of what financial analysts like to call "fundamentals." By year's end, HP had posted substantial profits and was talking of even happier days to come; IBM -- and Big Blue's mainframe division, in particular -- were looking forward to a rollicking 2008.
Microsoft, which (notwithstanding its forays into mice, keyboards, game consoles, and -- thanks to its purchase of appliance hardware specialist DATAllegro Corp. -- data warehousing systems) is still mostly a software house, generated $60 billion in revenue for the twelve months ending in June 2008. Ten years ago, Microsoft was a mere $25 billion-a-year entity.
A Transitional Year, to Put It Mildly, for Microsoft
Microsoft mounted an ambitious hostile takeover of Yahoo Inc. (spawning the short-lived neologism Microhoo) which ultimately fizzled. Adoption of its Windows Vista operating system continued to disappoint -- by late 2008, according to market watcher Net Applications, Microsoft's share of the desktop market had dipped below 90 percent (down from 96.4 percent four years ago) -- and its Internet Explorer Web browser continued to give up market share (dropping under 70 percent for the first time in nine years, according to Net Applications).
According to analysts, this year Microsoft confronted two of its biggest-ever threats, those of virtualization and cloud computing. Redmond adopted a surprisingly benign stance on the virtualization front -- finally settling on a virtualization strategy that was long on embrace and short on extend (see http://esj.com/enterprise/article.aspx?EditorialsID=2990) -- and, late this year, announced its first-ever cloud computing play: Windows Azure.
Industry watchers at Gartner Inc. saw Microsoft standing at a crossroads -- or perhaps even at the brink of a yawning chasm. "This most recent [Professional Developer's Conference] was the most important such event Microsoft has held in a decade. At the forefront, Microsoft Chief Software Architect Ray Ozzie led Microsoft's Azure Services Platform announcement -- a significant and coordinated shift in Microsoft strategy," wrote analysts Neil MacDonald, David Smith, and David Cearley, in October. "The vision significantly expands Microsoft's 'Software plus Services' vision to encompass all of Microsoft's offerings, and it will impact all of Microsoft's products during the next decade."
Heads Not Quite in the Clouds
Azure was Microsoft's spin on cloud computing. Cloud computing -- even in the absence of bona-fide enterprise uptick -- was one of the Big Stories of 2008. Everyone outlined a cloud computing strategy. IBM, for example, opened several cloud computing centers, adding to its quiver of computing-in-the-cloud resources. HP announced a new Data Center Transformation services portfolio, centering around its cloud-based Adaptive Infrastructure as a Service (AiaaS) offering. (This summer, HP also notched a deal with Intel Corp. and Yahoo Inc. to create a cloud computing "test bed" service.) Also this summer, Sun made its own belated entry into cloud technology, outlining a strategy to recast its utility computing division into a Cloud Compute service.
Once again hype outstripped reality. The enterprise case for cloud computing, circa-2008, was admittedly weak, proponents conceded. At the same time, there was ample reason to believe that computing in the clouds might one day -- and one day soon -- be ready for the enterprise prime time. IBM, for example, started funneling resources into a mainframe-centric cloud computing effort. What's more, an increasing number of mainframe hands are also talking about cloud computing as a natural for Big Iron (see http://esj.com/Enterprise/article.aspx?editorialsId=3432). Mainframes, with their ability to minutely manage resources, dynamically allocate new workloads (either by bringing up new application resources or, just as likely, by firing up new virtual machine instances), and run a mix of proprietary and next-gen workloads, are ideally suited for cloud computing, they argue.
With several Big Iron-centric cloud computing sessions on tap at SHARE's upcoming meeting in Austin (to be held in March 2009), cloud-computing-on-the-mainframe is a technology proposition that bears watching.
Karl Freund, vice-president of global strategy and marketing for IBM's System z unit, even describes it as a no-brainer. "You take something like virtualization -- the mainframe was doing that long before any of these other [systems] came about. Virtualization on System z is best in class. No other [system] has the granularity, the scalability, [or] the ability to manage virtual [instances that] the mainframe has," he said. "Why wouldn't you make a platform like System z, which can securely and scalably host and manage these thousands of virtual [instances], the centerpiece [of a cloud-computing effort]?"
Big Iron Beat Goes On
It was another huge year for IBM's System z unit. You might remember that the mainframe finished 2007 on something of a down note -- chiefly, industry watchers said, because of pent-up anticipation for Big Blue's upcoming next-gen mainframe refresh. IBM didn't disappoint in this regard, kicking things off early in the year with the announcement of System z10, its most powerful, scalable, and most available mainframe to date. System z10 succeeded System z9, which was IBM's reigning most powerful, most scalable, most available mainframe to date.
The upshot, according to IBM-ers, is that Big Blue's mainframe unit notched another successful year, growing overall revenues, profits, MIPS shipments, and -- crucially -- new workloads (see http://www.esj.com/enterprise/article.aspx?EditorialsID=3400) .
Mainframe sales (a category that includes both outright purchases and system leases) are sizzling. This was particularly the case in Q3 of 2008, which -- admittedly -- predated the worst of the economic crisis.
"Revenues for System z increased 25 percent [in Q3 of 2008] compared with the year-ago period, where -- admittedly -- we had a bit of a downturn, mostly because of pent-up demand for [System] z10. But [in Q3 2008] we posted double-digit growth in all geographies," says Karl Freund, vice president of global strategy and with IBM's System z unit. "System z has seen quite a renaissance as customers realize the benefit of larger-scale consolidations and as they realize the benefits of putting applications and data closer together -- putting them on the same systems. These two things are driving demand."
How will the ongoing (and probably worsening) economic crisis affect mainframe sales? Items don't get much more big ticket than Big Iron. Isn't there a chance -- even a good chance -- that mainframe uptake could nosedive in Q4 of 2008 and struggle through much of 2009? Freund demurs on that question. Instead, he says, Big Blue is giving customers plenty of incentive to upgrade to bigger and faster mainframes. He cites a program that Big Blue promotes through its IBM Global Finance (IGF), which -- through January of 2009 -- is offering customers a no-money-down, interest-free entrée into Big Iron country.
Given that many customers opt to lease their mainframes in the first place, Big Iron's comparatively high ticket price can be somewhat misleading (see http://www.esj.com/enterprise/article.aspx?EditorialsID=3400). Big Blue, like many U.S. firms, has cash tucked away (see http://www.esj.com/Enterprise/article.aspx?EditorialsID=3418), so it's not only possible but relatively easy to finance a mainframe through IGF, Freund says.
Uncertainty Will Carry Over into 2009
Which brings us to the uncommonly sober topic of IT spending. In most cases, the solid performances of the big computing players in 2008 predate the worsening of the economic crisis, which -- exacerbated by a perfect storm of calamities (e.g., the failure of prominent investment banking house Lehman Brothers; the federal takeovers of government-sponsored enterprises Fannie Mae and Freddie Mac; the government bail-out of insurance giant AIG) -- ruptured into an economic tsunami in September.
No one seems to know what a worsening economic climate will mean for IT spending. Through much of 2008, market watchers (such as Forrester Research, Gartner Inc., and IDC Inc.) hedged their bets, issuing updated forecasts that, in most cases, concluded that IT spending was still going to grow, just not at the rate they'd previously predicted. The market itself seemed to bear out those forecasts -- as indicated by the robust earnings of HP, IBM, Microsoft, and others. Again, there's a reason: U.S. firms are sitting on lots of cash (see http://www.esj.com/Enterprise/article.aspx?EditorialsID=3418).
In 2008, hardware, software, and services players offered the major players plenty of opportunities to spend that money. Some of them might bear watching in 2009. In the first half of last year, for example, both HP and IBM hopped on the data-center-in-a-shipping-container bandwagon -- a category that was first initiated by Sun via its Project Black Box effort -- announcing their own perspective of the drop-in, pre-fab, shipping container-sized (or double-wide shipping container-sized, in HP's case) data center. That's in spite of the fact that there hasn't exactly been an upsurge in demand for such offerings (see http://esj.com/Enterprise/article.aspx?EditorialsID=3231).
Computing players specialize in first creating markets and then (e.g., cloud computing) waiting for the empirical, rubber-meets-the-road reality to catch up to those markets. Sometimes it never does. Utility computing, for example, has been a six-years-and-counting phenomenon, although, arguably, it's found its killer apps in virtualization and cloud computing. The same can be said for grid computing, which also has tenuous ties to cloud computing.
Virtualization should continue to be profitable in 2009 -- even though virtualization stalwart VMWare Inc. had a rocky 2008. All of the big players -- HP, IBM, Microsoft, Sun, VMWare, et. al. -- are of one mind in pushing highly virtual, increasingly dense data center visions. One new wrinkle in 2007 and 2008 -- which you should expect to see more of in 2009 -- is virtualization + Greening. The upshot, market watchers say, is that the highly virtual data center visions being touted by HP, IBM, and others require a new class of (you guessed it) the highly virtual, highly resilient, and highly flexible data center (see http://esj.com/Case_Study/article.aspx?EditorialsID=3393).
The Green angle, of course, is that the data centers of the future must in a sense comprise living -- or, at any rate, highly adaptive -- organisms.
That's the way Gartner vice-president Rakesh Kumar framed the issue. The data centers of today are "functionally obsolete," Kumar argued, in a research bulletin published in October. Going Green, according to Gartner and Kumar, involves transforming the static, reactive, and largely inert data centers of today into something quite different. "If 'greening' the data center is the goal, power efficiency is the starting point but not sufficient on its own," said Kumar, in the study. "'Green' requires an end-to-end, integrated view of the data center, including the building, energy efficiency, waste management, asset management, capacity management, technology architecture, support services, energy sources and operations."
The political change -- occasioned by the first Presidential transition-of-power in eight years -- might grease the skids, so to speak, for a nationwide Green IT (i.e., data center transformation) initiative here in the U.S. There's been speculation that an incoming Obama administration might -- among other priorities -- make a Green economic makeover (supported, naturally, by a mix of government spending, tax breaks, and similar incentives) one of its primary policy objectives. That's something HP, IBM, and other players could hope for.
There's much more likely on tap in 2009. Microsoft plans to ship a new version of Office next year -- along with the next version of its Windows desktop operating system, Windows 7. Meanwhile, Microsoft, Oracle, and others will continue to push a new product category that all but made onto the scene in late 2008: that of the commodity big data appliance. Once the provenance of Teradata Corp., Netezza Inc., and other specialty players, Big Data became big business last year: in July, Microsoft bought DATAllegro, and (just two months later, in September) Oracle unleashed its "Database Machine," a deliverable that Larry Ellison pitched as the most scalable data warehouse yet built (see http://www.tdwi.org/News/display.aspx?ID=9143).
Elsewhere, HP and IBM will continue to jockey for bragging rights in the server market segment -- with (unless mainframe sales really do take an unrecoverable nosedive) IBM claiming revenue bragging rights and HP nabbing unit shipment accolades -- even as Sun tries to right itself from a bearish 2008.
It's certain to be an interesting year. Although that isn't necessarily a good thing.