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Cheap money underpins the new wave of cloud software companies

IT future to rest on cash of the Titans?

Canalys Channels Forum The long-expected inevitable rise in interest rates will create upheaval in the cloud, with traditional IT companies able to play to their strengths of deep relationships with serious customers.

Kicking off the Canalys Channels Conference in Barcelona, channel guru Steve Brazier said the explosion of infrastructure as a service over the last few years had been underpinned by cheap money, and an investment community that did not demand profits from “startups”.

Last year, Brazier predicted a coming cloud apocalypse, saying some of the economics of the public cloud resembled the characteristics of a “pyramid scheme” with vendors cutting prices faster than they added customers.

This year, Brazier said that in terms of growth, AWS was doing “really well”, and would take 30 per cent of a total IaaS market of $25bn this year. The IaaS market should hit $35bn next year, he continued.

He conceded that AWS had since begun to release financial data, but noted that while the media had played up its operating profit, there had been no net profit figure – i.e. taking into account taxes, HQ costs and interest payments.

AWS had capex of around $4.5bn a year, he continued, and Canalys analysis suggested that while interest rates were at 1 per cent AWS’s interest costs were $140m. A rise in interest rates to 5 per dent would push this figure to somewhere around the $700m mark. The finance world has been on tenterhooks for months, guessing when the US Federal Reserve would shift interest rates from their historic low.

“When interest rates go up, that’s when we expect this will change”, Brazier said.

“Capital will become more expensive, and the cloud will become more expensive.”

Presumably this pattern would be repeated at other cloud pushers.

One consequence, he predicted, could be a “flight to quality” in the shape of the traditional industry “titans”, such as HP, EMC, Microsoft, et al, which have a collective cash pile of over $500bn, though 40 per cent applied to Apple alone.

These companies also had established sales forces, support, and tangible products, which would create key differentiators, when the price of cloud infrastructure became more reflective of the real world costs.

In a similar vein, Brazier flashed a slide of the CEOs of startups like LinkedIn, Box Inc., and the granddaddy of them all, Marc Andreessen, noting that these were the gurus the world – or at least the media – looked to tell us how to run a business.

Yet, he continued, they had collectively never reported a profit. Amazon’s Jeff Bezos and’s Marc Benioff were responsible for a collective $3bn in losses.

By contrast, he said, CEOs of traditional tech companies, were, like their channel counterparts, expected to deliver profits.

"The playing field is really not level," he said. ®

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