By Camuel Gilyadov, on November 17th, 2010

Emerging Proprietary Hardware Renaissance

INTRO
I cannot count number of times I heard that cloud computing means innovation stagnation in the proprietary hardware business and that with cloud computing, hardware doesn’t matter anymore and will succumb sooner or later into boring razor-thin-margins oligopolistic commodity industry.

GAME OVER FOR FAT MARGINS IN PROPRIETARY HARDWARE?
Why folks think like that? Well… there is one reason that dominates their thinking – hardware products became components and worse of all they became a well standardized components. And as such, certain low-wage countries can quickly master how to assemble them in large quantities and win competition purely on cost and nothing else seriously matters in component business. No one carries about component extended enterprise feature set and premium brand and long list of ISV partnerships and etc… what matters is very well defined functionality and price, price and price. In fact it already happened to low-end gear like entry-level basic servers and routers. The situation is very different for enterprise IT products. I estimate that if IT costs will be tripled overnight for most enterprises it would not matter in their bottom line. So IT departments of most enterprises are cost-insensitive regarding IT gear. They will not blindly overpay in most cases but cost is not high in their priority list either. IT for most enterprises is more or less fixed cost amortized among very large number of its products or services. I guess if Coca Cola IT was tripled the price of single can of coke should be elevated for less than a cent. Unlikely that it is life-threatening to their business. Therefore the game was and largely still is to market hardware products directly to enterprise IT departments competing on enterprise feature set rather than price. Now with emerging cloud computing paradigm hardware products are components and are marketed to cloud operators which are essentially server farmers. And they are extremely cost-sensitive and marketing to them premium computing gear will be as successful as marketing a premium booze as fuel to alcohol-fueled car owner. If for cloud operator server costs will be tripled overnight the next morning it would be out of business. So without a doubt it is a game over for fat margins in hardware manufacturing/assembly business. What happened to enterprise software 5 years ago is happening to enterprise hardware right now – commoditization.

PROPRIETARY HARDWARE INNOVATION
So the common thinking goes, in the boring commodity business no one is going to invest in innovation so no one is going to invest much into proprietary hardware because no cloud vendor is going to buy premium hardware. The only hope is private cloud as a freshly invented loophole to continue to sell premium gear to enterprises. Well lets consider the following situation. XYZ startup manages to build a proprietary appliance which is essentially a cloud-in-the-box solution that through tight internal integration and optimization for one particular task achieves an order-of-magnitude better price-performance.Lets say it is an KV-store appliance. Would cloud-operators be interested? I bet they will. From outside it doesn’t matter if the functionality are backed up by cassandra-on-generic hardware or custom-hardware-appliance. So the cloud provider quietly rolling out such appliances can compete well both on price and on functionality (like latency) with other cloud providers running software-based KV-store on generic hardware. Other startup ABC may produce a computing appliance that can run ruby-on-rail or java or pyton applications order-of-magnitude more efficiently than a generic hardware and a cloud provider deploying such appliances from ABC startup could compete better serving RoR clients. Yet another startup may build a custom rack-sized box filled with fermi chip specifically designed for video processing. I can bring more examples but the trend is obvious. Use large chunk of dedicated hardware to do one specific task and do it extremely efficiently and you can have nice margins as hardware manufacturer. Before cloud – hardware must be generic because single enterprise server should be able to run a variety of different workloads. With cloud computing it is not longer the case. A vendor can build a dedicated hardware appliance optimized to do one specific workload and serve the whole world with it raising high barriers for the competitors. So despite popular belief I think cloud computing presents unique opportunities to creative hardware engineers, tough not in premium enterprise-feature set area as it used to be but in extreme-efficiency, acceleration and specialization areas.

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