Piper Jaffray: 3 Firms To Grow Big In The Cloud

It's almost a manifesto. "Everything will move to the cloud," predicts Piper Jaffray & Co. analyst Mark Murphy and researcher Brian Schwartz. And as it does, three medium-sized companies will become star cloud suppliers. Do you think you know who they are? I, for one, didn't get them right.After surveying 100 IT managers, Murphy and Schwartz in, "The Future Is In The Cloud: A Survey Driven Forecast For Cloud Computing," predict that many more companies will adopt some form of cloud computing and the large vendors will adapt and participate in its revenues, no big surprise there. But they also concluded: "Red Hat will play an important role as its open source solutions are often the foundation of cloud computing…" The other two medium-sized companies named were VMware and Salesforce.com. The report says all three have less than $2 billion in revenues today. Actually, VMware was slightly over $2 billion in 2009 revenues, though that was not known at the time this report was composed last December.

I understand how VMware and Salesforce.com are in a prime position to become suppliers to the cloud. The addition of Red Hat shouldn't have been a surprise. In a conversation with Jim Whitehurst, Red Hat CEO, he had mentioned Piper Jaffray had highlighted Red Hat as a cloud vendor. Still, I thought of Red Hat as an outfit that wanted to participate in cloud computing, not one that was already there.

It's not so much that Red Hat has produced brand new products for the cloud. It's more that what Red Hat has been doing for years is well suited to the cloud. Compared to Windows or high end Unix, Red Hat Enterprise Linux can be replicated many times at a low cost in the cloud. It has a world class development system behind it in the Linux kernel process, lead by Linus Torvalds and Andrew Morton. And Red Hat supplies a tested, enterprise version of Linux through commercial subscriptions.

Still, I wasn't sure Red Hat had emerged as the overwhelming, dominant supplier of Linux to the cloud computing vendors. The report's authors note that all examples of the next generation, cloud computing data centers are running Linux, and more often than not, Red Hat Enterprise Linux. That would include Salesforce.com, Google and Amazon.com. In effect, cloud computing "leverages the compelling economics of open source components," Murphy and Schwartz wrote.

"Red Hat's operating system and the MySQL database (now owned by Oracle) are key components to many of the leading-edge clouds being developed today," the report states. It cites the ability of the Linux kernel development process to marshal "a global community development process which results in a product that evolves rapidly, provides transparency into the source codes dynamics, and surpasses other products in security and reliability -- all at a lower total cost of ownership than traditional offerings." The more Murphy and Schwartz thought about how large scale cloud data centers will be built, the clearer it became that "open source will represent a critical element in the equation." Those who understand the economies of scale being built into EC2, Salesforce.com or Google App Engine understand also that cloud computing is the first form of the data center built almost entirely around open source code and low cost x86 parts.

Murphy and Schwartz didn't peer into the tea leaves and discover this on their own. They asked 100 IT manager to rank 22 potential suppliers to the cloud. Thirty-three percent voted for Red Hat, 52% for Salesforce.com and 55% for VMware.

The mega vendors collected strong votes as well, Oracle, Microsoft and Google, to name three. "However, the relatively outsized mindshare for mid-cap vendors VMware, Salesforce.com and Red Hat paints a very positive picture for the future for those vendors." Each can be expected to notch strong growth over the next five years, the report says.

Red Hat is scarcely holding the cloud at arm's length. Last July it started certifying applications as ready to run in the cloud under Enterprise Linux, giving its customers assurance that what they had acquired to run in house could also be moved out to the cloud. Red Hat CTO Brian Stevens hosted its second, online cloud event Feb. 10 titled, "The Open Source Cloud Computing Forum," meant to broaden the notion that open source and cloud computing will progress hand in hand.

VMware is encouraging additional cloud construction by offering VMware Cloud Express, a way to build a public cloud and run ESX Server virtual machines in it. Amazon's EC2 run's its own stripe of the open source Xen hypervisor virtual machine, leaving VMware feeling left out.

Salesforce.com was the first bold cloud vendor and its software as a service established the credibility of multi-tenant applications. That is, it was possible to design an application and host it so that a few running instances can handle thousands of simultaneous users.

Cloud computing will go further to disrupt the established order of the top technology companies. We'll try to add to this list as its adoption broadens. But for now, Piper Jaffray has sampled a pulse and found a strong heart at these three companies.

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