To the average Internet user, it is an invisible
Newer, faster and more efficient concepts for how to structure
and manage networks are rapidly altering the light-speed maze
through which consumers and businesses work, play and communicate
Cloud computing is a trend consolidating Internet computing
power in vast armories referred to as server farms. Another
trend, Big Data, describes the tech world's effort not just to
manage, but to make useful the rising waves of information
gathering in digital coffers worldwide.
The convergence of those trends is creating lucrative
opportunities for fresh armies of tech companies. Demand is hot
for hosted data centers, networking equipment and software
solutions: anything that helps companies save money on
information technology while speeding access to and processing of
their mountains of data.
"The technology industry is in the early rounds of a massive
secular shift that will change the way businesses consume
) CEO Lanham Napier said on a conference call with analysts Aug.
7. "Massive technology disruptions like this create opportunities
for companies to seize the moment, disrupt the status quo, and
lead to revolution. We believe Rackspace faces one of those
opportunities and that we are in a position to lead this
IBD's Internet networking solutions industry group is home to
Rackspace and 29 other companies, many of which revolve around
cloud-based services. The group ranks No. 57 out of 197 industry
groups tracked by IBD. Its index is up 36% for the year, the
sixth-best gain among all industry groups.
The data center providersEquinix (
) and Rackspace Hosting have played a large role in that gain. So
has network management software firmSolarWinds (
), as well as the website publishing and marketing companyWeb.com
Market research firm IDC estimates that spending on cloud
computing will top $40 billion worldwide this year and reach $99
billion in 2016. Rival researcher Gartner sees public cloud
services generating $58 billion this year and $117 billion in
That's creating business opportunities for data center
operators, like Rackspace andInterxion (
). Another hot spot is firms that optimize and speed the delivery
of applications, video and other data online, such asF5 Networks
(FFIV) andAkamai Technologies (AKAM).
Meanwhile, virtualization technologies, which multiply server
capacity, are rapidly reducing the number of servers needed to
power networks. That lowers the cost of Internet cloud-based
computing, boosting service providers' cash flow and opening the
door to more potential customers.
Cisco estimates that global Internet data traffic will rise
from 43.4 exabytes monthly this year to 110.3 exabytes a month in
2016. An exabyte is equal to 1 billion gigabytes.
Network management software providers like SolarWinds
andInfoblox (BLOX) must continually innovate in order to scale
their offerings to new and rising levels of traffic. A large
share of the rising Internet buzz is being driven by mobile
devices, namely smartphones and tablets.
That is helping the cloud computing space expand at a more
rapid rate than the overall IT industry.
"IT services (are) a sector that grows at GDP plus 1% a year
and yet we are seeing the data center services companies like
Equinix and Rackspace growing around 20% a year," said Evercore
Partners analyst Jonathan Schildkraut. "What's going on is a
major paradigm shift in the way that companies purchase, manage
and access IT resources. And these companies are leaders in this
Companies in the space compete by focusing on niche markets or
offering lower prices or better service than rivals.
For instance, Equinix concentrates on lightning-fast data
centers serving multiple customers or industries and located near
key markets. Its customers are typically top-tier corporations
that demand the highest performance, such asApple (AAPL),AT&T
(T),BT (BT) andIBM (IBM).
A horse of a different color, Web.com, has carved out a niche
serving small businesses. It has more than 3 million customers
for its website hosting, domain name registration, online
marketing and other online services.
A typical Web.com customer is a plumber, electrician or
restaurant owner who is too busy to master search engine
optimization, social media and online marketing. They turn to
Web.com because their online presence isn't generating traffic
and business leads.
The Internet is a big place and no one industry group contains
all the innovative companies that make it work.
Networking hardware companies likeCisco Systems (CSCO)
andJuniper Networks (JNPR) belong to the computer networking
A big part of the attraction of cloud computing is that it
saves companies money by allowing them to pay for computing
resources as a service.
"IT budgets have been relatively flat and chief information
officers have been tasked with getting the same productivity out
of the same sort of budgets," said Benchmark Co. analyst James
Dobson. "One way to do that is to look for lower-cost
alternatives, and outsourcing through co-location or cloud and
managed hosting (are among) the ways they've been able to do
SolarWinds has enticed many customers with its cheap software
for monitoring servers and networks.
"These guys have a very low-cost business model," said JG
Capital analyst Jeff Gaggin. "They're beating companies like CA
and BMC on a regular basis."
SolarWinds software doesn't have all the functionality of that
offered by such larger rivals, but it sells for about a tenth the
price. "It allows more affordable IT service management
solutions," Gaggin said.
One of SolarWinds' cost advantages is its use of lower-paid
salespeople, he says. And its marketing efforts are focused on
online advertising where customers are researching IT management
Rackspace is aiming to shake up the IT industry by using an
open-source cloud operating system based on OpenStack technology.
Open-source programs are, in effect, publicly owned, not
copyright protected and generally in a constant state of evolving
Rackspace touts its technology as an alternative to
proprietary brands that lock customers into a static product. It
competes with proprietary cloud operating systems such asAmazon
(AMZN) Web Services.
Other competitors, such asInternap (INAP), have also joined
the OpenStack movement. Rackspace hopes to differentiate its
offering through superior customer service, Napier says.
San Antonio-based Rackspace runs computer and data center
operations for more than 190,000 customers worldwide.
IDC predicts that spending on public IT cloud services will
rise at a compound annual rate of 26% over the next five years.
That's five times the expected growth rate of the IT industry
It expects the U.S. will remain the largest market for public
cloud services, followed by Western Europe and the Asia-Pacific
region, excluding Japan. The fastest growth in cloud services,
however, will be in the emerging markets, including China, India
Meanwhile, Cisco predicts global Internet data traffic will
increase threefold over the next five years. It forecasts
compound annual growth of 29% in the next five years.
Demand for cloud computing resources continues to grow apace
and so is capital investment in the sector, Dobson says.
"The main driver is the digitization of the economy," he said,
"and we think that's in its early stages."