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How open-source software and cloud computing have set up the IT industry for a
once-in-a-generation battle
AS BOSSES go, Linus Torvalds and Andy Jassy couldn t be more different. Mr
Torvalds works, often in his bathrobe, out of his home in Portland, Oregon. He
leads an army of volunteer developers whose software can be had for nothing.
The office of Mr Jassy, who usually sports business casual, is in a tower in
Seattle. His employees operate dozens of huge data centres around the world and
work to create new online services that his firm can charge for.
Yet their organisations share an anniversary and an intertwined history. On
August 25th 1991 Mr Torvalds asked other developers to comment on a computer
operating system he had written, which became known as Linux. It has since
become the world s most-used piece of software of this type. On the same day in
2006 Mr Jassy s team made available a beta version of Elastic Compute Cloud
(EC2), the central offering of Amazon Web Services (AWS), the cloud-computing
arm of Amazon, an e-commerce giant. Over the past 12 months the division racked
up sales of $11 billion.
These two organisations have been central to the rise of cloud computing, the
provision of all kinds of number-crunching services over the internet. Global
networks of huge data centres, of the sort run by AWS, have become one of the
world s most important infrastructures. Without open-source programs like
Linux, however, cloud computing would have been stillborn. Old-style
proprietary software was too expensive and hard to adapt. In writing his
program, Mr Torvalds was just scratching his own itch: he simply needed what
later became Linux for his own PC. Now about 1,500 developers contribute to
each new version of Linux. As for AWS, rapid growth had left its parent company
with jumbled IT systems , says Mr Jassy, and it needed to integrate them into
a single platform, or set of reusable services, which later emerged as AWS.
Being first to succeed on a large scale allowed both Linux and AWS to take
advantage of network effects, which make popular products even more entrenched.
Linux also took off because Microsoft s rivals, in particular IBM and Oracle,
wanted to rein in Windows and threw their weight behind the open-source
alternative. AWS s timing, just before smartphones emerged in 2007 and ushered
in the app economy, was especially good. It became the go-to service for
startups because it charged only for the capacity they used rather than a fixed
fee. AWS is still a haven for young firms: nearly two-thirds of its more than
1m customers are startups, although it increasingly also serves big companies
such as General Electric and Netflix.
Both open-source software and cloud computing have been disastrous for the old
giants of IT. New firms almost always opt for an open-source database in the
cloud rather than a pricey proprietary version from Oracle, the biggest vendor
of such software. The more firms use the cloud, the less they buy equipment
from Dell, Hewlett-Packard and other hardware makers. Cloud-computing
providers, for their part, have little time for traditional vendors of
computing gear and instead buy from contract manufacturers in China. The
incumbents have seen sales in their core business stagnate or drop in recent
years. IBM s revenues, for instance, have fallen for 17 consecutive quarters.
But if their pasts share resemblances, the futures of Linux and AWS will
diverge. Linux will probably just happily plod along , in the words of Mr
Torvalds, as will open-source software in general. Meanwhile, AWS shows no sign
of slowing its progress towards full dominance of cloud computing s wide skies
(see chart). It has ten times as much computing capacity as the next 14 cloud
providers combined, according to Gartner, a consulting firm. AWS s sales in the
past quarter were about three times the size of its closest competitor,
Microsoft s Azure. This business is the reason why its parent company was able
to report its third consecutive record quarterly profit in July, after years of
patchy results.
It is much more profitable than anyone expected, too, even after many rounds of
price reductions designed to seize market share. One reason is that as well as
offering basic storage and number-crunching, it sells hundreds of other
computing services and features, from analytics and e-mail to search and
workflow; the marginal cost for providing these add-on services is close to
zero because the necessary software is already written.
Others are struggling to keep up. Hewlett-Packard has thrown in the towel. IBM
had to buy SoftLayer, a startup, in 2013; it has since become the core of Big
Blue s cloud but IBM is still lagging behind. Google is also struggling. Last
year it hired Diane Greene, a renowned IT executive, to give its computing
utility a boost. Only Microsoft s Azure is currently able even to touch AWS,
says Paul Miller of Forrester, a consultancy.
Get off of my cloud
The cloud-computing wars , as some call them, are not yet over. The prize is
too great. Gartner estimates that about $205 billion, or 6% of the world s IT
budget of $3.4 trillion, will be spent on cloud computing in 2016 a number it
expects to grow to $240 billion next year. The latest battleground is data.
Cloud providers are hoovering up digital information left and right so they can
mine it and use the insights to offer new services or improve existing ones.
Earlier this year, for example, IBM bought Truven Health Analytics, which has
data on 215m patients.
Yet again, however, AWS has stolen a march on its rivals. Its latest database
offerings, Aurora and Redshift, have been in especially high demand. Last year
it began to offer a service called Snowball, a suitcase-sized box packed with
50 terabytes of digital memory, which firms can use to transfer mountains of
data into AWS s cloud.
AWS may eventually discover some limits to its growth, as users seek to keep
alternative providers in business. Many customers fret about getting locked in
to it. Startups often use the service in ways that deliberately allow them to
switch providers. In Europe some two-fifths of firms use more than one cloud,
according to Forrester. This will help other players to catch up.
But AWS s momentum is immense. Even Salesforce.com, a big provider of online
business applications that operates data centres of its own, recently announced
that it will start using AWS, notes George Gilbert of Wikibon, a group of IT
consultants. At some point, Mr Gilbert reckons, even IBM may have to take the
same step.
AWS could end up dominating the IT industry just as IBM s System/360, a family
of mainframe computers, did until the 1980s. If that happens, the antitrust
authorities may eventually have to step in, as they did with IBM. Back in the
early days, when Messrs Torvalds or Jassy tinkered with their creations, that
outcome would have seemed inconceivable.