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Revisiting the 2014 Predictions

With the calendar now reading January, it’s time to look ahead to 2015 and set down some predictions for the forthcoming year. As is the case every year, this is a two part exercise. First, reviewing and grading the predictions from the prior year, and second, the predictions for this one. The results articulated by first hopefully allow the reader to properly weight the contents of the second – with one important caveat that I’ll get to.

This year will be the fifth year I have set down annual predictions. For the curious, here is how I have fared in years past.

Before we get to the review of 2014’s forecast, one important note regarding the caveat mentioned above. Prior to 2013, the predictions in this space focused on relatively straightforward expectations with well understood variables. After some ferocious taunting constructive feedback from Bryan Cantrill, however, emphasis shifted towards trying to better anticipate the totally unexpected than the reverse.

You can see from the score how that worked out. Nevertheless, we press on. Without further delay, here are the 2014 predictions in review.


38% or Less of Oracle’s Software Revenue Will Come from New Licenses

As discussed in November of 2013 and July of 2012, while Oracle has consistently demonstrated an ability to grow its software related revenues the percentage of same derived from the sale of new licenses has been in decline for over a decade. Down to 38% in 2013 from 71% in 2000, there are no obvious indications that 2014 will buck this trend.

Because of some changes in reporting, it’s a bit tricky to answer this one simply. When Oracle reported its financial results in 2012, their consolidated statement of operations included just two categories in software revenue: “New software licenses” and “Software license updates and product support.” The simple, classic perpetual license software business, in other words. A year later, however, Oracle was still reporting in two categories, but “New software licenses” had become “New software licenses and cloud software subscriptions.”

While this made it impossible to compare 2012 to 2013 on an Apples to Apples basis, the basic premise held: theoretically reporting new software licenses-only in 2012, the percentage of overall software revenue that represented was 37.93%. The number in 2013, with “cloud software subscriptions” now folded in? 37.58%. With or without cloud revenue included, then, a distinct minority – and declining percentage – of the overall Oracle revenue was derived from the sale of new licenses.

For the fiscal year 2014, however, Oracle finally abandoned the two category reporting structure and broke cloud revenue out into not just one but two entirely new categories. In its 2014 10-K, Oracle provides revenue numbers for the following:

  • New software licenses
  • Cloud software-as-a-service and platform-as-a-service
  • Cloud infrastructure-as-a-service
  • Software license updates and product support

Which begs the question: if we’re trying to determine what percentage of Oracle’s software revenue derives from the sale of new software licenses, do we include one or both cloud categories, or evaluate software on a stand alone basis?

If the latter, the 2015 prediction is easily satisfied. If we exclude cloud revenue, only 32.25% of Oracle’s non-hardware revenue was extracted from new software licenses – a drop of 5.68% since the last time Oracle only reported on that category. But given that 2013 conflated software and cloud revenue and was used as the basis for the 2015 prediction here, it seems only fair to use that as the basis for judgement.

So what percentage of overall revenue did new cloud (IaaS, PaaS and SaaS included) and software licenses generate for the company in 2014? 37.65%.

Which means we’ll count this prediction as a hit.

The Biggest Problem w/ IoT in 2014 Won’t Be Security But Compatibility

Part of the promise of IoT devices is that they can talk to each other, and operate more efficiently and intelligently by collaborating. And there are instances already where this is the case: the Nest Protect smoke alarm, for example, can shut off a furnace in case of fire through the Nest thermostat. But the salient detail in that example is the fact that both devices come from the same manufacturer. Thus far, most of the IoT devices being shipped are designed as individual silos of information. So much so, in fact, that an entirely new class of hardware – hubs – has been created to try and centrally manage and control the various devices, which have not been designed to work together. But while hubs can smooth out the rough edges of IoT adoption, they are more band-aid than solution.

And because this may benefit market leaders like Nest – customers have a choice between buying other home automation devices that can’t talk to their Nest infrastructure or waiting for Nest to produce ones that do – the market will be subject to inertial effects. Efforts like the AllSeen Alliance are a step in the right direction, but in 2014 would-be IoT customers will be substantially challenged and held back by device to device incompatibility.

If the high profile penetrations of JP Morgan, Sony et al had been IoT related, this prediction would have been more problematic. But while there were notable IoT related security incidents like those described in this December report in which the blast furnace in a German factory was remotely manipulated, in 2014 the bigger issue seems to have been compatibility.

Perhaps in recognition of this limiting factor, manufacturers have indicated that 2015 is going to see progress in this area. Early in January, for example, Nest announced at CES that it would partnering with over a dozen new third party vendors, from August to LG to Philips to Whirlpool. 2014 also saw the company acquire the manufacturer of a potentially complementary device, the Dropcam. This interoperation will be crucial to expanding the market as a whole, because connected devices unable to interoperate with each other are of far more limited utility.

I’ll count this as a hit.

Windows 7 Will Be Microsoft’s Most Formidable Competitor

The good news for Microsoft is that Windows 7 adoption is strong, with more than twice the share of Windows XP, the next most popular operating system according to Statcounter. The bad news for Microsoft is that Windows 7 adoption is strong.

With even Microsoft advocates characterizing Windows 8 as a “mess,” Microsoft has some difficult choices to make moving forward. Even setting aside the fact that mobile platforms are actively eroding the PC’s relevance, what can or should Microsoft tell its developers? Embrace the design guidelines of Windows 8, which the market has actively selected against? Or stick with Windows 7, which is widely adopted but not representative of the direction that Microsoft wants to head? In short, then, the biggest problem Microsoft will face in evangelizing Windows 8 is Windows 7.

The good news for Microsoft is that Windows 7 declined slightly, from 50.32% in January to 49.14% in December. The bad news is that Windows 8.1 (11.77%) is still behind Windows XP (11.93%) in share. Back on the bright side, that was up from Windows 8’s 7.57% in January and the next closest non-Microsoft competitor was Mac OS at 7.83%.

Still, it seems pretty clear that Windows 7 is Microsoft’s most formidable competitor – we’ll see how Windows 10 does against it. Hit.

The Low End Premium Server Business is Toast

Simply consider what’s happened over the last 12 months. IBM spun off its x86 server business to Lenovo, at a substantial discount from the original asking price if reports are correct. Dell was forced to go private. And HP, according to reports, is about to begin charging customers for firmware updates. Whether the wasteland that is the commodity server business is more the result of defections to the public cloud or big growth from ODMs is ultimately irrelevant: the fact is that the general purpose low end server market is doomed. This prediction would seem to logically dictate decommitments to low end server lines from other businesses besides IBM, but the bet here is that emotions win out and neither Dell nor HP is willing to cut that particular cord – and Lenovo is obviously committed.

It’s difficult to measure this precisely because players like Dell remain private and shipment volumes from ODM suppliers are opaque, but there are several things we know. In spite of growth in PCs, HP’s revenue was down 4% (1% net) in 2014. And while CEO Meg Whitman expects x86 servers to play a part in a 2015 rebound, there are no signs that that was the case in 2014. Cisco, meanwhile, which eclipsed HP for sales of x86 blade servers in Q1, grew its datacenter business (which includes servers) in 2014 at a 27.3% clip compared to the year prior, but that was down from 59.8% growth 2012-2013 and the 2014 revenue represents only 7.3% of Cisco’s total for the year.

Amazon, on the other hand, is growing by virtually any metric, and rapidly in terms of users, consumption metrics and its portfolio of available services. Nor is Amazon the only growth area in public cloud: DigitalOcean has become the fourth largest web host in the world in less than two years, according to Netcraft.

Whether you base it on Amazon’s one million plus customers, then, or the uncertain fortunes of the x86 alternatives, it’s clear that traditional x86 businesses remain in real trouble. Hit.


2014 Will See One or More OpenStack Entities Acquired

Belatedly recognizing that the cloud represents a clear and present danger to their businesses, incumbent systems providers will increasingly double down on OpenStack as their response. Most already have some commitment to the platform, but increasing pressure from public cloud providers (primarily Amazon) as well as proprietary alternatives (primarily VMware) will force more substantial responses, the most logical manifestation of which is M&A activity. Vendors with specialized OpenStack expertise will be in demand as providers attempt to “out-cloud” one another on the basis of claimed expertise.

There are a few acquisitions here that are not OpenStack entities but certainly influenced by same – HP/Eucalyptus and Red Hat/Inktank come to mind – but it’s not necessary to include these to make this prediction come true. Just in the last year we’ve seen EMC acquire Cloudscaling, Cisco pick up Metacloud and Red Hat bring on eNovance. That leaves a variety of players still on the board, from Blue Box to Mirantis to Piston, and it will be interesting to see whether further consolidation lies ahead. But in the meantime, this prediction can safely be scored as a hit.

The Line Between Venture Capitalist and Consultant Will Continue to Blur

We’ve already seen this to some extent, with Hilary Mason’s departure to Accel and Adrian Cockcroft’s move to Battery Ventures. This will continue in large part because it can represent a win for both parties. VC shops, increasingly in search of a means of differentiation, will seek to provide it with high visibility talent on staff and available in a quasi-consultative capacity. And for the talent, it’s an opportunity to play the field to a certain extent, applying their abilities to a wider range of businesses rather than strictly focusing on one. Like EIR roles, they may not be long term, permanent positions: the most likely outcome, in fact, is for talent to eventually find a home at a portfolio company, much as Marten Mickos once did at Eucalyptus from Benchmark. But in the short term, these marriages are potentially a boon to both parties and we’ll see VCs emerge as a first tier destination for high quality talent.

The year 2014 did see some defections to the VC ranks, but certainly nothing that could be construed as a legitimate trend for the year. This is a miss.

Netflix’s Cloud Assets Will Be Packaged and Create an Ecosystem Like Hadoop Before Them

My colleague has been arguing for the packaging of Netflix’s cloud assets since November of 2012, and to some extent this is already occurring – we spoke to a French ISV in the wake of Amazon reInvent that is doing just this. But the packaging effort will accelerate in 2014, as would-be cloud consumers increasingly realize that there is more to operating in the cloud than basic compute/network/storage functionality. From Asgard to Chaos Monkey, vendors are increasingly going to package, resell and support the Netflix stack much as communities have sprung up around Cassandra, Hadoop and other projects developed by companies not in the business of selling software. To give myself a small out here, however, I don’t expect much from the ecosystem space in 2014 – that will only come over time.

In spite of some pilot efforts here and there including services work, there was little “acceleration” of the packaging of Netflix’s cloud assets. This is a miss.


Disruption Finally Comes to Storage and Networking in 2014

While it’s infrequently discussed, networking and storage have proven to be largely immune from the aggressive commoditization that has consumed first major software businesses and then low end server hardware. They have not been totally immune, of course, but by and large both networking and storage have been relatively insulated against the corrosive impact of open source software – in spite of the best efforts of some upstart competitors.

This will begin to change in 2014. In November, for example, Facebook’s VP of hardware design disclosed that they were very close to developing open source top-of-rack switches. That open source would eventually come for both the largely proprietary networking and storage providers was always inevitable; the question was timing. We are beginning to finally seen signs that one or both will be disrupted in the current year, whether its through collective efforts like the Open Compute Project or simply clever repackaging of existing technologies – an outcome that seems more likely in storage than networking.

As discussed previously, strictly speaking, disruption had already come for storage at the time that this was originally written. As for networking, the disclosure that some of the largest potential networking customers – Amazon and Facebook, among others – are now designing and manufacturing their own networking gear instead of purchasing it from traditional suppliers was disruptive enough. The fact that it’s that Facebook’s custom network designs, at least, are likely to be released to the public should be that much more concerning to traditional networking suppliers.

With the caveat then that the storage timing, at least, was off, this is a hit.


The Most Exciting Infrastructure Technology of 2014 Will Not Be Produced by a Company That Sells Technology

More and more today the most interesting new technologies are being developed not by companies that make money from software – one reason that traditional definitions of “technology company” are unhelpful – but from those that make money with software. Think Facebook, Google, Netflix or Twitter. It’s not that technology vendors are incapable of innovating: there are any number of materially interesting products that have been developed for purposes of sale.

The difficulty, as I should know by now, with predictions like these, is that they’re dependent on arbitrary and subjective definitions – in this case what’s the most “exciting” project of 2014. While there are many potential candidates, however, for us at RedMonk, Docker was one of our most discussed infrastructure projects over the past calendar year. By a variety of metrics, it’s the one of the most quickly growing projects we have ever seen. The Google Trends graph above corroborates this, albeit in an understated manner.

As a result, it seems fair to argue that Docker is a good candidate for the most exciting infrastructure technology of 2014. And unfortunately for my prediction, it is in fact produced by a company that sells software. So this is a miss.

Google Will Buy Nest Google Will Move Towards Being a Hardware Company

In the wake of Google’s acquisition of Nest, which I cannot claim with a straight face that I would have predicted, this prediction probably would have been better positioned in the Safe or Likely categories, as it seemed to indicate a clear validation of this assertion. But then they went and sold Motorola to Lenovo, effectively de-committing from the handset business.

So while I don’t expect hardware to show up in the balance sheet in a meaningful way in 2014, it seems probable that by the end of the year we’ll be more inclined to think of Google as a hardware company than we do today.

In spite of the launch of the Nexus Player, the acquisition of Nest, the continued success of the Chromecast, beating Apple to market with Android-powered smartwatches and a new pair of Nexus phone and tablet devices – not to mention the self-driving cars – it can’t realistically be claimed that people think of Google as a hardware company today. Certainly the company has more involvement in physical hardware than it ever has, but by and large the company’s perception is shaped by its services: Search, AdSense/Words, Gmail, GCE etc. That might have shifted somewhat if the Nest brand had been folded into Google’s and the company had released additional device types, but that’s merely speculation.

The fact is that Google is not materially more of a hardware company today than it was when these predictions were made. Ergo, this is a miss.


Google Will Acquire IFTTT

Acquisitions are always difficult to predict, because of the number of variables involved. But let’s say, for the sake of argument, that you a) buy the prediction that a major problem with the IoT is compatibility and b) that you believe Google’s becoming more of a hardware company broadly and IoT company over time: what’s the logical next step if you’re Google? Maybe you contemplate the acquisition of a Belkin or similar, but more likely you (correctly) decide the company has quite enough to digest at the moment in the way of hardware acquisitions. But what about IFTTT?

By more closely marrying the service to their collaboration tools, Google could a) differentiate same, b) begin acclimating consumers to IoT-style interconnectivity, and c) begin generating even more data about consumer habits to feed their existing (and primary) revenue stream, advertising.

Not much argument here, as IFTTT was not acquired by anyone, Google included. The logic behind the prediction remains sound, but there’s no way to count this as anything other than a miss.

The Final Tally

To wrap things up, how did the above predictions score? The short answer is not well. Out of the ten predictions for the year, five were correct. Which means, unfortunately, that five were not, good for a dismal 50% average. In the now five years of this exercise, 50% is the lowest score ever, and the lowest since last year, which saw the debut of the new more aggressive format – which is obviously not a coincidence.

In my defense, however, the misses were primarily drawn from the least certain predictions; all of the “Safe” predictions, for example, were hits. In terms of scoring, then, the context is important. The failure rate of predictions is highly correlated to their difficulty. It’s simpler, obviously, to predict acquisitions in a given category than to predict a specific acquirer/acquiree match.

All of that said, the forthcoming predictions for 2015 will remain aggressive in nature, even if that means 2016 will see a similarly contrite and humble predictions wrap up.

Categories: Cloud, Hardware, IoT, Network, Storage.

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3 Responses

  1. You could make a good argument for Netflix this year given their hire of Andrew Spyker, a highly visible enterprise user at IBM, to do almost exactly what you predicted.

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