Markman Capital Insight

The cloud eats the desktop

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One area of commerce that is seeing no diminution of demand is the cloud. We know that in part because Amazon.com (AMZN) reported spectacular earnings in early May, illustrating the prescience of its massive early investment in cloud computing. Those results stood in stark contrast to the dreary numbers reported earlier by the likes of Intel (INTC), Apple (AAPL) and Microsoft (MSFT), and shine a spotlight on the new normal in computing.

Amazon Web Services, a collection of data centers, saw revenues surge 64% to $2.6 billion and net income leap 170% higher to $604 million, accounting for 56% of total Amazon profits. The 10-year-old online services business is now on a $10 billion run rate with 24% profit margins. Most important, AWS has been able to increase profitability despite continued massive upgrades in compute power while systematically reducing prices for customers.

As you might expect, companies large and small have been flocking to AWS. Fortune 100 companies like General Electric (GE) , Netflix (NFLX) and the Instagram unit of Facebook are attracted because they can buy storage and compute power as needed and at a fraction of the cost of building proprietary facilities. It's a no-brainer. It's cost effective and there are no hardware headaches. Startups, often cash-strapped, get the same resources and cost savings.

In fact, because the playing field is so level, nimble new firms have been able to develop disruptive technologies that would have been cost prohibitive prior to AWS and the advent of cloud computing. Consider the fantastic computing power required to run a worldwide logistic plan on the scale of Uber or to locate and play on-demand any song from any album for tens of millions of Spotify customers.

The next time you pull out your smartphone and request an Uber on a rainy Saturday afternoon and it appears in 3 minutes or you ask Spotify or Youtube to play an obscure cover of "When My Guitar Gently Weeps," take a moment to appreciate the power of cloud computing and how it changed our expectations

While benefiting developers and end users, cloud computing has been extremely disruptive to computer hardware makers. It's causing a seismic shift in the way people use computers. With the powerful cloud awaiting instruction in the background, the need to purchase powerful workstations is erased. They became no more than screens and input devices. As Dell, Hewlett Packard (HPQ) and Intel can attest, cloud computing is destroying the once lucrative desktop computer businesses.

Mobile devices will not be far behind. Smartphones, powerful and addictive as they may be, are nevertheless just computers. In an era of cloud computing, they too will become little more than screens and input devices -- classic "thin clients" in industry parlance. Wall Street is finally beginning to understand what businesses and consumers came to realize long ago: Almost any handheld device is good enough since most computing is taking place in the cloud. And that's why it's so fitting that Amazon climbed steadily in April and May as Intel and Apple were falling.

When Amazon founder and chief executive Jeff Bezos began building massive data centers in Oregon and Virginia a decade ago, analysts questioned his vision. What they didn't know was that infrastructure investment would change computing forever.

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