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A new hope for tech's old war horses
With so much computing power wasted, harnessing the leftovers may prove a boon for business -- and the next big thing for software and hardware makers alike.
By Jon D. Markman
Most of the six elder statesmen of the Nasdaq have reported earnings in the past few weeks, and for the three largest the news was anything but gray. Microsoft (MSFT, news, msgs), Intel (INTC, news, msgs) and Oracle (ORCL, news, msgs) all reported impressive gains in revenue and earnings, while only Sun Microsystems (SUNW, news, msgs) reported a loss, not to mention its 12th consecutive quarterly decline in revenue.(Microsoft is the parent of MSN Money.)
Next to report, in about 12 days time, are Dell (DELL, news, msgs) and Cisco Systems (CSCO, news, msgs), and the early indications suggest more of the same: The recovery in information-technology spending is fully under way, and while stock prices already reflect much of that good news, both fundamental and investor momentum should remain on track. Government data suggest inventories are being rebuilt and demand from consumers and businesses is modestly advancing. A sustained reversal in job growth, even if accompanied by higher interest rates, should accelerate both trends, as most personal computers are bought for new employees -- and for better or worse, the tech economy still depends on the sales of those old workhorses.
Hardware takes the lead
What have investors learned?- Over the past 12 months, hardware has become the star of the show, with Intel shares in the lead with a gain of 45%, Sun next at +29% off an extremely low base and Dell in third with a gain of 23%. Trailing badly are the software guys, with Microsoft shares advancing just 7% in the past 12 months, and once-mighty Oracle up just 2%.
- Over a longer period, lets say three years, hardware also holds the lead, with Dell up 38% since April 2001 and Intel down 9%. Meanwhile, Microsoft is down 18% and Oracle is down 28%. Sun, which became inconsequential over the time span as it lost enterprise software business to inexpensive Linux providers and enterprise semiconductor business to low-price leader Intel, is down 75%.
- Over the past five years since April 1999, however, Oracle shares are in the lead with an 82% gain, followed by Intel with a 10% loss, Dell with a 13% loss and Microsoft with a 32% loss. Meanwhile, Amazon.com (AMZN, news, msgs) and Yahoo! (YHOO, news, msgs) fared even worse, with 45% and 35% declines, respectively.
This was not the picture that many expected to emerge in the late 1990s, when experts considered software the apotheosis of technology. Hardware was considered lifeless metal that only became relevant when sparked by operating systems and applications. Internet software was the the dot in dot-com, as Sun put it.
Why did large-cap hardware stocks charge to a surprising lead in the past few years? The answer is fivefold: Hardware got smarter, as engineers began to design more software into their chips and boxes; hardware makers did a better job of fending off trustbusters in Washington; hardware makers started the period more undervalued; and hardware engineers proved better at squeezing costs out of their businesses. But perhaps most importantly, hardware makers proved the better marketers. The hottest new technology of the past few years, wireless broadband, was brilliantly sold to the public by Intel as a function of its chips. Dude, think of it this way: When you bought a Dell laptop with a Centrino wireless chip to surf the web at Starbucks (SBUX, news, msgs), you probably couldnt name a single piece of software that made the computer or wi-fi hotspot work.
A united future
Now an innovative initiative gaining traction in the marketplace of ideas and purchasing managers may help hardware and software makers advance into the next phase in tandem, as they will depend on each other more than ever. This new, new thing is grid computing, which is a variant of an old, old thing once called utility or distributed computing.
Grid computing has as many definitions as Donald Trump has hair stylists, but the easiest way to think of it is as many small computers acting as one large computer. These computers can be in one room at a company or university, or spread out over a region or country. Its sold as a lower cost way of doing large-scale computing, and it is, but grid computings primary benefit is its ability to provide computing power on demand for varying intensities of a users needs.
When you switch on a light in your office, for instance, you get only as much power as you need for the light bulb in that space. You dont need an entire power plant in your building to supply that juice, as you depend on the electricity grid of your city to provide juice as necessary, either from local power plants or ones many hundreds of miles distant. When you turn on your Pentium 4 computer to access your e-mail, however, you have the technology equivalent of a power plant on your desk. You only need a fraction of your computers capacity to do e-mail, and the rest of its ability, referred to as cycles, are wasted.
Grid computing provides ways for businesses to harness those wasted cycles sitting around on employees desks. After everyones gone home, for instance, grid-animating software from companies such as Oracle can put all those idled computers to work as if they were a single, extra-large parallel-processing computer -- boosting cycle utilization from the low teens up to 80%.
Grid computing also provides a way for companies to buy a roomful of relatively inexpensive Dell blade servers for mission-critical computational functions, such as determining the most efficient way to move a container ship of sneakers from the Seattle docks to 175 retailers in the Midwest, rather than a single expensive IBM (IBM, news, msgs) mainframe. After the shipping conundrum is solved, the Dell blades can be divided up into smaller clusters, or provisioned differently, on the fly to solve six different other smaller tasks that could not be run on a mainframe.
Grids winners
While the potential for grid computing has been discussed for years, its only recently that hardware like low-cost Intel Itanium-based servers, storage-area networks and Oracle software has made them feasible. So-called distributed computer schemes have long allowed computer clusters running your accounts receivables and sales reporting software separately to basically pass messages back and forth with each other. In contrast, Oracle vice president Robert Shimp said his companys new software now allows IT managers to manage those clusters as if they were one big computer.
Grids were first developed at universities to get the most out of meager computing budgets, and they are standard features now at Argonne National Labs, University of Texas, University of California at Los Angeles, and CERN in Europe. But the seamless operation among disparate commercial systems required for genetic studies at biotech companies or options modeling at financial services firms required a much longer gestation period. Due to the complexity of making various vendors equipment work together, technology companies this year formed a consortium called the Enterprise Grid Alliance to develop tools and standards for developers and users. Oracle announced it joined the group last week; other participants are Hewlett-Packard (HPQ, news, msgs), EMC Corp. (EMC, news, msgs), Cisco Systems and Sun.
Companies that should be winners in a new golden age of grids would be low-cost blade server makers, such as Dell and Hewlett; software makers Oracle and Computer Associates (CA, news, msgs); storage-network equipment makers such as Brocade Communications Systems (BRCD, news, msgs); data warehousing service providers such as Acxiom (ACXM, news, msgs); and many private companies working on various parts of the solution, such as Egenera, Platform Computing and Entropia, which may go public in the coming couple of years.
Mark Anderson, publisher of Strategic News Service and a veteran observer of technology trends, said he believes grid computing has evolved out of hype mode into a legitimate business weapon for large companies trying to recoup the investment in their existing hardware. He noted that the first inter-university grid is currently being built in the Research Triangle in North Carolina at a cost of $30 million.
In short, grid computing could finally deliver much of the cost savings and networking power that Internet visionaries first promised enterprises many years ago. A transformative technology that makes both individuals and companies more powerful together than they would be separately. For the rest of the year, at least, Ill keep an eye out for new developments. And if you have any comments on how grids are being developed at your company or school, e-mail me at jdmmail@hotpop.com.
Fine Print
To learn more about Oracles grid initiative, visit its Web site. To learn more about Platforms grid business, visit its Web site. To learn more about Entropias business, visit its Web site. . . . According to a PC Magazine article last year, the American Diabetes Association uses a grid to simulate the intricacies of health-care plans, culling CPU power from more than 250 of its employees' machines. The magazine also reported that the University of Pennsylvania runs a data grid that gives doctors access to patient mammograms stored on hospital systems across the country. . . . There are several Web sites focused on grid computing, including GridComputingPlanet.com, the Global Grid Forum, Grid Computing Info Center and Globus Alliance, not to mention the Enterprise Grid Alliance.
Jon D. Markman is publisher of StockTactics Advisor, an independent weekly investment newsletter, as well as senior strategist and portfolio manager at Pinnacle Investment Advisors. While he cannot provide personalized investment advice or recommendations, he welcomes column critiques and comments at jdmmail@hotpop.com. At the time of publication, Markman owned or controlled positions in the following securities mentioned in this column: Microsoft, Starbucks, Dell, Cisco Systems.
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