Apple services are growing, hardware slowing

Apple posted quarterly results, and received a standing ovation: the stock rose 7% at the opening this morning.
What’s intriguing is that the numbers show lower sales of iPhone (down 15% compared to last year), Mac (down 10.5%), and iPad (down 8.3%). But Apple has pulled off some hand jive, and drawn attention to what may be the future of its growth engine: services.
In the release, Luca Maestri — Apple’s CFO — wrote ‘our Services business grew 19 percent year-over-year and App Store revenue was the highest ever, as our installed base continued to grow and transacting customers hit an all-time record’.
As I mentioned earlier this week (see What’s going on in Phoneland?), the market had already priced in the negatives coming in Apple’s quarterly results. As others — like Chris O’Brien — have pointed out, Apple has done a great job managing the expectations of Wall Street, and drawing the analysts’ attention to the figures Apple wants us to pay attention to. And the trend in services, and the growing margins in iPad sales, are the figures that are causing the stock to soar.
Tim Cook stated that the services side at Apple is on track to be ‘the size of a Fortune 100 company next year’.
So, once again the maturation theme is front and center: Apple’s sales of new hardware is dropping, but with a huge installed base, what can Apple do to make money? Sell — or more aptly, rent — services to all those folks with iPhone, iPads, and Macs. (Oh, and Watches, but that’s too tiny to matter, and might never.) So if Apple can continue to grow services to the installed base — plus get some additional boost in iPhone sales in the fall when new models come out — the company will remain a Wall Street darling.
Relative to enterprise sales, the better margins in iPads has got to be a proxy for increased sales in the enterprise based on the new larger iPad Pro. But, at present, Apple doesn’t have much of a story for enterprise services. Maybe it’s time to the company to revisit the plan to buy Dropbox or Box, and replace/rework iCloud (iCloud Pro?) with a cloud file sync-and-share solution –including a deep integration with Apple’s productivity suite — that makes more sense for the enterprise?
 

How Salesforce & Box are changing the landscape in regulated industries

Sarah is a tech blogger and researcher focused on cloud and enterprise. You can follow her here.
With an aim to encourage the adoption of cloud CRM solutions in regulated industries, Salesforce recently announced the launch of a new platform called Salesforce Shield, which came shortly after Box introduced the general availability of Box Governance. Like Shield, it also focuses on ensuring cloud customers meet legal, regulatory and business policies regarding data storage and transfer.
For organizations that operate in the healthcare, finance and legal industries, both Salesforce Shield and Box Governance may bring the highly sought after flexibility to cloud services without disrupting the organizations’ security requirements. Meanwhile, companies providing cloud-based services to these regulated industries provides a new opportunity to increase marketshare — and in doing so, change the landscape for cloud services. Here’s how…

Cloud adoption in finance and health care

The fact that the leading cloud CRM and cloud collaboration providers have launched solutions for the regulated industries almost at the same time could indicate a new trend that isn’t likely to disappear. Namely, after several years of struggles with cloud implementations, organizations that have strict data security policies have started changing their attitudes towards the cloud. A recent survey by Cloud Security Alliance revealed that the cloud adoption in the finance sector increased significantly in 2014.
Also, 61 percent of professionals working in the finance sector are in the process of creating a cloud strategy within their organizations, according to the same survey. Conversely, only 18 percent say they are planning to continue using the private clouds.
Similarly, the healthcare industry is also seeing an accelerated adoption of cloud solutions. Skyhigh Q2 2015 report on the cloud adoption and risk in health care suggests that more institutions are embracing the cloud to increase employee productivity and cut costs.
Compared to previous years, the use of private clouds in these industries is gradually decreasing — mainly thanks to the growing number of secure cloud solutions designed in accordance with the national security standards. Among them, Salesforce Shield and Box Governance are probably the products that would revolutionize the industries and enable even more organizations to migrate sensitive data to the cloud.

Secure offerings

With the ability to support the strict regulations for data access and retention, Salesforce Shield opens a new door for the organizations that were previously limited to using private clouds for security reasons. The service includes a number of security features designed to enable clients to safely work with the cloud without fear of violating federal regulations. More specifically, organizations in regulated industries will now have access to:

  • Platform encryption native to the Salesforce1 platform.
  • Data archive designed to help organizations cut costs by keeping data in “nearline storage.”
  • A field audit trail that enables companies to keep track of changes and ensure they are using only the most accurate data.
  • Event monitoring for the purposes of increasing visibility of the actions associated with the data use.

Unlike Salesforce, which enables organizations to build trusted cloud apps “using clicks, not code,” Box Governance is a new add-on service that adds advanced security features to Box’s widely used sharing and collaboration SaaS. The company has introduced three key capabilities in order to adjust the service to the needs of organizations that need to ensure compliance:

  • Retention management, which helps administrators control preservation and deletion schedules of their sensitive documents.
  • Content security policies that protect clients’ sensitive data.
  • Defensible eDiscovery to comply with data discovery requests.

The impact

Historically, the cloud has been associated with numerous security risks, which is why its adoption in the regulated industries has been notably slow. While the enterprises managed to find an intermediary solution by implementing hybrid clouds, businesses in regulated industries took more time to actually develop efficient public cloud strategies.
This is especially true for the health care industry, which has probably seen the tightest constraints regarding IT infrastructure innovation. The challenges here range from managing employee productivity apps to authentication, access and audit paradigms, as mentioned in a study by SecureLink. Working with highly sensitive citizens’ data, healthcare institutions have had a limited number of IT solutions at their disposal.
For the past few months, however, we’ve been seeing a significant increase in the number of apps that support HIPAA and FINRA compliance for healthcare and finance organizations. Unsurprisingly, this contributed to accelerating the adoption of new IT solutions in the sector, with the cloud leading the innovation process.
The new offerings by Salesforce and Box are likely to become leaders in the regulated industries market given their already established reputation of reliable cloud providers. The precisely-defined features are likely to be welcomed by numerous organizations worldwide, significantly changing the landscape in the regulated industries, as previously mentioned.
However, this does not mean that their struggles associated with IT innovation will be over. Salesforce Shield and Box Governance may make a deep impact on the way regulated industries use the cloud, but a number of other IT challenges will remain.
This mostly relates to the trends of outsourcing IT components and managing their implementation, which will force these industries to keep improving their strategies until they’re sure they’ve found all the right solutions for their needs.

Sorry, Box, but free is not a business model

Free is not a sustainable business model. Everyone knows this, especially those who lived through the dot-com bubble 15 years ago. Everyone, it seems, except for cloud storage investors. Billions of dollars have been poured into cloud storage companies that are giving away their product, with just a tiny sliver of their customer base actually paying for anything.

Offering a free version of your product is nothing new for technology companies, but those who are successful at using this model either give the customer a strong incentive to upgrade to a paid version, or they do as [company]Google[/company] has done and create a massive audience that can then be sold to advertisers. The most popular and heavily-financed cloud storage companies do neither.

Venture capitalists have invested more than $400 million in [company]Box[/company], a cloud storage file sync and share company, and assessed its value at $1.2 billion. Its much delayed IPO ultimately did better than anticipated, pricing above the expected range — even though only about 10 percent of its customers pay anything at all. Unlike Box, Dropbox is not a public company and has never filed for an IPO, so its financials remain private, but it has raised $1.1 billion in financing, $500 million of which is debt, and is valued at around $10 billion. It too has said that most of its customers use the free product.

Mission: Converting users to customers

With Box, a free personal account provides 10 GB of space, plus the ability to sync and share files with other Box users. Similarly, Dropbox offers 2 GB of free space, with the potential to earn up to 16 GB by referring new customers. Just 1 GB of storage will hold more than 15,000 Word documents, on average, and more than 300 images.

Ideally, the free product offers not only enough value to spread virally, but also offers a strong incentive to upgrade so that it sells itself. Unfortunately for Box and Dropbox, the free services more than cover the needs of customers, which is why it should come as no surprise that about 9 in 10 of Box’s customers don’t pay, according to its SEC filings.

What’s more, Box is paying about as much money as it makes to win those paying customers. For the nine month period that ended Oct. 31, 2014, Box brought in $153.8 million in revenues, while spending $152.3 million on sales and marketing alone. Its total net loss for the nine month period was $129 million. If Box has to spend almost everything it makes from current customers to win new ones, what is the use of giving its product away for free, aside from boosting the size of their user base to impress investors? After all, the entire purpose of giving the product away is to introduce people to the product and then entice them to buy. Simply put, Box went public because it had no other choice. It needed another big cash infusion to pay for its losses.

Dropbox’s financial results are not public, but given how similar its model is to Box’s and how much more money Dropbox has raised, there’s little reason to believe that they are significantly different. After all, the more money a company raises, the more of the company the founders have to sell, and no founder enjoys parting ways with equity. The only reason for Dropbox to raise that much money is because the company needs it.

Why pay if you don’t have to?

The marketing value of “free” is minimal in terms of real dollars if very few of those users convert to paying customers. And, more importantly, Dropbox and Box still have to support all those non-paying customers. There is simply no palatable way for them to eliminate free users, and the costs associated with them will continue to rise as the need for storage increases. As more free customers are added into the system, those costs continue to grow, creating a death spiral. Last year, in an effort to increase the number of paid customers, Dropbox reduced the price of a gigabyte of storage by 90 percent. That is a clear indicator that, over time, the price of cloud storage will continue to reduce to zero.

Eventually, these competitive pressures will likely force Dropbox and Box to invest heavily in building their own storage clouds, but that’s a losing game as well, as Nirvanix discovered much to its chagrin last year. Nirvanix had raised $70 million to build a storage cloud to compete with Amazon, Azure and Google. It sealed big partnerships with IBM and Dell, and had won customers like NASA, Fox Sports and National Geographic. But in the end, Nirvanix couldn’t keep up in the ruthless price war between the bigger, commodity cloud storage giants. When Nirvanix abruptly announced it would shut down, customers had mere weeks to move terabytes of data out of their system.

Eventually, investors will cut off the spigot, and, unless they change course, companies like Box and Dropbox will die like Nirvanix.

So, how can these free sync-and-share companies avoid disaster? The most likely scenario is acquisition by a large software or systems vendor who would ultimately integrate this sync and share functionality into their own products as a major feature. To thrive as independents, however, sync and share companies will need to do two things: move beyond a business model built on free and create a more robust and valuable product offering.

It’s not that sync-and-share isn’t valuable — it is! I personally use Dropbox almost every day. But sync-and-share is quickly shrinking from a stand-alone product into just one feature of a much larger integrated workspace. If these companies can create a compelling service that integrates communications, collaboration and project management into a single, intuitive environment, they may have a future. Box is clearly already moving in that direction, but both companies will need to do much, much more if they’re going to win against companies like Slack and their numerous competitors and outpace their own prodigious burn rates.

Finally, these new products will need to provide ample incentives for customers to pay. Having a lot of “customers” that don’t pay you anything is the surest way to repeat a lesson we were all supposed to have learned after the dot-com bubble burst. That lesson was painful enough the first time, and there should be no need to repeat it.

Andres Rodriguez is CEO of Nasuni, a Natick, Massachusetts-based cloud storage-as-a-service company.

Hilary Mason on taking big data from theory to reality

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If you’re interested in assessing how and when a given data technology — deep learning, machine intelligence, natural language generation — can move from the theoretical to commercial use,  Hilary Mason may have the best job around. This week’s guest, the CEO and Founder of Fast Forward Labs, talks about how that startup taps into a wide array of expertise sources– from academic and commercial research, the open source world to “outsider art” in the realms of spam and malware, to come up with new ideas for applications.

One natural language generation (NLG) project, for example, lets a person who wants to sell her house, enter the parameters — square footage, number of rooms etc — then step back to let the system write up the ad for that property. (As a person who makes her living from writing words, all I can say is: “ick.”)

She’s also got an interesting take on opportunities in the internet of things — a term she dislikes — and why the much-maligned title of data scientist has validity. Mason is really interesting so if you’re pressed for time, check out at least the second half of this podcast. And to hear more from her, be sure to sign up for Structure Data in March, where she will return to speak in March.

Shivon Zilis, VC, Bloomberg Beta; Sven Strohband, Partner and CTO, Khosla Ventures; Hilary Mason, Data Scientist in Residence, Accel Partners; Jalak Jobanputra, Managing Partner, FuturePerfect Ventures.

Shivon Zilis, VC, Bloomberg Beta; Sven Strohband, Partner and CTO, Khosla Ventures; Hilary Mason, Data Scientist in Residence, Accel Partners; Jalak Jobanputra, Managing Partner, FuturePerfect Ventures.

As for segment one, Derrick and I discuss Datapipe’s acquisition of GoGrid, the first cloud consolidation move of the new year; the long-awaited Box IPO; and an itty bit on Microsoft’s foray into augmented reality.

So get cozy and take a listen.

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Hosts: Barb Darrow and Derrick Harris.

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Pro tip: If you use cloud storage, bring your own security

If you weren’t already worried about the security of your company’s internal memos and other documents, the recent Sony hack probably fixed that (and reinforced the message that if you don’t want egg on your face, you shouldn’t write embarrassing emails).

Here’s the thing: Security is hard, and as we’ve heard over and over, it requires a mix of technologies from different providers, constant vigilance and good end-user practices to safeguard a company’s crown jewels.

Thanks to widely publicized breaches at Target, Home Depot and — yes — [company]Sony[/company], companies are reconsidering their security practices, according to a new research note from Nomura Securities analyst Frederick Grieb. That means more budget will flow to security next year and also that top-notch Chief Information Security Officers (CISOs) and Chief Security Officers (CSOs) with expertise in both relevant technologies and their company’s business and regulatory requirements are in short supply.

Lesson: Add your own security

In that vein, the director of security for a Fortune 100 healthcare provider recently told me that keeping company data and documents secure, requires that companies layer additional security atop whatever cloud storage and file share service is used. These storage vendors may have good marketing statements, but when you drill down, not very good security stories, he said.

Speaking on the condition that neither his or his company’s name be disclosed, he said the issue for a highly regulated company like his is to ensure that a document — whether it’s a PDF file of a doctor’s report or a digital X-ray of a broken arm — is protected not only at both ends (“at rest”) but also in transit (“in motion”).

That’s because the basic problem of the internet is that traffic goes through any number of third parties. “You don’t know and you can’t trust that your file is private — it’s like sending a postcard in the mail — anyone can read it,” he noted.

To address this, his company is deploying fan-favorite Dropbox but is also using a third-party product, nCrypted Cloud, to encrypt files before they’re sent, which leaves the encryption keys in the hands of the customer. The cloud storage provider, whether it’s [company]Dropbox[/company] or Box or Google Drive or Microsoft OneDrive does not hold those keys and cannot access the files or disclose them to third parties. (Neither does nCrypted Cloud, which competes with WatchDox and Sookasa, for that matter),

Shutterstock/deepspacedave

He’ s also trying out a new nCrypted Cloud product, Infinite Mail, that strips out attachments embedded in messages, and replaces them with secure links that the intended recipient can open as set up by an IT administrator. It supports popular [company]Microsoft[/company] and [company]Google[/company] email products.

If the problem of secure mail can be solved, this security exec sees possibly huge perks down the road. Currently, the cost of printing and mailing reports and benefits documentation is humongous — it can cost a company like his up to $100 million a year. If there is a way to guarantee secure digital delivery of such documents to the right end users, the cost savings could be huge.

Box CIO decamps for Yahoo

Ben Haines, who was named Box’s first CIO 18 months ago, is now the VP in charge of applications at Yahoo.

There comes a point when it is not just about storage space

Is the difference between cloud storage provides about free space? In a word, no. I wrote about the cloud storage wars and potential bubble here:

The cloud storage wars heat up

http://avoa.com/2014/04/29/the-cloud-storage-wars-heat-up/

4 reasons cloud storage is not a bubble about to pop

http://avoa.com/2014/03/24/4-reasons-cloud-storage-is-not-a-bubble-about-to-pop/

Each of the providers is doing their part to drive value into their respective solutions. To some, value includes the amount of ‘free’ disk space included. Just today, Microsoft upped the ante by offering unlimited free space for their OneDrive and OneDrive for Business solutions.

Is there value in the amount of free space? Maybe, but only to a point. Once they offer an amount above the normal needs (or unlimited), the value becomes a null. I do not have statistics, but would hazard a venture that ‘unlimited’ is more marketing leverage where most users only consume less than 50GB each.

Looking beyond free space

Once a provider offers unlimited storage, one needs to look at the feature/ functionality of the solution. Not all solutions are built the same nor offer similar levels. Enterprise features, integration, ease of use and mobile access are just a few of the differentiators. Even with unlimited storage, if the solution does not offer the feature you need, storage value is greatly diminished.

The big picture

For most, cloud storage is about replacing a current solution. On the surface the amount of free storage is a quick pickup. However, the real issue is in the compatibility and value beyond just the amount of free storage. Does the solution integrate with existing solutions? How broad is their ecosystem? What about Single Sign On (SSO) support? How much work will it take to implement and train users? These are just a few of the factors that must be considered.