Last week, NVIDIA announced that it had agreed to acquire UK-based chip company Arm from Japanese conglomerate SoftBank in a deal estimated to be worth USD 40 billion. In 2016, SoftBank had acquired Arm for USD 32 billion. The deal is set to unite two major chip companies; power data centres and mobile devices for the age of AI and high-performance computing; and accelerate innovation in the enterprise and consumer market.
Rationale for the Deal
NVIDIA has long been the industry leader in graphics chips (GPUs), and a smaller but significantly profitable player in the chip stakes. With graphic processing being a key component in AI applications like facial recognition, NVIDIA was quick to capitalise. This allowed it to move into data centres – an area long dominated by Intel who still holds the lion’s share of this market. NVIDIA’s data centre business has grown tremendously – from near zero less than ten years ago to nearly USD 3 billion in the first two quarters of this fiscal year. It contributes 42% of the company’s total sales.
The gaming PC market has been the fastest-growing segment in the PC market. The rare shining light in an otherwise stagnant-to-slightly declining market. NVIDIA has benefited greatly from this with a huge jump in their graphics revenues. Its GeForce brand is one of the most desired in the industry. However, with their success in AI, NVIDIA’s ambition has now grown well beyond the graphics market. Last year NVIDIA acquired Mellanox – who makes specialised networking products especially in the area of high-performance computing, data centres, cloud computing – for almost USD 7 billion. There is clearly a desire to expand the company’s footprint and position itself as a broad-based player in the data centre and cloud space focused on AI computing needs.
The acquisition of Arm though adds a whole new dimension. Arm is the leading technology provider in the mobile chip market. A staggering 90% of smartphones are estimated to use Arm technology. Arm is the colossus of the small chip industry – having crossed 20 billion in unit shipments in 2019.
Acquiring Arm is likely to result in NVIDIA now having a play in the effervescent smartphone market. But the company is possibly eyeing a different prize. Jensen Huang, Founder and CEO of NVIDIA said “AI is the most powerful technology force of our time and has launched a new wave of computing. In the years ahead, trillions of computers running AI will create a new internet-of-things that is thousands of times larger than today’s internet-of-people. Our combination will create a company fabulously positioned for the age of AI.”
With thoughts of self-driving cars, connected homes, smartphones, IoT, edge computing – all seamlessly working with each other, the acquisition of Arm provides NVIDIA a unique position in this market. As the number of connected devices explodes, as many billions of sensors become an ubiquitous part of 21st century living, there is going to be a huge demand for low power processing everywhere. Having that market may turn out to be a larger prize than the smartphone market. The possibilities are endless.
While this deal is supposed to be worth around USD 40 billion, somewhere between USD 23-28 billion is going to be paid in the form of NVIDIA stock. This brings us to an extremely interesting dynamic. At the beginning of 2016 NVIDIA’s market cap was less than USD 20 billion. Mighty Intel was at USD 150 billion. AMD the other player in the market for chips who also sell graphics was at a mere USD 2 billion. In July this year, NVIDIA’s value passed Intel’s and today it is sitting at around USD 300 billion! Intel with a recent dip is now close to USD 200 billion. AMD too with all the tech-fueled growth in recent years has grown to just shy of USD 100 billion market cap.
What this tells us is that the stock portion of the deal is cheaper for NVIDIA today by around 55% compared to if this deal was consummated on 1st January 2020. If there was a right time for NVIDIA to buy – it is now. This also shows the way the company has grown revenue at a massive clip powered by Gaming PCs and AI. The deal to buy Arm appears to be a very good idea, which would establish NVIDIA as a leader in the chip industry moving forward.
While there appears to be some good reasons for this deal and there are some very exciting possibilities for both NVIDIA and Arm, there are some challenges.
The tech industry is littered with examples of large mergers and splits that did not pan out. Given that this is a large deal between two businesses without a large overlap, this partnership needs to be handled with a great deal of care and thought. The right people need to be retained. Customer trust needs to be retained.
Arm so far has been successful as a neutral provider of IP and design. It does not make chips, far less any downstream products. It therefore does not compete with any of the vendors licensing its technology. NVIDIA competes with Arm’s customers. The deal might create significant misgivings in the minds of many customers about sharing of information like roadmaps and pricing. Both companies have been making repeated statements that they will ensure separation of the businesses to avoid conflicts.
However, it might prove to be difficult for NVIDIA and Arm to do the delicate dance of staying at arm’s length (pun intended) while at the same time obtaining synergies. Collaborating on technology development might prove to be difficult as well, if customer roadmaps cannot be discussed.
Business today also cannot escape the gravitational force of geo-politics. Given the current US-China spat, the Chinese media and various other agencies are already opposing this deal. Chinese companies are going to be very wary of using Arm technology if there is a chance the tap can be suddenly shut down by the US government. China accounts for about 25% of Arm’s market in units. One of the unintended consequences which could emerge from this is the empowerment of a new competitor in this space.
NVIDIA and Arm will need to take a very strategic long-term view, get communication out well ahead of the market and reassure their customers, ensuring they retain their trust. If they manage this well then they can reap huge benefits from their merger.
Alibaba’s partnership with Equinix, the interconnection and data centre company dates back a few years. In 2017 the partnership started providing enterprises with direct, scalable access to Alibaba Cloud via the Equinix Cloud Exchange in 5 of their global data centres.
Last week the partnership was further strengthened by Equinix extending the reach of Alibaba Cloud via its network of Equinix Cloud Exchange Fabric (ECX Fabric) Cloud interconnection platform. The deal will widen Alibaba’s cloud reach in the US, EMEA, and the Asia Pacific region for customers to privately connect with Alibaba’s cloud. Under the partnership, Alibaba will integrate its API with Equinix ECX Fabric to facilitate direct and secured connections to Alibaba Cloud, across these regions:
9 US metros. Chicago, Dallas, Denver, Los Angeles, Miami, New York, Seattle, Silicon Valley and Washington DC
5 Asia Pacific hubs. Hong Kong, Jakarta, Singapore, Sydney and Tokyo
3 hubs in EMEA. Dubai, Frankfurt and London
The deal also gives Alibaba direct access to Equinix’s interconnected ecosystem of over 9,700 customers including enterprises, cloud and network operators, and IT service providers.
The Hybrid Cloud Push
In the last 18 months or so, the industry has seen a greater push in private/hybrid cloud or multi-cloud adoption. Ecosystm Principal Advisor Andrew Milroy says, “As enterprises move to hybrid cloud infrastructures, the world’s leading IaaS providers, including Alibaba Cloud, are expanding their private cloud and hybrid cloud services.”
Many of these IaaS providers may not have the capabilities to provide a hybrid cloud offering at a global level. Partnerships such as the one between Equinix and Alibaba Cloud may well be the solution. Milroy says, “Equinix offers interconnection services from multiple sites across the globe. These interconnection services are necessary for the provision of private and hybrid cloud services, on a global scale, offering the level of performance and security that organisations want.”
“In order to compete with AWS, GCP and Microsoft, Alibaba Cloud needs to be able to scale its private and hybrid cloud offerings globally. Equinix can enable them to do this. At the same time, Equinix will also benefit from Alibaba Cloud’s growth into newer markets, which will lead to an increased demand for its interconnection services.”
Cloud adoption, especially in the small and medium enterprise (SME) sector is expected to continue to rise. The Ecosystm Business Pulse Study shows that only 16% of Australian organisations had not increased their cloud investments after the COVID-19 crisis and its impact on the economy.
Ecosystm Principal Advisor, Tim Sheedy says, “The current pandemic has highlighted the digital ‘haves and have nots’ in Australia. The NBN has helped to narrow the gap, but too many in rural and regional Australia continue to suffer the tyranny of distance. Businesses and government departments have been reluctant to relocate outside of the major cities due to the lack of internet and data centre infrastructure. Investing in data centres in rural and regional locations will not only help to close the digital divide but also remove a significant barrier that stops businesses from investing in and relocating to locations out of cities.”
Growing Australia’s Data Centre Footprint
This week, Australia’s Leading Edge Data Centres and Schneider Electric announced a AU$30 million project where Schneider Electric will provide Tier-3-designed prefabricated data centre modules for Leading Edge’s six locations in Australia. Each site will host 75 racks with 5kW power density to support computing operations and minimise data exchange delays. Ecosystm Principal Advisor, Darian Bird says, “The inaccessible nature of some sites makes them suitable for prefabricated data centres, which are plug-and-play containers that can be set up and maintained by a relatively small IT team. Standardisation in edge data centres and automation are key to remote management for anyone deploying distributed infrastructure.”
This announcement follows the news that Leading Edge has secured an investment of AU$20 million from Washington H. Soul Pattinson to construct 20 Tier-3 data centres across Australia. They have also received funding from the SparkLabs Cultiv8 2020 accelerator group. The funding will be used to build more than 20 Tier 3 data centres across regional Australia to provide faster internet speeds and direct cloud connectivity.
This will impact businesses that host mission-critical applications, and stricter uptime requirements, and is expected to benefit IoT, AgriTech and telecom industry applications.
Impact on Industry
Edge connectivity will create a seamless experience for the users to take advantage of faster computing with a local host, lower latency by taking connectivity to where operations reside, and data sovereignty by keeping data within the region, aiding in the development of Australia’s Digital Economy.
Sheedy sees this as an opportunity for primary industries. “One of the real challenges for farms and other agribusinesses investing in IoT and other tech-based solutions has been the lack of local or nearby computing infrastructure that will support applications that require low latency. Leading Edge’s investments in providing data centres in rural and regional Australia will mean these businesses can accelerate their digital transformations.”
With the simultaneous rollout of 5G, Smart City initiatives will also benefit from edge data centres. “Investment in edge infrastructure is likely to take off and follow the 5G coverage map across Australia. We will see operators take advantage of their vast network footprint and combine micro data centres with some 5G antenna locations,” says Bird. “Smart City initiatives will be made possible by 5G connected IoT devices but computing at the edge will be needed to keep, for example, public safety systems, operating in real-time. Many monitoring systems will require local data analysis to be effective.”
Bird also sees potential impacts on the Entertainment industry. “The COVID-19 restrictions and the launch of new services such as Disney+ and Binge in Australia will ensure streaming video continues its impressive growth trajectory. Even facilities such as sports stadiums are beginning to deliver in-person digital experiences to grab back attention from their online competitors. Positive user experience is crucial here and low latency is a must. We’ll see a shift towards edge computing delivered on-site as part of a distributed network. Regional data centres and local caching have always been vital for content delivery to ensure the quality of service and reduce bandwidth costs but the scale is unprecedented.”
Bird talks about potential retail opportunities in the future. “We may see anchor tenants at malls offering their excess capacity to smaller, nearby stores that need the benefits of edge but can’t justify the investment, similar to the way Amazon launched AWS.”
This year Google Cloud is set to expand the number of locations to 26 countries. Earlier in the year, Google CEO Sundar Pichai had promised to invest more than US$ 10 billion in expanding their data centre footprints in the USA and they have recently opened their Salt Lake City data centre. Last week Google announced four new data centre locations in Doha (Qatar), Toronto (Canada), Melbourne (Australia), and Delhi (India). With Australia, Canada and India, Google appears to be following the same policy they followed in Japan – where locations in Osaka and Tokyo give customers the option to have an in-country disaster recovery solution. Doha marks Google Cloud’s first foray into the Middle East. While the data centre will primarily cater to global clients, Google has noted a substantial interest from customers in the Middle East and Africa.
Mortensen says, “Google’s new data centres can be seen as an organic geographical expansion of their cloud services but there are a few more factors at play. With data privacy laws getting stricter across the globe, the ability to offer localised data storage is becoming more important – and India is a very good example of a market where keeping data within the geographical borders will become a must.”
“The expansion will also help the development of Google’s own edge computing services going forward. As we noted in our Ecosystm Predicts document, we believe that Cloud and IoT will drive edge computing (which is tightly tied to 5G). Edge computing will function in a symbiotic relationship with centralised data centres where low latency is important. The geographical expansion of Google’s data centre presence will thus also help their push towards edge computing services.”
Google offers their cloud infrastructure and digital transformation (DX) solutions to customers in 150 countries. Not only are they expanding their data centre footprint, but they are also creating industry differentiation. They have targeted industry-specific solutions that deliver new digital capabilities in 6 key verticals – financial services; telecommunications media and entertainment; retail; healthcare and life sciences; manufacturing and industrial; and public sector.
Partnering with Telecom Providers
Last week also saw the unveiling of the Global Mobile Edge Cloud (GMEC) aimed at the telecom industry’s need to transform and the challenges it faces. The telecom industry – long considered an enabler of DX in other industries – stands at a crossroads now. It is time for the industry to transform in order to succeed in a challenging market, newer devices and networking capabilities, and evolving customer requirements – both consumer and enterprise. Talking about the impact of 5G on telecom providers, Ecosystm Principal Advisor, Shamir Amanullah says, “5G is an enterprise play and leading tech giants, carriers and the companies in the ecosystem are collaborating and inking partnerships in order to create solutions and monetise 5G opportunities across industries.”
Google Cloud announced a partnership with AT&T, which is meant to leverage AT&T’s 5G network and Google Cloud’s edge compute technologies (AI and machine learning, analytics, Kubernetes and networking) to develop a joint portfolio of 5G edge computing solutions. This is part of Google’s larger strategy of supporting telecom providers in their efforts to monetise 5G as a business services platform. Through the GMEC, Google Cloud will partner with carriers to offer a suite of applications and services at the edge via 5G networks.
The telecom industry is a key focus as Google aims to help operators take 5G to market, by creating solutions and services that can be offered to enterprises. This includes better customer engagement through data-driven experiences, and improvement of operational efficiencies across core telecom systems. Telecom providers such as Vodafone and Wind Tre are leveraging Google to improve customer experience through data-driven insights.
Amanullah says, “Google Cloud already has thousands of edge nodes inside the carrier networks which will be enabled for use by enterprises, providing access to data analytics, AI and machine learning capabilities. Carriers can offer enterprises these data-driven solutions, to transform the customer experience they offer. Google will also create solutions which will enable carriers and enterprises to improve infrastructure and operational efficiencies through modern cloud-based Operations Support Systems (OSS) and Business Support Systems (BSS).”
Mortensen also thinks that the data centre expansion should be seen in the light of Google’s GMEC push. “Both India and the Middle East are big potential markets via the local telecom providers.”
4.5/5 (2) In the Top 5 Cloud Trends for 2020, Principal Analyst Claus Mortensen observed that 2020 is a do-or-die year for Oracle if they wanted to remain as a key contender in the Cloud market. Mortensen said, “Oracle has not been able to break into Cloud in the same way as their competitors and has so far not made the same “leap of faith” into this area as similar companies have. Unless the company makes a clear decision about their Cloud strategy and succeeds in communicating it to the market in 2020, Oracle may quickly find itself more of a niche Cloud player going forward.”
Oracle’s intentions to remain one of the leading global Cloud providers becomes clear as they actively expand their global coverage. Last week Oracle announced that, as part of their ongoing regional expansion plan, they have added local regions in Jeddah (Saudi Arabia), Melbourne (Australia), Osaka (Japan), Montreal (Canada) and Amsterdam (The Netherlands). This expands the reach of Oracle’s Generation 2 Cloud to 21 independent locations, and Oracle intends to further add 15 locations by the end of 2020. At OpenWorld last year, Oracle had announced their plans to have Cloud sites dedicated to the enterprise market as well as government customers.
Dr Alea Fairchild, Principal Advisor Ecosystm, thinks that Oracle appreciates the needs of their enterprise customers. “Oracle understands the sensitivity of the enterprise to the location and availability of their data, which remains an issue with Cloud implementations involving large data sets. They have broken some ground as the first public Cloud vendor with data centres in Saudi Arabia, and are putting efforts in to offer a minimum of two regions in almost every country in which they operate,” says Dr Fairchild. “From a corporate user’s perspective, regional data management and appropriate licensing models are still sensitive spots when it comes to database management.”
Getting Ready for the Hybrid Cloud Market
Oracle also appears to be ramping up for the growing hybrid Cloud market. Ecosystm research shows that more than a third of global organisations have adopted the hybrid Cloud and this will only increase. Given the increased uptake of hybrid and multi-cloud environments, Oracle offers preconfigured links between Oracle and Microsoft Azure cloud regions in the eastern states of the US, London, and Toronto, as part of the Cloud interoperability partnership announced in June 2019. Last year, saw another mutually beneficial partnership between VMWare and Oracle, that supports their customers’ hybrid cloud strategies, allowing the VMware Cloud Foundation to run on Oracle Cloud Infrastructure. Organisations can also avail technical support for Oracle software running in VMware environments both in on-premise data centres and Oracle-certified cloud environments.
“Oracle’s Generation 2 Cloud is now available in 21 locations and is on track to have a total of 36 Cloud regions up and running by the end of the year,” adds Dr Fairchild. “But when compared to AWS, Microsoft and IBM, Oracle still holds a fraction of the market share. They can be seen as a niche infrastructure provider, but indeed the partnerships with Microsoft and VMware are set to help Oracle’s Cloud business make traction with companies that are adopting multi-cloud strategies.”