By Brad Slingerlend
In normal times predictions are difficult enough. During a pandemic? Forget about it.
However, if we look back on the dot-com crash, the Sept. 11, 2001, attacks and their aftermath that compounded its impact, and the 2008 financial crisis, there is a common thread: Recessions and crises ultimately accelerate the shift to the digital economy.
And one consequence of the coronavirus is becoming increasingly easy to see: A surge in cloud computing and bandwidth demand with positive implications for many parts of the technology sector.
With schools, retailers, leisure facilities and commercial premises being shuttered, and travel all but grinding to a halt, people are spending a lot more time at home. The resulting increase in remote work, video conferencing and streaming, distance learning and online gaming is putting a peak-time strain on cloud computing. Behavior is changing and it could stick.
Telecom Italia reported a 70% jump in traffic, driven in no small part by children playing Fortnite. Netflix /zigman2/quotes/202353025/composite NFLX +1.31% , YouTube and Amazon Prime are throttling video speeds to counter a surge in streaming at the behest of the European Union. In the U.K., BT PLC said weekday daytime demand on its fixed-line network rose 35% to 60% last week, while in the U.S. Verizon /zigman2/quotes/204980236/composite VZ +0.28% reported a 75% increase in video-game usage since self-quarantine began, along with a 20% rise in overall traffic.
That may be the tip of the iceberg, as several states issue shelter-in-place orders, which currently restrict the movements of about 80 million U.S. residents.
While computing capacity can be switched across geographies and workload demand varies across time — TV and gaming in the evenings, enterprise apps during the day — a prolonged and pronounced spike in usage could lead to Amazon Web Services, Microsoft /zigman2/quotes/207732364/composite MSFT +0.64% Azure and Alphabet’s /zigman2/quotes/205453964/composite GOOG +1.23% /zigman2/quotes/202490156/composite GOOGL +1.30% Google Cloud favoring apps such as banking and health care over games and video streaming, which creates the potential for premium pricing tiers.
It also shows an ever-increasing need for vastly more compute power as we enter the age of the Internet of Things, with the potential for trillions of smart, connected, always-on devices.
Capacity cannot be easily added overnight. According to Next Platform, the market for cloud servers was about one million units in the fourth quarter of 2019, and at a rough estimate Amazon.com /zigman2/quotes/210331248/composite AMZN +0.32% might typically add about 2,000 servers a day, or one million a year, to meet rising demand and to replace aging infrastructure. Should traffic double within a few weeks, that install number could surge about 10 times to maintain the same buffer to peak capacity. It’s clearly not easy to ramp component production and testing to meet such a spike, particularly with China only beginning to recover from the pandemic.
Even with price deflation in cloud components and services, volume expansion augurs well in the short term for Intel /zigman2/quotes/203649727/composite INTC +0.85% , which accounts for about 90% of server chips, and Advanced Micro Devices /zigman2/quotes/208144392/composite AMD +0.55% , which supplies a bulk of the remainder, along with memory makers Micron Technology /zigman2/quotes/205710729/composite MU +1.26% and Samsung Electronics /zigman2/quotes/202367843/delayed SSNLF 0.00% , along with Nvidia /zigman2/quotes/200467500/composite NVDA +0.20% , which provides graphics cards to power all those games and artificial intelligence cloud workloads.
As it bids to reduce its dependency on Intel and AMD, Amazon has built a Graviton 2 server chip in-house using ARM Holdings architecture that’s highly tuned to AWS needs, while Ampere Computing has also designed an ARM-based chip. This may help Softbank-owned ARM, whose semiconductors mostly power mobile phones today, to make the headway that has so far eluded it in the server space five years after it targeted a 25% share by 2020.
Away from hardware, it seems logical that other possible beneficiaries of an accelerating shift to cloud-based computing caused by the COVID-19 outbreak could be makers of collaboration software such as Microsoft, which said daily active users of its Teams platform rose 37.5% to 44 million March 18 from a week earlier, along with Atlassian, Zendesk /zigman2/quotes/209571012/composite ZEN +0.50% and Adobe /zigman2/quotes/200389143/composite ADBE +1.48% Document Cloud. Security and identity-protection providers such as Okta /zigman2/quotes/210420951/composite OKTA -0.69% , SailPoint Technologies /zigman2/quotes/208922889/composite SAIL +4.37% and CyberArk Software /zigman2/quotes/206810080/composite CYBR +1.44% may also benefit.
Only time will tell. Meanwhile, the focus is on putting this humanitarian and economic crisis firmly in the rear-view mirror while we look forward toward the continuing digital transformation of the economy, powered by an accelerating shift to the cloud.
Brad Slingerlend is the author of the SITALWeek newsletter and co-founder of NZS Capital, an investment company.