Beware: OpenStack Cloud Bubble Approaches

Numerous companies focused on OpenStack -- the open source cloud platform -- are getting funded and acquired. No doubt, OpenStack has serious momentum. But it's starting to look like the Linux market in the late 1990s, when numerous players got funding or went public -- only to collapse in the shadow of Red Hat. Here's why OpenStack 2015 could be just like Linux 1999 all over again.

First, the good news: OpenStack, after initial backing from Rackspace and NASA, has grown to become an industry ecosystem -- backed by hardware, software and cloud companies. In theory, OpenStack allows cloud providers, telcos and corporations to more rapidly build and manage public or private clouds. Moreover, corporations can move their workloads between on-premises deployments and off-premises clouds.

OpenStack Goes Boom

OpenStack-related business revenue is expected to skyrocket to more than $1 billion in 2015, according to 451 Group. Investors and vendors are chasing those dollars. Just like the Linux market's early days, numerous companies are introducing their own OpenStack distributions. Moreover, hardware, software and cloud companies are introducing OpenStack support across their product lines. Key examples:

Bottom line: A lot of people are betting a lot of money on OpenStack. But not all of the bets are going to pay off.

Remember The Linux Bubble?

Today's OpenStack market looks a lot like the Linux market around 1999. Just about every vendor (other than Microsoft) was slapping "Linux support" on their products just to jump on the wave. Yes, the Linux market grew and expanded. And it lifted many boats. But quite a few capsized as well.

Giants like Dell, HP, IBM and Oracle adjusted their hardware and/or software strategies to support Linux. The moves triggered billions of dollars in new Linux-related product sales. At the same time, numerous software companies introduced their own Linux distributions -- similar to the current OpenStack distribution trend.

Red Hat emerged as the commercial Linux leader in corporate enterprises. But plenty of companies imploded.

Big IPO, Bigger Implosion

Anybody else remember VA Linux's big IPO in 1999? Shares were priced at about $30, and closed at about $240 during the opening day of trading. Mainstream media like The New York Times pointed out that VA Linux had no clear path to profits, but Day One investors didn't care.

Those who stuck around got burned. A year after its IPO, VA Linux shares were down to about $10. The company ultimately imploded. Moreover, dozens of additional Linux-focused companies never made it past the funding stage. There was no IPO. There was no successful exit. Generally speaking: Red Hat earned the profits, while many rivals drowned in red ink.

The Lesson for OpenStack

As a whole, today's Linux industry -- more than a decade after VA Linux's implosion -- remains strong and continues to grow.

And therein resides the lesson: I believe the OpenStack industry will continue to grow and thrive. But don't mistake an overall industry's health for individual company health.

An OpenStack bubble is nearing. I think it will pop in 2015. Some companies will survive and thrive. Many won't. As an investor, CIO or IT entrepreneur -- consider your OpenStack bets carefully before opening your wallet. 

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