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Amazon's Latest IT Disruption Is Aimed at Those Who Hate IT

Aaron Pressman
The Exchange

Thousands of small- and medium sized-business owners may be getter closer to their dream IT set up: no set up.

Amazon (AMZN) this week jumped into the tiny but fast-growing market to offer entirely virtual Windows computing. Starting at $35 a month, Amazon’s new WorkSpaces service runs a powerful Windows PC from a massive Amazon data center that a user can control from their phone, tablet or laptop.

VMWare (VMW) last month bought its way into the hosted desktop space and Microsoft (MSFT) is rumored to have its own play, known by the code name Mohoro, coming next year. Until the recent moves, Citrix Systems (CTXS) largely had the field to itself over the past few years.

Using one of these services, a mobile worker could use their iPad or Kindle Fire HDX to write macros for an Excel spreadsheet, process digital video into a new format or use other software features too powerful for a tablet. Employers could save a significant amount of money and would not have to deal with maintaining a finicky and often insecure network of Windows computers.

A tiny, growing market

Still, the market for this kind of virtual desktop in the cloud is tiny – about $30 million at Citrix, the leading player, according to Nomura Securities analyst Rick Sherlund. VMWare just acquired its desktop play, Desktone, last month for an undisclosed sum and said the additional revenue would be immaterial, at least for now.

“This is something that’s been building for quite a while but things are really starting to heat up now,” says Brett Waldman, who tracks the market as an analyst with International Data Corporation.
The market remains tiny but it’s growing fast, Waldman says. Sales of virtual desktop services will make up almost 20% of the $3.5 billion market for virtual client computing by 2016, he estimates.

“[Virtual desktop services are] potentially appealing to the small businesses with 25 to 500 employees who don’t have their own data center and want out of the IT business,” says Ken Oestreich, senior director of product marketing for the business at Citrix.

Customers see perhaps the greatest benefit for mobile workers who can take their desktop environment wherever they go. And there’s no risk from a lost laptop, since all the data are stored in the cloud. It also allows companies to keep control of their data and applications when they allow employees to use their own devices at work, via so-called bring your own device, or BYOD, policies.

The technology isn’t terribly new. All the computing happens on the server and just the screen image is sent to the user over the Internet. But the market is small because most large corporations want to keep critical data on their own machines. They’ve opted for the more complicated and expensive technique of running virtual desktops from their own servers. That’s where Citrix and VMWare currently garner serious revenues.

Shares take a hit

In fact, stocks of both companies took a hit after Amazon’s announcement. Shares of Citrix lost 10% on November 13, the day Workspaces was unveiled, and the next day shares of VMWare lost 4%.
Why the outsized reaction? Some investors fear Amazon’s aggressive pricing and CEO Jeff Bezos's penchant for surprising and disrupting the IT market will inevitably lead to an offering tailored for big companies, too.

Amazon's web services unit, AWS, already has strong relationships with many large corporate IT departments, notes John Abbott, an analyst with 451 Research. And the security and portability features of Workspaces could be appealing to financial services and healthcare companies. "It will be interesting to see which markets AWS targets first and how," Abbott says. "The fact that AWS serves global markets specifically meets the needs of large financial service companies, to the degree they can deal with regional privacy demands."

Citrix, for its part, says it welcomes the new entrants and expects their brand recognition and marketing muscle will expand the market overall.

“Taking a step back, this is good for the market,” says Oestreich. “It’s good for businesses to know that they don’t need to be chained to a physical desktop anymore.”

Citrix also doesn’t offer to do the actual hosting for customers. Instead, it licenses software to thousands of third-party hosting providers. Amazon, VMware and eventually Microsoft may be more in direct competition with those smaller vendors.

Ordinary consumers may also be tempted to toss out their Windows computers and use an Amazon Workspace when they need more power than an iPad can offer. But that’s not expected to become a large part of the market due to the expense.

Another new Amazon service may be more useful for consumers on mobile devices. Dubbed Appstream, the service lets a developer create a program that runs on a high-powered server on the Internet and only shuffles the actual pixels to the end user’s iPad or Kindle Fire tablet. That allows a game maker, for example, to create an app with detailed, vivid graphics requiring a graphics processing chip far more powerful than the one in the iPad.

That could put mobile games in even greater competition with console games, just as Sony (SNE) and Microsoft are coming out with their next generation of gaming boxes.

For Amazon, that could be just one more IT business in line for overthrow.