It’s safe to say that most people enjoy a good magic trick from time to time, but a street hustle is an entirely different matter. The three card monte is a con where the victim is tricked into thinking they have an edge on the system, but the victim is actually rigged to lose. The cloud industry has some problems that are pinned to the perceptions of hype and well, bullshit. One thing that doesn’t help is when companies get caught (or accused of) inflating financial reports through what is basically a three card con game.
There’s a term for this called “cloud washing” and if the term isn’t familiar, the practice should be. That’s because it describes packaging technology with the label of “cloud” for the purpose of selling things under the hot product banner. It is, for lack of a better description, a disgrace. As though the term “cloud” wasn’t nebulous enough, “cloud washing” confuses customers, it confuses investors, and it doesn’t do anything to advance the industry.
Industry giants and corporate shenanigans
Cloud washing is a label that is easily applied to small hosting companies, standard application publishers that have shoved their wares onto hosted services, and even email providers, to name a few. It is typically in the realm of a small company, but cloud tricks aren’t limited to this segment in any way. In recent years, as industry monoliths have staked a greater claim and dependence on cloud revenue, some of the most famous names in the industry have been accused of being creative with their cloud profit reports.
Financial reporting on cloud revenue has a history of being fuzzy. For example, Microsoft is currently facing criticism for its segmented reporting between “business cloud” and the company’s consumer cloud efforts. Oracle is facing a lawsuit placed by a former employee that refused to take part in an alleged attempt to inflate cloud-based revenue figures. Made public in a lawsuit, it is alleged that the employee’s refusal to part in the scheme, followed by a threat made by the employee to go public with the situation, resulted in an unfair dismissal. Oracle and its deep pockets are planning on filing a countersuit against the former employee. Several years ago, IBM was similarly accused and investigated by the Securities and Exchange Commission (SEC) for misleading investors on what the company defined as cloud products in its official reports.
Gartner points to an obvious sham
Gartner, the highly trusted research and advisory firm, produced a paper in early 2016 that called the industry out for its creative accounting methods for reporting the success of cloud businesses. Titled Vendor Cloud Revenue Claims – Should Enterprises Care?, the position was made that companies are pressured to appear to perform through the numbers they report, potentially to appear as leaders in the industry, perhaps to stoke investment on Wall Street, or perhaps to maximize their cloud credentials. Salesforce.com is known to package in the revenues from dedicated hardware into its Software as a Service figures. Should that count as “cloud?” Microsoft reports downloaded and packaged software figures into the numbers it shares regarding its cloud operating revenues. This includes all of those Office 365, Azure, and Dynamics CRM product reports, which have genuine cloud elements. Is that all cloud profit? Although arguments could (and are) made for how these numbers are put together, the obvious answer is no, this is some kind of game.
Although rare, there are examples of companies creatively stacking reports to suit their business needs. Amazon’s Web Services (AWS) division is a recent and rather public example of this. Amazon, the parent company of AWS, had long been reporting relative strength by obfuscating how much of Amazon’s profit run depended on AWS. To the surprise of few, when Amazon started showing their profit hand just a few short months ago, the massive profitability of its cloud operations were apparent. Although it hasn’t happened (yet), at the time industry pundits believed that the new disclosures were a potential sign of a coming spinoff.
Cloud industry: predisposed
From the beginning of the era of cloud, there could be no other fate. I vividly remember the VP at the managed hosting company I once worked for emphatically coining the phenomenon as “marketing bullshit” and shutting down what could have been a remarkably productive team conversation. Years on, that company is a “leader” in cloud and it still makes me laugh. Not to be outdone, I recently discovered a Magento-focused hosting company that sold itself as cloud-everything, but wouldn’t know a cloud if it hit them in the face. Suffice it to say that everyone is in the cloud game now. Every product is a cloud product, because it makes money, and in a way, that makes me laugh too.
Cloud washing isn’t pretty. People get hurt, money gets made, money is lost, reputations get crushed, and sometimes they get made. At the end of the day, you could write volumes of books on the one subject alone of cloud revenue reporting. There seems to be a vast range of definitions in this field that count on the ambiguous opportunity that is afforded by the term “cloud” itself.
Washing our hands of cloud washing
There may not ever be an ideal time for some kind of change, especially with the economy in the fragile state that many have still not acknowledged. One can only hope that for the good of the industry, the benefit of investors, and the benefit of customers that once and for all some sort of legal precedent for defining both cloud products and cloud profits might finally be made.
In terms of what can be done, the front lines of the industry and the investors out there have to hold these companies and their reports accountable for sensible reporting. Recognize what a fluffed up report looks like. When a vendor spouts overly-impressive cloud revenue numbers, read between the lines, and break down the figures in a way that makes sense to the real world. Ask whether those numbers include non-cloud services in the ultimate calculation. You can also ask whether the numbers being shared include services that are not significantly being used. The object is to drill down and get down to what the numbers are really saying. It's time to stop buying into the fairy tales and cheap card tricks.
Photo credit: David