Virtualization And Cloud Computing

There is more and more talk of cloud computing lately, however what is not clear is how data center managers can integrate this into their capacity planning in a standardized way. Most of the various approaches to external cloud computing on offer today work differently from vendor to vendor, or based on the technology area they are trying to solve. To be truly valuable the data center manager needs to be able to take advantage of this technology using extensions of their current processes and management technologies.

As regular virtualization has shown it has become far easier for a new environment to be brought online. This is a huge boost to datacenter flexibility, allowing for far easier management of environment growth, whether this is ongoing or to deal with spikes in demand or seasonality. It also allows for rapid failover of environments and easier launch planning when new environments are needed.

These advantages however have downsides. They can lead to environment sprawl and a lack of control in terms of change management. This can lead to security risks, reliability issues and a lack effective business continuity planning.

Recognizing these issues, vendors of virtualization software are working to offer management tools to support both environment deployment, as well as the processes that have allowed datacenter managers to gain control of their environment such as change management, security, reliability and continuity planning.

Based on this a logical conclusion is that access to the cloud should be managed in a similar way to access and control of virtual environments. What is better than being able to reuse the tools and processes built to manage my virtualized datacenter to access the cloud? This allows to some extent the scaling back of physical procurement and planning processes, replacing those with contracts with the cloud provider. They should be able to specialize in physical capacity management and setup, and in theory get better pricing on HW based on their relative size.

For this to work however, standards will need to be developed to support deploying and managing virtual environments based in the cloud. Given the fragmented state of this market between virtualization providers, cloud providers with their own technologies and ISPs, how this will happen remains to be seen.
This being said VMware appears to recognize this potential and are approaching it via their vCloud Initiative. Given the attractiveness of this model it seems likely other virtual environment vendors will follow the same approach.

One needs to recognize that the cloud still presents issues. As anyone who has worked with a hosted application knows, interacting with its APIs brings very different security and performance challenges than a purely internally hosted application environment. That being said if these constraints are known upfront, application design and deployment approaches can take these issues into account. This should allow for this potenital approach to datacenter management to be realized.


US Follows UK Approach To Quantitative Easing

In response to interest rates approaching zero both the UK and the US have embarked on a process of quantitative easing, the modern equivalent of printing money to try and drive economic growth. In most circumstances increasing the money supply in this way needs to be done very carefully, as it can lead to inflation and a decrease in the value of a country’s currency. In this situation however, with deflation a much more realistic threat and interest rate reductions failing to drive needed growth, this approach has been deemed worth the risk for the time being.

The approach being taken is to generate money that the central bank, in the case of the US the Federal Reserve, and in the case of UK the Bank of England, use to purchase various forms of debt. As of today the US Fed has decided to follow the approach taken by the Bank of England and start purchasing government issued bonds. The goal of this exercise is to drive down interest rates on this government debt, due to the price of these bonds rising based on increased demand. Hopefully we will then see a similar effect happen in other areas of debt issuance. Up until today the US Fed had chosen not to go down this route. Instead it had chosen to invest in multiple types of commercial debt, the goal being to kick start the flow of lending in this area more directly. This path will continue and will now be complimented with government debt purchases. There will also be an expansion of planned purchases of mortgage backed securities.

Interestingly the US benefits greatly from being a safe haven reserve currency, especially in these troubled times. Despite the huge amount of debt the US plans to issue, the safety of US bonds continues to allow the US government to gain financing at relatively low rates. The dollar has gained considerably in value because of this status. It seems however that the Fed feels we have reached the time to pull out all the stops, so has opened up another front in the battle to revive growth.

The UK is similarly hoping that money flowing into the system through the purchase of UK government debt, will translate into additional lending and generally lower interest rates. It has not embarked on purchasing commercial debt directly as in the US, but could do so in the future. You also have to wonder if the decision by the US to purchase its own debt will put some pressure on the effectiveness of the UK scheme.

At the end of the day we will need to wait and see how effective this all is. Quantitative easing was used by Japan during the period of their “Lost Decade” and there is debate as to the effectiveness of this. Only time will tell how effective it will be for the US and UK.

Will Used Games Sales Drive Video Gaming To Downloads?

Recently Rockstar Games introduced a new update to the popular Grand Theft Auto Franchise, The Lost And Damned. This was a download only extension to the Grand Theft Auto IV video game and is available on XBox 360. The user pays for the software and they download it to their Xbox via XBox Live. 

Unlike commercial software or some consumer market software which require registration to run, continue to operate or access content as in the case of antivirus software, video games do not require registration to run. The user is able to and expects to buy it or rent it like a movie. They expect to be able to use it on multiple consoles and to sell it when they are done.

This is in contrast to commercial and registered SW where a license to use is granted and resale is not permitted. Any disk supplied is purely the media used to load the SW which the license is then applied to.  This has a couple of key advantages. Firstly you generally avoid resale of the SW. Secondly with good customer registration you can drive customer retention selling such as upgrades, support agreements, patches and continued content if needed.

With video games on the other hand some of these basics of the software industry start to break down. The ability to rent and resell undermines the total volume of initial sales. What better way to ensure less renting or reselling than to launch an initial game and then offer a series of extra content online. The content has to be purchased and downloaded to the target machine, meaning renting and buying it used are not options. In addition the requirement to have the original game for the content to work drives up the chances of a purchase of the original game. Indeed if one can issue three updates at $20 each before a new major revision of the franchise, then there is a chance to potentially double sales if a game had an initial purchase price of $60.

Full game downloads may be a harder sell as the only way to distribute right now. It’s probably not possible for a franchise to go to full download yet, partly due to the customer’s perception of being able to get a game by purchasing it either new or used, or by renting it. I suspect however we’ll see a lot more installment based content between major franchise releases from more and more studios.

Will The Housing Bailout Work?

It seems that the new housing bailout being proposed by the administration may not go to the core of the issue, namely helping to stabilize the markets in parts of California and Florida where some of the biggest hits to housing have happened and many problem mortgages exists.

The first approach being proposed, a loan modification, may help some people, especially those whose interest rates have risen considerably or who have suffered a drop in income. The loan servicer can be approached to see if the terms can be adjusted, either by rate reduction or loan term extension. Federal government support provides principle reductions extending up to five years if the borrower stays current. This can amount to $1000 a year. The adjustment lasts for five years after which rates can adjust back up to conforming rates at the time of the adjustment and at most increase by 1% a year. This means there is already an assumption that house prices will have had time to recover or the borrower’s situation improved by that time. We may just be deferring a problem five years out at considerable cost. Another issue is that homeowners may have a second mortgage, which they may have taken to get into the home in the first place or they later added which may complicate things.

The refinance approach may hit a hurdle on a chunk of the California and Florida mortgages as well. To be eligible the mortgage needs to be held by Fannie Mae or Freddie Mac. In this situation if the borrower can pay the new loan amount a refinance may be offered via these institutions. They must have less than 20% equity in their home and loans worth up to 105% of a home’s value may be eligible. Those people with more that 20% equity in their home can refinance though the standard market. The issue is some of the loans in these states were jumbo loans and so won’t qualify, or had low deposits so may not have been Fannie or Freddie loans. Many people who could get Fannie or Freddie loans in these states may have had large equity amounts, down payments, or got into the market long enough ago to still have adequate equity. In addition some people in these states are far more than 5% underwater with their mortgage, which means a modification if viable is the only option.

The one thing not noted is the case of the person with more than 20% equity. If they resisted the temptation to over borrow or refinance money out of the home and have saved money for a rainy day, there is nothing for them if they suffer a drop in income. If the income drop because of the recession is too great to get a regular refinance they have to wait until their finances are depleted for a modification.

A lot of government money is going to go into these programs. If they can’t break the cycle of foreclosures in California and Florida, or stabilize house prices in these states, then they may not do much to put a floor under the issues in the financial markets, or restore house price statistics at the national level appropriately.

A True Test Of The European Vision

This weekend saw perhaps a pivotal moment in the development of the EU and Europe as a whole. As the economic crisis shifts from the US to Europe and especially Eastern Europe true stress testing of the larger European vision is happening for the first time.

With regards to Eastern Europe, these countries face ongoing pressure on their currencies and issues in their economies that may require substantial support. Within the core of the EU and the euro zone similar issues are starting to show. Weaker euro zone economies such as Greece and Ireland are starting to show stress in the premiums demanded on their government bonds versus those of stronger members such as Germany.

Unfortunately Europe has so far not shown what is needed to solve these problems. Their refusal to overtly support Eastern Europe this weekend may in retrospect be seen as a costly mistake, especially given the exposure of Western European banks to the region.

Within the euro zone itself countries seeing issues such as Ireland, with a potential banking issue several times its GDP, appear somewhat protected at first glance. They cannot see a run on their currency as would normally happen. On the other hand they cannot devalue their currency to drive economic growth.  Absent a euro wide stimulus, or a willingness to drop rates to zero which the ECB seems loathed to do, their recession may well be longer and harder than needed. Perhaps a bigger issue is what would happen if a member state went into default. This is a stress test case that the euro zone is not immediately equipped to deal with, though it seems certain that the stronger states would step in to support the buying of the weaker states debt. This however may not be an easy sell to the voters back at home in Germany or France.

Ironically the biggest winner from this confusion may be the USA. We have seen a major strengthening in the value of the dollar versus many other reserve currencies, even though we have seen interest rates hit zero here first. Driving this is a flight to safety and an aversion to risk. The dollar is always a safe haven, but right now the predictability of the US, the structure of it institutions and its scale make this even more so.

As an investor, the working of the Fed in managing the money supply and interest rates, and the Treasury in managing the issuance of government debt is clear. In addition the framework for bank regulation while not perfect is defined. In the euro zone while interest rate policy may reside with the ECB, debt issuance and bank regulation is done by the member states. In fact a whole host of economic policy issues are spread between the central bank and the member states. This worked fine during the boom years, but the cracks start to show when issues hit, especially of the magnitude we are seeing now.

In some ways this crisis may accelerate the tighter integration and passing of responsibilities to a European level that has been so hotly debated for some time across the EU. This will be necessary if the EU is to ever truly rival the US, or the other large and upcoming economies such as China or India.