Apple's Server Farm Hints at Cloud-Based Ambitions

By: Money_Morning

David Zeiler writes: Apple Inc. (Nasdaq: AAPL) has secretly built a massive server farm in Maiden, North Carolina that should come online any day now, if it hasn't already. The facility is five times larger than Apple's existing data center in Newark, California.

Apple has been typically cagey about the purpose of this data center, which ultimately could cost as much as $1 billion.

"North Carolina is on schedule," Apple Chief Financial Officer Peter Oppenheimer said during the July earnings conference call. "We expect to complete it by the end of the calendar year and begin to use it."

Much of Apple's existing business relies heavily on content delivery already, but building a 505,000 square-foot facility - which ranks it among the largest in the world - hints at far more grandiose plans.

Most analysts believe it is needed to deliver music, applications (apps) and video from the iTunes Store. But such added capacity also could allow Apple to expand its cloud-based initiatives, using the existing MobileMe online service as a starting point.

Owners of Macs, iPhones, iPod Touches and iPads already can sync such data as calendars and contacts between all their Apple devices. But what if Apple decided to adapt its iWork suite of productivity software to the web à la Google Apps?

Given Apple's existing dependence on content distribution, it likely has multiple purposes in mind for the Maiden facility.

Let's examine each of them in detail.

Climbing Onto the Cloud
First, let's look at a few general reasons Apple would take its content delivery network (CDN) in-house.

Other major tech companies, namely Microsoft Corp. (Nasdaq: MSFT) and Google Inc. (Nasdaq: GOOG), also have built their own data centers - both to curb reliance on external CDNs and to protect their cloud-based innovations from prying eyes.

Apple currently contracts with both Akamai Technologies Inc. (Nasdaq: AKAM) and Limelight Networks Inc. (Nasdaq: LLNW) for much of its content delivery; no doubt it shares its rivals' concerns of wanting more control over data distribution and costs.

Furthermore, Apple clearly can use any new data distribution capacity immediately. The iTunes Store alone sells about 10 million song downloads per day, and that doesn't count all of the people streaming 90-second song previews before they buy. Fewer customers buy (or rent) Apple's television and movie offerings, but those much larger files eat up distribution capacity.

Then you have the App Store, which services iPods, iPads and iPhones. Volume at the App Store is comparable to the iTunes Store, somewhere in the neighborhood of 10 million apps downloaded per day. And Apple will launch the Mac App Store early next year, which itself should ramp up download volume very quickly as software developers jump on that bandwagon.

Now we come to the more intriguing uses of the Maiden data center. Let's start with Apple's online service, MobileMe.

MobileMe
MobileMe is a basic form of cloud computing, offering e-mail, data storage and syncing of personal information among a customer's array of Apple gadgets. Those willing to pay the $99 annual fee can access their MobileMe data from their Mac, their iPhone or their iPad.

Other than MobileMe, Apple has made little noise in the cloud computing space.
But the new data center creates an opportunity to vastly expand MobileMe's cloud capabilities. In fact, it may well be that MobileMe hasn't advanced much over the past several years precisely because Apple lacked the server capacity to do more. Content delivery infrastructure could be the last piece of the puzzle.

A glimpse into MobileMe's potential is currently in beta: iWork.com. Designed to work with Apple's iWork productivity suite, the site allows users of those apps - Pages, Numbers and Keynote - to share documents and collaborate. Though, you can't edit the documents online as you can with Google Docs. However, Apple eventually could use its prodigious server capacity to expand iWork.com into something more competitive with Google's offerings.

Actually, this is where Apple's legendary vertical integration model could reap major rewards. It already leverages its control over the "whole widget" - both the hardware products and the operating systems on which they run. If Apple adds cloud-based services to the mix, it can leverage the power of integrating all three into a seamless user experience - the very essence of its formula for success and an advantage no other tech firm can match.

Now throw the potential for personal media sharing into Apple's cloud. The latest models of iPhones, iPod Touches and iPads all come equipped with video cameras, and of course they all have Wi-Fi connectivity. Apple could use its North Carolina data center to allow customers to create and share streaming video anywhere, anytime.

The Next Phase
Indeed, Apple's investment in heavy-duty content delivery assets could portend a bigger push into the streaming media sector.

About a year ago Apple bought Lala.com, a subscription-based streaming music service. Apple shut it down several months later, but the acquisition launched speculation over what the company planned to do with the technology.

Apple could offer its own streaming subscription service, drawing on its iTunes library of more than 13 million songs, or it could offer a cloud-based storage service for customers who buy songs but would rather not keep them on their hard drive or mobile device. Both would entail customers pulling significant amounts of content from Apple's servers, and both would create fresh revenue streams.

Similarly, the arrival of Apple's new data center seems to dovetail with an expansion of its video business. For the past several years, the company has offered a growing number of movies and TV shows for sale and for rent through iTunes, beginning in the United States and spreading slowly to a handful of countries like the United Kingdom, Canada, Australia and Germany.

But in April, Apple started branching out more quickly, launching movie stores in France and Ireland. And Spain, Italy, Austria, Switzerland, Mexico and Japan joined the rapidly growing list in November.

In September Apple unveiled another data delivery hog, version 2.0 of Apple TV. This $99 gizmo uses Wi-Fi to stream movies and TV shows from the iTunes Store over the Internet. Apple TV has yet to really take off, but eventually could catch fire in the United States.

Most of Apple devices are capable of consuming streaming video, and the iPad in particular, is ideal for the purpose.

So the real question may not be what Apple plans to do with its server farm in Maiden, but is the server farm large enough to handle the full scope of Apple's ambitions?

The clues available indicate Apple may just be getting started. It filed for permits over the summer to construct another large structure on the same site as the Maiden facility. Apple also owns a second large parcel of land at Maiden, which could become home to yet a third data center.

Apple's thirst for data distribution capacity conceivably could lead to the construction of a series of such centers. Reliance on numerous cloud-based businesses will require a system capable of handling ever-increasing loads without flinching; any outage would be a PR nightmare.

But with well over $50 billion in cash and investments tucked away, Apple can afford to construct as many centers as it needs. Alternatively it could speed up the process by purchasing an existing CDN, like Limelight.

Analysts seem to agree that there is some upside left in Apple stock - even at $320 per share. In fact, Goldman Sachs Group Inc. (NYSE: GS) added the stock to its "Conviction Buy" list on Dec. 13 with a $430 price target.

Source : http://moneymorning.com/2010/12/27/...

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