When we talk about cloud computing, two companies immediately jump to mind: Salesforce.com and Amazon. Each represents a very different model of cloud, and each is equally valued by enterprises. Whereas Salesforce.com provides an ecosystem of out-of-the-box applications, Amazon provides the building blocks enabling companies to migrate existing applications to, or build new ones on, a cloud foundation.
In the Infrastructure as a Service (IaaS) world, Amazon is the 900-pound gorilla who faces stiff competition from Microsoft Azure and Google. However, the number of competitors in the public IaaS space is shrinking as evidenced by the recent exits of Hewlett Packard and Verizon. Why is a sector just reaching the tipping point of adoption by the Fortune 500 already consolidating?
For years, I’ve heard the argument that leadership in IaaS is all about scale and that winning the IaaS adoption race is about increasing scale to undercut the competition. I’ve heard this both from employers and clients. What I’ve never understood is how the argument matches reality. If scale were the answer, then success would always follow investment in infrastructure, and it doesn’t.
When discussing public cloud adoption with clients, cost is rarely given more than a cursory nod in the discussion. Instead, the focus is in improving agility, efficiency and elasticity with a healthy dose of security. What I firmly believe is the key to leading the segment isn’t providing the lowest cost or the greatest scale; those just happen to be benefits of the true driver: innovation.Innovation is the special sauce which has placed Amazon at the front of the pack, at least for now, with Microsoft and Google working hard to close the gap. Innovation helps drive costs down and adoption up. Without innovation scale is scary because it locks in the imperfect decisions made during the early days. So are we destined for a world with only three large public IaaS providers? Yes, if scale is the sole focus.
Thankfully, innovation in this space reigns supreme and will for the foreseeable future. The better question is how can competitors use innovation to beat the leaders in a business where innovation-driven disruption has been institutionalized? By disrupting their own businesses on a regular basis – whether lowering prices, entering into partnerships, or releasing new capabilities – the public IaaS providers leave very little air in the room for others. Buyers should expect innovative services delivered at the lowest possible cost to continue into the foreseeable future.
Another factor driving consolidation is the challenge of choice. Customers want to choose among a variety of options, however too many options creates confusion. In fact, much of the delay by enterprises in adopting public cloud stems from the confusion generated by the variety of competitors. Competition has allowed potential buyers to sit on the sideline and let the providers fight it out, waiting for the market to find its natural rhythm and weed out the weak.
Consolidation means an easier to navigate landscape, however it also means specialized capabilities which lack broad appeal will likely disappear or be overlooked. If any of those specialized capabilities are critical to a cloud strategy, buyers should be prepared to engineer an alternative. Buyers should expect fewer providers but more choices within each provider. As a result, strategy and architecture will grow in value, exacerbating the talent shortage across cloud.
Consolidation is also a by-product of commoditization as competitors find it harder and harder to differentiate their value. Enterprises want to benefit from the capabilities of multiple providers while avoiding dependency on any one vendor – an often used best practice in cloud adoption.
The struggle today is innovation vs lock-in; so far, buyers can’t have their cake and eat it too. Lock-in avoidance is a powerful force which has driven the development of OpenStack, containers, and SDN. Buyers need to define what lock-in means and what they want to avoid. Does it mean avoiding any service not available from multiple providers? Does it mean building an abstraction layer so providers can be added as services become available? Does lock-in avoidance include Platform as a Service, operational management or even billing capabilities? Avoiding lock-in is balancing on a knife’s edge because by bypassing it, a company is very likely locking themselves out of valuable innovations.
Consolidation is a reality of any market, however it seems to have started early in the public IaaS domain. Expect to see a growing visibility into public cloud spend to put the spotlight on the challenges of having too many choices which will further accelerate IaaS consolidation. As buyers shift toward public IaaS, the market will likely pick one or two additional large scale competitors, several competitors will exit, and small innovators will be pushed into niche markets.
Additionally, expect to see the combatants to turn the corner from general commodity services to vertical specific capabilities to differentiate offerings. By creating vertical overlays on their IaaS foundation, providers can show how the service is uniquely positioned to meet specific needs and challenges. Strategically, it will give providers a counter-balance to the buyers’ concern of vendor lock-in. In the end, it’s the buyers who make the market and choose the winners, not the competitors. If the public IaaS space ends up with few options, it’s simply because the buyers wanted it that way.