Google has decided to drop its prices for cloud service and expand its IaaS offerings, apparently to compete better with Amazon or to respond to a cloud market that seems to be racing for the bottom. Another possibility is simply that there’s a lot of “undifferentiated interest” in the cloud, meaning that buyers don’t know exactly what they want. In that kind of market, classical wisdom says that a broader product line gives you more avenues for engagement and a potential pull-through for higher-margin stuff. Google and Amazon may simply be trying to spread the shot to hit the duck. But can this kind of approach work?
Look at the cloud market overall for a moment, forgetting hype. We have realized less than one percent of the opportunity and we’re already having price wars? What does that say? I think it says a number of things, all of which are important.
First, it says that sellers don’t have pricing power for cloud services, which in turn says that the buyers are having some difficulty making the cloud transition. Generally that sort of problem occurs when the business case is weak, when buyer literacy on how to proceed is limited, or both. My surveys say that we’re at about half the level of market literacy in cloud computing needed to sustain a natural, healthy, market. Thus, sellers are forced to start something that could all too easily turn into a race to the bottom.
Second, it says that price reductions will quickly mean that nobody in the market could even dream of competing with network operators if cloud services stay in the IaaS basement. Former public utilities have very low internal rates of return, meaning that they can sustain projects with low ROI without hurting their financials overall. So Amazon or Google are doomed if the cloud is the IaaS pond the market seems to think it will be.
Which brings us to third, the key point. You have to climb the cloud chain. The higher-layer cloud services displace more cost and are more easily consumed by buyers with limited technical literacy, so they are more likely to succeed. That means that the seemingly smart thing would be for Google and Amazon to be CLIMBING the cloud chain and not diving down to the IaaS depths. So why do they do it? First, because they think their lower-cost IaaS will generate software partnerships that will provide the higher-layer services. They don’t want to be full-service cloud providers themselves. Second, because with the exception of Microsoft and maybe Oracle, nobody has enough application software on their own to offer a higher-layer service that’s broad enough to be compelling.
The IaaS position Google or Microsoft or Amazon takes in the near term as a bridge becomes an isolated outpost in an unfriendly financial world, unless these companies promote a transition strategy for apps themselves. If IaaS is needed because we don’t have a formal development dogma for cloud apps, then we need that to be developed or we’re stuck in lower (and lowering) margins forever.
I don’t think that Google, Amazon, or anyone else in the cloud space has done enough to promote the Great Reality of the cloud, which is simply that to make it optimally useful you’ll need to write cloud-specific apps. A war among vendors to promote their own platform for this mission could be the best thing that could happen in the cloud. It would focus buyers on the real question, which is not how to host stuff we already host in-house somewhere else instead, but how to do stuff we couldn’t do in-house at all. More benefits are needed to drive more spending; without them the cloud becomes another way to cut IT budgets at best, and a failure at worst.
