More on Attractive Profits in the Cloud

I’ve been touching on the subject of commoditization of the cloud a couple of times on this blog(1, 2.

Today, I’ll like to look at the current players and how a possible commoditization of the cloud will affect their businesses. That is to say, do the current players own an adjacent layer in the value chain that can reap the attractive profits.

Barb Darrow at GigaOM, citing Rick Sherlund from Nomura Securities, gave some estimates on which companies are are making money from their cloud business (below). It is clear that Amazon AWS is losing it’s position as the dominant cloud vendor. The other companies, Salesforce, Microsoft, IBM and Google are significantly narrowing the gap. Microsoft and IBM in particular have very high growth rates relative to AWS.

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Given that cloud services are in many ways similar to rental servers, and that it is probably difficult to maintain differentiation, it is likely that prices will drop and cloud services will commoditize. When commoditization happens, Christensen’s “law of conservation of attractive profits” predicts that the attractive profits will shift to an adjacent layer in the value chain. Here I would like to see if the current players in this market will be able to capture the profits as they shift.

  1. Microsoft, IBM: Both of these companies are very strong in enterprise IT. As the cloud commoditize and enterprises move their data centers into the cloud, Microsoft and IBM could easily provide value through consultation and customized services. They are both well positioned to take advantage of cloud commoditization.
  2. Salesforce: Similar to Microsoft and IBM, Salesforce will benefit through consultation and customization for the cloud services.
  3. Amazon: I can’t see any of Amazon’s strengths in the layers adjacent to the cloud. I don’t see them benefiting at all from commoditization of the cloud.
  4. Google: Google makes almost all of it’s money from advertising, and it doesn’t make much money (at least not directly) from other activities. Hence it is difficult to say whether they are capturing profit or not in any of their activities other than search. Likewise, it is difficult to discuss how the commoditization of the cloud will affect them.

Commoditization Of AWS

I have previously brought up the subject of the commoditization of the Cloud. Despite the common preconception that commoditization is unidirectional from hardware to software and eventually to the cloud, the reality is that commoditization can happen at any stage in the value chain and that the order is not defined.

Recently, we are witnessing signs that the cloud is starting to be commoditized. I have brought up the commoditization of DropBox-like services in this blog (1, 2), but other services are also likely to follow.

The recent earnings call for Amazon shows evidence that commoditization has also come to AWS. During the years, AWS has drawn competition from Microsoft Azure, Google Cloud Platform and also from internal servers. This is forcing AWS into a price war which is negatively impacting Amazon’s financials.

In fact, if a price war was the end game, that would be a fortunate result. The more worrying scenario is the game that Apple is playing with CloudKit. Apple is trying to make the cloud effectively free, and they can easily do this because they make obscene profits from hardware sales.

It is likely that infrastructure-like cloud services will soon be commoditized and that attractive profits will shift to adjacent layers. Companies like Amazon which do not have a business in these layers will lose profits. Companies like Microsoft and Apple which have a strong business in an adjacent layer are likely to make a net profit.