The cloud industry is often portrayed as a race between Amazon’s AWS, Google’s Compute Engine and Microsoft’s Windows Azure. The reality however – at least if we go by the numbers – is more like AWS and the also-rans. The lesson is scale and the classroom is Walmart.
Google and Microsoft have made significant progress in features and ecosystem, but both still come up short of AWS. AWS not only offers products that match all of the most recent features of its two competitors, it still surpasses them by a considerable margin. Moreover, while Google and Microsoft have some third-party partners that provide additional services on top of their cloud, neither is a match for the sprawling third-party ecosystem surrounding AWS.
Google’s strength in networking owing to its global fiber footprint and Microsoft’s SSD-powered storage capabilities are formidable. So are both companies’ cash hoards. But they will not be enough to catch AWS.
The reason is this: AWS built its lead with most customers using it for basic compute and storage services. As more enterprises migrate more workloads to the cloud, they seem to want to buy as much capacity from a single vendor as possible. There are numerous motivations for this, ranging from cost and integration to security and governance.
And it commodity businesses, coming down the learning curve is not only about cost; it is also about reliability, efficiency and customer service. As Google and Microsoft still work through the kinks of service interruptions, when was the last time AWS experienced the type of outage that the media loves to write about?
Is there a Target to AWS’s Walmart?
This gives AWS the type of insurmountable advantage that Walmart still commands. In the 1980s, Walmart invested more heavily in technology than any of its competitors. This gave the company overwhelming advantages in warehousing and distribution. As it learned more about its customers, Walmart extended its advantages into sourcing and merchandising.
The company then plowed the cost advantages into discount pricing that no other retailer could match. In fact, there were instances where Walmart could sell certain products below what it cost some of its competitors to purchase the same product.
The result was a sad story in retail road kill. As Walmart opened new stores, flocks of discounters went out of business, while others merged unsuccessfully in attempts to reduce costs. When Walmart diversified into the supercenter format, scores of supermarket and drug chains felt similar pain.
Target was the only retailer with comparable scale. It succeeded by maintaining a tight focus on quality and fashion in order to differentiate itself from the boa constrictor. It followed this formula into the supercenters as well. In more recent years, however, Target stumbled due to merchandising blunders and its much-publicized data breach that severely affected customer’ loyalty.
Only Differentiators that Come with Scale Matter
The point in this is that in a commoditized business where scale is critical, the key to competing against the 800-pound gorilla is differentiation. Rackspace’s results confirm that white-glove service is not going to be the determining differentiator. Instead, customers will gravitate toward those differentiators that come with scale – reliability, service offering (variety and geographic) or platform (read: Openstack, but more on this in Part 2).
Joyent’s attempts to compete with AWS – and the other big two – on price will also likely end in tears. Because trying to compete with AWS on raw compute pricing is like trying to wrestle with a boa constrictor. Smaller players like Rackspace and Joyent are going to get crushed.
Cloud providers can either sell against AWS with better reliability or they can try to distinguish on service offering. In the latter, it will probably require some specialization. One example would be allowing customers to scale up processor threads, memory, disk and flash independent of each other depending on the workload needs. But AWS does that too.
That type of flexibility would require excess infrastructure and beget greater management complexity. But offering customers dynamic configurations would represent a value-added service that could command a premium price, especially for workloads that do not scale well horizontally across virtualized server slices as they do in a larger virtual footprint.
This would be similar to what the category-killers such as Staples, AutoZone, PetSmart or Sports Authority did. Focus on one of Walmart’s aisles and try to out-execute the giant on either selection or service. For Google and Microsoft, the alternative is the Target strategy. They both have the resources to make a go of it – even as the number 2 and number 3 players.
The others can only hope they won’t end up as Kmart, which was later merged into Sears and continues to shrink. Investors can then wait for the hoped-for “real estate play”. But in the cloud industry, capacity is a depleting asset because obsolescence loses value over time.
