What statement about the cloud has the largest number of enterprise agreements? “My cloud services are too expensive!” is the answer. Not only that, cloud costs are the number one reason enterprises give for not doing more in the cloud, and the number one reason they give for looking at another cloud provider. On the surface, this is a pretty profound insight into user attitudes about cloud computing, but it’s even more profound if you dig deeper.
The Economist ran a piece on “The Battle of Competing Clouds” and its growing intensity. It points out that the rumored gross margins for public cloud services from Amazon is 60%, a level that’s attracting competition from smaller players, including Oracle, who recently reported way-better cloud revenues than expected. There are some good points in the story, but I also think it’s missing some key points.
One true point the story makes early on is that users bought into the cloud for its elasticity and agility rather than because of its lower cost. Those of you who have followed my writing over the years know that I’ve always said that the economy of scale of a public cloud provider isn’t so much greater than that an enterprise could achieve that “moving to the cloud” was likely to result in lower costs, given provider profit margins. The problem is that moving to the cloud was never the real goal for enterprises. Instead, what they were looking for was the ability to support highly variable workloads with broad geographic distribution. It wasn’t the stuff in the data center that they were trying to move, it was stuff never in the data center that they were trying to develop, and develop right.
A cloud giant like any of the Big Three (Amazon, Google, Microsoft) has the ability to deploy resource pools that can provide agile capacity for a large base of customers, when private facilities for any such customer would require building out to the peak capacity needed, at a far higher cost. It wasn’t economy of scale, but elasticity of scale that was valuable. However, elasticity of scale is still ultimately about costs; in this case, the cost of a capacity-agile hosting option.
A fledgling cloud provider faces a problem much like that of an enterprise looking for “private cloud”. How do you build out to match the elasticity of scale of a giant? You either have to risk a boatload of money or you have to try to find buyers whose situation fits a more practical infrastructure model. The former option is practical for some players like Oracle or IBM, who have other products/services to generate the capital needed. The latter requires a shift in buyer thinking, and that shift is the big news in cloud competition that The Economist missed. It’s “competitive multi-cloud”.
Amazon had a major outage recently, and of course it’s not the first for them, nor are they the only cloud provider who’s had one. When something like that happens, the companies who have depended on their cloud provider for the critical front-end relationship with their customers and suppliers take a major hit. They want to mitigate their risk, and so they look at spreading out their commitment to the cloud among multiple providers, which is a multi-cloud. By carefully targeting their services and carefully placing their resources, smaller up-and-coming providers could make a go in the competitive multi-cloud.
Despite the hype we’ve had on multi-cloud, enterprises don’t use them nearly as much as you’d think from the stories, but that’s changing…slowly. The reason for the slow change is that the major cloud players understand the risk of cherry-picking competition, the “death of a thousand cuts” that erodes their profit as small players grab specialized niches. They have multiple weapons to address that risk and they’ve used them regularly.
High among their weapons list is value-added platform services, or “web services”. These are software features hosted in the public cloud and available (for a fee) to developers. Look at the websites for the public cloud and you see dozens of such features listed. Each of them makes development of a cloud application easier, and each of them is implemented in a slightly different way across the cloud providers. Applications that are written for Cloud A will almost always have to be changed to run on Cloud B. Operations practices are also likely different for each cloud, and multi-cloud operations and management is harder than that of a single cloud. All these things discourage enterprises from trying to use multiple providers.
Volume discounts are another factor. If cloud provider pricing has usage tiers, which most do, then users will pay more if they divide their cloud applications across providers. That’s true even when enterprises lack the skill or resources needed to truly audit their cloud bills and determine just how much they’re actually paying, or saving.
Will the evolving cloud landscape make cloud services more competitive? It’s true, as the article suggests, that customers are putting more pressure on the Big Three to control the cost of cloud services, and it’s likely that there will be an erosion in cloud service prices and margins from the major players. But does that really generate any competitive pressure? Do other cloud providers like Oracle or IBM or Cloudflare, find the market attractive when they have to know that the giants will cut their profit margins to keep competition out? Wouldn’t the giants also advance the platform-service features they already offer?
There’s already pressure on the cloud giants, particularly Amazon, to change their data transfer charging policies, which currently penalize movement of data across cloud boundaries, and some changes have come about. A broad trend to eliminate these transfer costs could lower multi-cloud costs, but my discussions with enterprises suggest that most multi-cloud deployments are based on a “parallel hybrid” model, where multiple cloud providers home back to a common set of data center applications and traffic crosses between clouds only in exceptional situations like a cloud provider failure.
Transfer cost reductions could help cloud providers themselves, though. While it’s convenient to talk about “front-ending” legacy data center applications with agile cloud components, the boundary isn’t a sharp one. As you move toward the user from the transactional applications, you see a gradual increase in the value of scalability and agility, and where that translates to a cloud versus data-center implementation depends on costs. If moving data across the cloud boundary were less expensive, then more components could cross the cloud border. But that commits more to the current providers rather than empowering new competition.
The real driver of increased cloud competition has to come from cloud-independent platform features. As long as every major provider has their own platform tools, it makes it harder for users to adopt multiple clouds because their software isn’t portable. We have cloud software and features from players like IBM/Red Hat and VMware, and many of the enterprises who are really trying to leverage hybrid cloud use this software instead of cloud-provider platform tools to avoid lock-in. Oracle is able to leverage its software success to create cloud success, showing that software-centric niches are possible. Since the cloud market is growing, niches are also growing, and this may give the impression of “competition” when it’s really a rising tide doing its usual boat-lifting.
Big cloud providers have the advantage in terms of capacity elasticity at a reasonable price, making it hard for the next tier to push out of being niche players. More competition in the cloud space can only come from that sort of push, because that’s the only demand shift that could create it. I don’t think that the forces needed to transform cloud competition are in play right now, and I think it will likely be several years until they can even start to transform the competitive landscape. I do think that second-tier players will work to address larger niches, and that the big players will respond with changes to pricing. Competition, then, may help cloud buyers by its threat more than its reality.