Thin Margins, Change and Differentiation
As we watch the explosion of cloud events, press releases and panels is anyone getting a sense of déjà vu all over again? It wasn’t that long ago when Webvan was going to transform the grocery business with new technology and processes.
After a flurry of announcements and expansions we learned that innovation could be tough in low margin/high volume service businesses.
Re-architecting highly segmented enterprise data centers (because of security, regulations, importance of data and access levels, etc) into dynamic pools of on demand processing power isn’t an easy task. Segments exist for important reasons.
For light SMB applications and x-as-a-service there is already a market. The enterprise IT as a service questions are really about scale, margins, flexibility and security; that is, enough for small and medium-sized businesses. Then there is a potential for more innovation as virtualization spreads and creates new markets for management and infrastructure software.
No doubt we’ll see service specializations with emphasis on app and vertical expertise and responsiveness. Yet these new specializations could still be stuck between Amazon, Google and a myriad of established players with paying customers, service expertise and existing profitability… and the evolution of enterprise IT to the intercloud.
The intercloud revolution will take some time, especially when you consider intercloud challenges. As soon as enterprises can convert scattered data centers into elastic meshes of processing power the business case for densely architected cloud startups will be disrupted. The intercloud can chase low cost rates from one optimum location to another.
A host of infrastructure service providers are likely to get to cloud first and evolve into dynamic meshes before the startups (growing and having to innovate on thin margins). While the advantage of concentration (the massive data center with dense blade servers) shifts with intercloud (the massive mesh of distributed data centers), the timing of when that shift happens will make all the difference for the thin margin, service players.
Today’s established service providers and enterprise IT teams are much more likely to innovate profitably, unless they make the wrong investments at the wrong time. Cloud technology is likely to experience multiple waves of disruption in early stages, and investing too early or too late in various approaches could have material consequences.
I moderated a Cisco panel last week at Cisco Live! And it was readily apparent that enterprise cloud still required plenty of work from vendors and enterprise IT. You can expect substantial innovation in coming months, according to at least one panel participant. For example, no one was ready to endorse a centralized versus decentralized architecture (a move to the powerful intercloud); perhaps it’s because the network isn’t ready for infrastructure 2.0 demands. When it is it will make all the difference.
Another cloud question relates to goliaths Google and Amazon. Amazon is probably in better shape from a classic business model basis. It is leasing off-peak, existing capabilities with line extensions while Google aims to re-architect IT, perhaps from the ground up. The Google strategy reminds me of Webvan to some extent, except with more cash, customers and options.
Remember the Webvan
Yet re-architecting enterprise IT (high volume, low margins, service excellence, etc.) still doesn’t sound that different from the recent attempts to re-architect the grocery business. The Internet home delivery sector that (I confess) pinched my dotcom portfolio comes to mind as we watch the flock of cloud players forming to reinvent enterprise IT:
“Among the Internet’s last players in the home-delivery sector, Webvan has seen the dot-com shakeout trim the ranks. Companies like ShopLink.com and Streamline.com have folded, and online convenience store Kozmo pulled the plug on its operations Wednesday.”
Greg Sandoval, CNET News, April 17, 2001
Google is in much better shape than the grocery upstarts ever were, yet they have an ambitious vision. The most compelling cloud service provider story I’ve read thus far is a recent blog by Benchmark’s Bill Gurley. He argues that Amazon’s model already leverages low margins and excellent customer support, two critical factors for cloud service success.
Like the grocery story stores taken on by Webvan, Amazon is already entrenched in the category with core strengths that may otherwise be hard to assemble within the confines of a high volume (scale) and thin margin business experiencing technology transformations on a frequently massive scale. Google certainly is better capitalized than Webvan and has a strong core business. Yet is it strong enough?
Gartner’s Whit Andrews, quoted in another piece of CNET coverage offers sage advice to those who wanted to enter the online grocery business:
“Here’s a radical thought: The future of the online grocer market belongs to the grocery stores,” Andrews said. “They know the business, they can mix (sales) channels, and they can take their time.”
Melanie Farmer and Greg Sandoval, CNET News, July 9, 2001
Amazon will likely beat the CloudVan model. After Amazon, Google has perhaps the best chance to win, versus a host of cloud start-ups betting on scale, service and thin margins, etc. Unlike Webvan, Google has a highly lucrative and complementary business. They have been accumulating top talent and generating incredible buzz.
The rest of the cloud pack survivors will likely come from the pack of successful legacy service providers who make evolutionary investments and serve specialized applications or market niches. Again, they’re the incumbents used to the rigors of tight margins and exemplary service.
More Surprises from Cisco?
Recently Cisco started talking up the idea of its own cloud app offerings. Suddenly the world of servers, computers and applications starts looking more like a rugby scrum than well-segmented complimentary markets.
This leaves Google cloud and legendary rival Microsoft in an awkward position. Microsoft is caught between Google and the rise of netbooks and increasingly powerful alliances between VMware and Cisco and IBM and Juniper, etc. They have a massive footprint that yet appears to be under siege from almost every angle.
Tech-savvy Google, on the other hand, could be triggering a transformation that benefits nimble, visionary incumbents versus the fresh crop of cloud service provider startups. The world of IT is breaking fresh ground these days, mostly due to the three horsemen: virtualization, cloud and netbooks. Fortune will likely go to the bold, innovative and nimble.