Cloud price war is bad news for technology industry’s old guard; Lowering the price will determine the fate of much of the IT industry

December 4, 2013 12:02 pm

Cloud price war is bad news for technology industry’s old guard

By Richard Waters in San Francisco

Lowering the price will determine the fate of much of the IT industry

Sometimes, the news headlines from the tech industry seem to be attention-grabbing stunts with little bearing on immediate business reality. Take the titillating suggestion from Amazon boss Jeff Bezos this week that his company will shortly be in a position to deliver small packages using aerial drones. Few experts think such an eventuality, though technically feasible, is likely in the near term.Some of the truly big moneymaking propositions, on the other hand, have a way of really taking the sizzle out of the tech story. “Dull” hardly does justice to the scope of some of these ideas.

Exhibit A: a service named Google Compute Engine, which was given an overhaul this week as the search company redoubled its efforts to make money by selling access to its internal computing capacity to other companies – a business that was pioneered by Amazon.

Weighing the merits of the revamped Google Compute Engine is about as entrancing as thumbing though a utility bill – which, in fact, is exactly what it is.

The cost of renting a gigabyte of storage on one of the company’s servers, for instance, has just been slashed from 10 cents a month to 4 cents. By contrast, Amazon charges 9.5 cents a month – with an extra charge for shipping data out of the system and on to the internet.

It may not be flying robots, but this is the kind of thing that will determine the fate of a large slice of the IT industry.

The un-enticing name given to this market –infrastructure as a service, or IaaS – obscures its dynamism. It was a $10bn business last year that will grow to more than $30bn by 2017, according to research group IDC, making it the fastest growing part of the new cloud IT world.

This is extremely bad news for many of the older names in information technology. The more that companies such as Google and Amazon crush the price of the basic computing capacity they sell as a service, the greater the pressure on all the hardware, software and services companies whose technology is used to run the world’s IT systems.

More aggressive pricing from the internet companies – along with Microsoft and IBM, the other main players in the IaaS market – will increase the attractions for customers of switching to these services, reducing the amount of new gear they buy for their in-house IT systems.

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The giant infrastructure service companies will need to buy equipment themselves, of course. But selling to this handful of powerful customers will leave vendors with little pricing power. Also, the Googles of the world have already perfected the art of using commodity hardware and open source software to lower their own systems costs.

As prices collapse, meanwhile, the question of how the big players in IaaS themselves turn a profit will start to loom large. Amazon’s low profit expectations and massive computing scale make it well suited to thrive amid the powerful deflationary winds that are blowing across the cloud IT landscape, but how many of its rivals will feel equally as comfortable?

They appear to have decided that they have little choice. Microsoft started out with its Azure service at a higher level in the cloud computing “stack”, providing a complete platform on which developers could build their own applications – an echo of the role that its Windows software played in the client-server era of computing. But this market, known as “platform as a service”, has failed to ignite in the same way, forcing Microsoft this year to push further down into IaaS.

Amazon’s low profit expectations and massive computing scale make it well suited to thrive amid the powerful deflationary winds that are blowing across the cloud IT landscape.

IBM has also had to shift its stance abruptly, as evidenced by its uncharacteristically aggressive use of outdoor advertising at an Amazon developer conference last month to position itself directly against the perceived market leader. Clearly, some of the big and demanding corporate customers that IBM sees as its birthright are drifting to Amazon – which started out as a consumer internet company, no less.

Rather than justify their ventures into selling access to commodity infrastructure as a standalone proposition, companies like this are seeking to bundle them with other services. IBM, for instance, says it is in the process of transferring all of its existing applications and platform services on to the new infrastructure layer. Success will depend on how many customers it can draw to these higher-value services.

But as Google’s new focus on selling infrastructure technology this week shows, the big names in the business are not waiting for a stronger business model to emerge before diving deeper into the market. For IT companies without a clear cloud strategy of their own, things are looking more ominous.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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