The cloud industry is often described as a race between Amazon’s AWS, Google’s Compute Engine, and Microsoft’s Windows Azure. However, the reality, at least to date, is more like AWS and also rans. The lesson is scale and the classroom is Walmart.
Despite all the recent announcements from Google and Microsoft, both still fall short of AWS in terms of available features and ecosystem. In fact, AWS not only offers products that match all the latest features that became generally available through its two competitors, but outperforms them by a significant margin. Also, while Google and Microsoft have some third-party companies that provide additional services on top of their cloud, neither of them are a match for the extensive third-party ecosystem that surrounds AWS.
Google’s strength in networking due to its global fiber footprint and Microsoft’s SSD-driven storage capabilities are formidable. So are the cash reserves of both companies. But they won’t be enough to catch AWS. The reason is this: While most customers use AWS for their core computing and storage services, as more companies migrate more workloads to the cloud, they will likely want to buy as much capacity as possible from a single provider. There are numerous motivations for this, ranging from cost and integration to security and governance. This gives AWS the kind of insurmountable edge that Walmart still has.
Is there a goal for AWS Walmart?
In the 1980s, Walmart invested more 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 expanded its benefits to sourcing and marketing. The company then invested the cost advantages in discounted prices that no other retailer could match. In fact, there were cases where Walmart could sell certain products for less than it cost some of its competitors to buy the same product.
The result was a sad story in retail outrage. When Walmart opened new stores, flocks of discount stores closed, while others merged unsuccessfully in an attempt to cut costs. When Walmart branched out into the supercenter format, dozens of grocery and drug store chains felt similar pain.
Target was the only retailer with a comparable scale. It was successful in maintaining a strict focus on quality and fashion to differentiate itself from the giant. He followed this formula also in the super centers.
The point here is that in a commodified business where scale is critical, the key to competing against the 800-pound gorilla is differentiation. And in the cloud, that will refer to the quality of service, the service offering (variety or geographic) or the platform (read: OpenStack, but more on this in Part II). The recently announced price cuts by Joyent and the server split to match AWS sound hollow and are likely to end in tears. To your credit, Joyent also offers a few dozen configurations that are not yet available on AWS.
But over time, trying to compete with AWS on price is like trying to fight a boa constrictor. With four data centers in total (three in the US and one in Amsterdam), Joyent will be crushed. Your plans for additional data centers in other regions will not give you the scale you need.
And judging by the two most recent quarterly results reported by Rackspace, they too will suffer the same fate. In his conference call, the vice president of finance said, “Don’t be surprised if we are continually lowering the prices of certain products. We are one more cost store.” That phrase could come back to haunt Rackspace in a big way. Because it’s crazy that cloud providers are trying to compete on raw computing prices with AWS.
Cloud providers can sell against AWS outages with greater reliability, or they can try to distinguish in service offering. In the latter, it will probably require some specialization. An example would be allowing customers to expand processor, memory, disk, and flash memory threads independently of each other, based on workload needs.
That kind of flexibility would require an excess of infrastructure and would lead to greater management complexity. But offering customers dynamic configurations would represent a value-added service that could come at a premium, especially for workloads that don’t scale well across virtualized server segments as they do across a larger virtual footprint.
This would be similar to what category killers like Staples, AutoZone, PetSmart or Sports Authority did. Focus on one of the aisles at Walmart and try to beat the giant in selection or service. For Google and Microsoft, the alternative is the Target strategy. They both have the resources to do it, even as players # 2 and # 3. The others can only hope they don’t end up like Kmart, which later merged with Sears.