The Landlords of the Net, aka Oligopoly in the Cloud

By Ofir Nachmani, CEO, IOD
(Edited by: Jen Maidenberg)

Did you see the film The Founder? It tells the success story behind fast food giant McDonald’s. Decades ago, McDonald’s founder, Ray Kroc, figured out the company could make far better money and achieve far more efficient growth by purchasing land for its restaurants, leasing them out and creating a franchise business, and collecting monthly rent along with a percentage of sales. They also continuously came up with new product offerings, guidelines, and suppliers.
We in the tech industry can relate to this landlord/franchise model in some way when it comes to “conquering” the online cloud lands: the irons, the servers and platforms, the developer tools, and the data frameworks that form the basic fundamentals for building the online world.
Last month, Gartner published their annual IaaS report and not surprisingly AWS is still the leader, Microsoft advanced, and Google is third. These three — what I’ve referred to as “the cloud trio” — not only lead in public infrastructure, but are slowly and surely taking over the land…and have become landlords over it.
Just think about the massive impact of the recent Microsoft acquisition of GitHub, the 28M developers’ oasis. This kind of “conquest” clearly demonstrates the enormous strength of the landlord, ruling the cloud lands, allowing some other, smaller “lords” to lease it out.

The Traditional Vendors Lost the Land

How did we get here? Well, in a nutshell, the market leaders of on-premise data centers failed to evolve. Though they tried for some time with private cloud initiatives, they failed. Below are a few examples of how.

The DIY, Private Cloud Failure

A few years back, Enstratius tried to help companies package their traditional data centers into clouds (i.e., IaaS). They had access to thousands of servers to build these private on-premise clouds. Enstratius was subsequently acquired by Dell, and the entity never prospered, afaik.
Nonetheless, we still see some well-known enterprises holding fast to the belief that they can succeed on their own with private clouds. They won’t. They will fail. (No, I am not referring to Dropbox which announced their full migration out of AWS to go “private cloud” as I consider Dropbox itself a public cloud vendor.)

The Hybrid Cloud Eventually = Migration

What about the hybrid model, then? The “safe choice” for the traditional CIO, who has his/her own excuses for not making a bold “migration to public” move? Well, the hybrid cloud (which is not really a cloud when you use the same on-premise VMWare environment) is only a means to an end; that end being a complete migration to the public cloud. Such a migration takes time, and both Microsoft’s Azure with Azure Stack and AWS with their VMWare offering are successfully taking this on.
New cloud-based technology platforms (such as Amazon SagerMaker, the company’s on-demand Machine Learning offering) will eventually force CIOs to abandon their on-premise “clouds”, and thus these hybrid clouds, as all workloads, will be permanently moved off-site to AWS, Azure, and others, controlled by a handful of providers, the “property owners.”
At last week’s IBM annual summit in Israel, it was said that 80% of data is still held by the traditional enterprise and not by the modern Ubers and Airbnbs. This is a dangerous statement, that ignores a clear trend. (A dangerous not unlike the one we heard from Kodak a long time ago: people take more pictures, so they will print more.)

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The Traditional Vendors’ Struggle

Back in 2014, I covered the challenge of the open source community OpenStack, and asked how much time OpenStack and the big names behind it—I’m talking to you, HP and Dell—needed before turning it into a legitimate cloud contender. Their time has passed, though — it seems that the “OpenStack Consortium” has been left behind, and HP is… where? I said then that this one-time tech titan was fighting for its life. Today, it has been left in the dust.

“We’re not necessarily the first place a startup is going to look for in getting going. But I can assure you we’ve also got the type of global footprint and an SLA and a business-grade point of view that understands the enterprise. That’s what we’re betting on.”- Zorawar Biri Singh, SVP and GM for HP Cloud Services 2011

Singh left HP just a couple years later, unable to successfully revive HP’s struggling cloud business, and in 2015 the company permanently ditched its Helion Public Cloud project.
Third-party service providers need to pay attention as well. SAP partnered with AWS back in 2012, and I stated then that “IMHO SAP made a great decision to ‘go with the flow’ and not resist it.” Unfortunately for them, too many today still are not getting this.
And when a vendor is really struggling, this is what happens:

“Oracle sometimes uses high-pressure sales tactics to sell its cloud IaaS offerings, including software audits or threatening to dramatically raise the cost of database licenses if the customer chooses another cloud provider. Customers should be cautious of these tactics, thoroughly understand their options and evaluate the risks of adopting OCI at this stage of its maturity. Gartner strongly encourages prospective customers to speak with references.” Gartner 2018 IaaS Annual Report

Another player that’s important to mention is Rackspace, which recognized the trend and has geared up — though a bit late — its managed services for public cloud providers, including helping companies migrate to AWS, thus taking advantage of the hybrid-migration phase.

The Evolution of “On…the Cloud”

The phrase “On AWS” is important to emphasize. AWS is and will remain the cloud leader for the next 5–10 years. However, you will also see “on Azure” and “on GCP” and maybe three or four other providers, including Alibaba, getting a small share. The important thing to understand is that everybody else will be building, operating, and growing on these public cloud properties. Just like McDonalds, who savvily bought up land for future McD’s franchise owners and collected the rent, every company in the world will need to have an R&D organization that will pay “rent” to these few landlords.

Why? It’s in Their DNA

Ruling the Web

These three have the major advantage of an already-present and endless infrastructure on the net. Their ability to deliver is simply unmatched by any others. Amazon is the leader on the web and has been for a long time. Their high-volume/low-margin advantage for more than two decades has bought them their position as #1. It has also, at present, yielded them a very high-volume/high-margin business: AWS.

Serving the Consumer

Whereas Google seems to find it challenging to break into the enterprise data center market, it has been disrupting the individual online consumer and office space with Gmail, Drive, and Docs. As an e-commerce giant, Amazon also achieved a massive leg up on the consumer front. Every time you watch a movie on Netflix, and every time you reserve a room on Airbnb, you are in fact using Amazon cloud. These businesses are hosted by Amazon servers.

Known Brands

Microsoft is playing their angle wisely, as well: help their massive numbers of loyal enterprise clients transition to the cloud by bundling cloud services with popular software offerings. AWS, too. With its market share, no one can blame a CIO today for choosing AWS .

Oligopoly Alert

Oligopoly: A market in which there are a limited number of providers providing the same service. A state of limited competition.

These guys are growing big. And it shows. Alphabet was not so forthcoming with its latest quarterly numbers for GCP, but Amazon’s sales from AWS grew 45% year over the last year, and Azure clocked revenue growth of 93% (not that some weren’t immediately griping that it was a decrease from 98% in the previous quarter).
Bernard Golden does a nice job giving a rundown of the money earmarked by the Big 3 for their cloud development in 2018, and the estimates are mind boggling. The revenues-to-capex stats are even more startling with only Amazon’s present sales greater than spending. With the commoditization in this market, only these giants can generate the huge economies of scale with margins to survive in this space.
And with their size come some risks—or worries—as well. We all saw Facebook’s Mark Zuckerberg pale-faced and dumbstruck as he was forced to testify in front of the U.S. Senate’s Commerce and Judiciary committees due to massive data protection concerns. Google’s stock price came under pressure earlier this year as well when it almost had to testify at that very same hearing, and analysts still believe European regulations will be an issue for Google due to new data privacy laws that have just come into effect.
I’m going to guess Bezos doesn’t want to end up in the hot seat. And I hope regulators are not going to wait and see if another crisis looms behind the “clouds.” I said it in the past, and I still believe that eventually all workloads will move to the cloud, private and hybrid clouds will go the way of the Dodo, and these Landlords of the Net will reign supreme. But that doesn’t mean they won’t be meeting some hefty challenges and need to make sure to be fair and honest with their residents.
Nonetheless, I love being in this market and researching and studying this ecosystem. I had the luck and pleasure of having been an early adopter, tracking the market’s growth and changes. I’m excited to see what comes next.

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