In my last three posts, I have introduced the concepts and technology behind cloud computing, how cloud computing can potentially change business models of companies in various sectors, some critical issues with cloud computing and how the future is projected for cloud computing. In this series, I am going to talk about relevance and benefits of cloud computing for particular industry sectors.
As has been projected by several research firm such as Forrester and Gartner,the potential future demand of cloud computing exemplifies the pervasiveness of cloud computing. Such a characteristic of this technology is bound to attract more firms to enter the cloud computing industry as providers. Currently, the landscape of this sector is characterized by the presence of big firms . In this post, I am going to point out some of the key characteristics of the sector and the competitive landscape of the sector from a provider's point of view.
As can be seen from the list below (http://cloudcomputingcompaniesnow.com/), there are many cloud computing providers and some of them has been trusted brand names in the information and communication technology sector and e-business sector for quite some time now.
These organizations differ in their service offering. Below is a view of the larger cloud market that I found in this website: http://cloudtimes.org/2011/11/30/top-paas-saas-and-iaas-cloud-companies-by-cloudtimes/
While Amazon is the biggest name in the IaaS market, Salesforce emerged as the best performer in the SaaS market. Though it is hard to quantify such measurements, the best approximations are as follows (http://cloud-computing-today.com/2011/06/30/quantifying-cloud-computing-market-share-2/):
Amazon's revenue from IaaS was $500-700 million followed by Rackspace which generated a revenue of $100 million approximately.
In the SaaS space, Salesforce has emerged to be the best performer with a revenue of $1.3 billion followed by NetSuite, Rightnow, SuccessFactor etc. with revenues around $200 million each.
Industry Analysis of Cloud Computing
The most comprehensive way to analyze an industry for me is to apply Porter's Five Forces. Thus I am going to begin the cloud computing sector analysis in the light of five forces. I have consulted the book titled "Cloud Computing: Principles and Paradigms" by Buyya, R., Broberg, J. and Goscinski, A. for this analysis.
The diagram below is the representation ((http://www.lidi.info.unlp.edu.ar/WorldComp2011-Mirror/SER8106.pdf) of cloud market using Porter's Five Forces (Market Model)
Cloud Market
Presence of many firms in the sector leads to a less concentrated market. Such low concentration indicates a highly competitive sector. Presence of almost all ICT industry giants (https://www.deloitte.com/assets/Dcom-Global/Local%20Assets/Documents/TMT/cloud_-_market_overview_and_perspective.pdf) such as IBM, Apple and Google also is an indication of high existing rivalry among competitors. Though their service offerings differ depending on IaaS, PaaS, SaaS or combination of any two, even in the same service area the competition tends to stay high because of low product differentiation.
New Entrants
In SaaS market, the threat of new entrants is high because of the requirement of low initial investment, low time to market and low exit barrier. In PaaS market (https://www.deloitte.com/assets/Dcom-Global/Local%20Assets/Documents/TMT/cloud_-_market_overview_and_perspective.pdf), presence of industry giants such as Google and Amazon creates a high barrier to entry which can be reduced by product differentiation and innovation. In IaaS market, threat of new entrants has been low because of the requirement of high initial investment and presence of high risk.
Buyers
Bargaining power of buyers tend to stay high in the SaaS market because of low switching cost and availability of many choices (http://www.lidi.info.unlp.edu.ar/WorldComp2011-Mirror/SER8106.pdf).
In PaaS market, lack of interoperability standards and usage of proprietary development language lead to a vendor lock-in which in turn leads to high switching cost for buyers. Thus in PaaS market, bargaining power of buyers tend to stay low because of high switching cost. Below is a video from Microsoft Azure which reveals how customers of this cloud would not be able to switch to a different cloud easily because their applications were developed on Azure.
IaaS is considered to be a commodity. Thus product differentiation is low and bargaining power of buyers is high. Amazon EC2 has been the early mover in the sector and is preferred by buyers mainly because of its brand name. Thus creating brand loyalty is only way to stay competitive in this market.
Suppliers
Suppliers in the cloud computing market are the cloud service providers. In SaaS market, suppliers have low bargaining power because of the low switching cost of buyers and presence of many players. In PaaS market, as I have discussed before, vendor lock-in leads to high bargaining power of suppliers. In IaaS, brand loyalty is the only way providers can gain some bargaining power.
Technology Development
Threat of substitute for all cloud computing services has been low because the cloud computing technology itself is in the growth phase. Open Source computing can be the only substitute for cloud computing. But SMEs tend to prefer cloud computing because of availability of consulting services from the providers and non existent switching cost.
Thus the overall cloud market looks very attractive from the providers' perspective. The sector has enough demand and supporting technology to reach economy of scale. Furthermore, substantial research conducted by academia and industry in this area and enriched collaboration between academic and corporate R&D will lead to new innovations that have the potential to enable product and service differentiation for new entrants in the future. Even though economy of scope is not yet possible in this sector, it can achieved in the future with new innovations.
Let me finish this discussion by showing you where cloud computing stands on the Rogers S curve. Don't curse me yet. I am going to tell you what Rogers S curve is. As the name suggests, this curve is shaped like S (mathematically, it is known as logistic function) and was introduced by Everett Rogers to describe the technology adoption life cycle. It depicts how the adoption of a new innovation progresses over time depending on the demographic and psychological characteristics of the targeted adopters. According to many experts, the S curve for cloud computing is as follows: (http://www.informationweek.com/news/software/info_management/228900680)
What does this mean? The early adopters of cloud computing are SMEs because in its current state cloud computing meets the demand pattern and IT need criteria of the same. But to attract big enterprises that already have extensive IT infrastructures, cloud computing providers need to add more value to their services and would need to introduce more service innovations. Some of the big corporations use Clouds mainly as a storage space but are yet to exploit cloud's full potential. To switch from their existing IT infrastructure to Cloud, the big enterprises would demand more functionality, additional value added services and customization.
I hope the this post was able to present a broad view of the cloud computing sector from the providers' perspective. In my next post, I will discuss the current cost structure, value chain and profitability of cloud computing providers. I will try to present my ideas on what kind of product differentiation and customization would attract big enterprises to move to cloud and how a new entrant can compete successfully with the existing brand names.
As has been projected by several research firm such as Forrester and Gartner,the potential future demand of cloud computing exemplifies the pervasiveness of cloud computing. Such a characteristic of this technology is bound to attract more firms to enter the cloud computing industry as providers. Currently, the landscape of this sector is characterized by the presence of big firms . In this post, I am going to point out some of the key characteristics of the sector and the competitive landscape of the sector from a provider's point of view.
As can be seen from the list below (http://cloudcomputingcompaniesnow.com/), there are many cloud computing providers and some of them has been trusted brand names in the information and communication technology sector and e-business sector for quite some time now.
While Amazon is the biggest name in the IaaS market, Salesforce emerged as the best performer in the SaaS market. Though it is hard to quantify such measurements, the best approximations are as follows (http://cloud-computing-today.com/2011/06/30/quantifying-cloud-computing-market-share-2/):
Amazon's revenue from IaaS was $500-700 million followed by Rackspace which generated a revenue of $100 million approximately.
In the SaaS space, Salesforce has emerged to be the best performer with a revenue of $1.3 billion followed by NetSuite, Rightnow, SuccessFactor etc. with revenues around $200 million each.
Industry Analysis of Cloud Computing
The most comprehensive way to analyze an industry for me is to apply Porter's Five Forces. Thus I am going to begin the cloud computing sector analysis in the light of five forces. I have consulted the book titled "Cloud Computing: Principles and Paradigms" by Buyya, R., Broberg, J. and Goscinski, A. for this analysis.
The diagram below is the representation ((http://www.lidi.info.unlp.edu.ar/WorldComp2011-Mirror/SER8106.pdf) of cloud market using Porter's Five Forces (Market Model)
Cloud Market
Presence of many firms in the sector leads to a less concentrated market. Such low concentration indicates a highly competitive sector. Presence of almost all ICT industry giants (https://www.deloitte.com/assets/Dcom-Global/Local%20Assets/Documents/TMT/cloud_-_market_overview_and_perspective.pdf) such as IBM, Apple and Google also is an indication of high existing rivalry among competitors. Though their service offerings differ depending on IaaS, PaaS, SaaS or combination of any two, even in the same service area the competition tends to stay high because of low product differentiation.
New Entrants
In SaaS market, the threat of new entrants is high because of the requirement of low initial investment, low time to market and low exit barrier. In PaaS market (https://www.deloitte.com/assets/Dcom-Global/Local%20Assets/Documents/TMT/cloud_-_market_overview_and_perspective.pdf), presence of industry giants such as Google and Amazon creates a high barrier to entry which can be reduced by product differentiation and innovation. In IaaS market, threat of new entrants has been low because of the requirement of high initial investment and presence of high risk.
Buyers
Bargaining power of buyers tend to stay high in the SaaS market because of low switching cost and availability of many choices (http://www.lidi.info.unlp.edu.ar/WorldComp2011-Mirror/SER8106.pdf).
In PaaS market, lack of interoperability standards and usage of proprietary development language lead to a vendor lock-in which in turn leads to high switching cost for buyers. Thus in PaaS market, bargaining power of buyers tend to stay low because of high switching cost. Below is a video from Microsoft Azure which reveals how customers of this cloud would not be able to switch to a different cloud easily because their applications were developed on Azure.
IaaS is considered to be a commodity. Thus product differentiation is low and bargaining power of buyers is high. Amazon EC2 has been the early mover in the sector and is preferred by buyers mainly because of its brand name. Thus creating brand loyalty is only way to stay competitive in this market.
Suppliers
Suppliers in the cloud computing market are the cloud service providers. In SaaS market, suppliers have low bargaining power because of the low switching cost of buyers and presence of many players. In PaaS market, as I have discussed before, vendor lock-in leads to high bargaining power of suppliers. In IaaS, brand loyalty is the only way providers can gain some bargaining power.
Technology Development
Threat of substitute for all cloud computing services has been low because the cloud computing technology itself is in the growth phase. Open Source computing can be the only substitute for cloud computing. But SMEs tend to prefer cloud computing because of availability of consulting services from the providers and non existent switching cost.
Thus the overall cloud market looks very attractive from the providers' perspective. The sector has enough demand and supporting technology to reach economy of scale. Furthermore, substantial research conducted by academia and industry in this area and enriched collaboration between academic and corporate R&D will lead to new innovations that have the potential to enable product and service differentiation for new entrants in the future. Even though economy of scope is not yet possible in this sector, it can achieved in the future with new innovations.
Let me finish this discussion by showing you where cloud computing stands on the Rogers S curve. Don't curse me yet. I am going to tell you what Rogers S curve is. As the name suggests, this curve is shaped like S (mathematically, it is known as logistic function) and was introduced by Everett Rogers to describe the technology adoption life cycle. It depicts how the adoption of a new innovation progresses over time depending on the demographic and psychological characteristics of the targeted adopters. According to many experts, the S curve for cloud computing is as follows: (http://www.informationweek.com/news/software/info_management/228900680)
What does this mean? The early adopters of cloud computing are SMEs because in its current state cloud computing meets the demand pattern and IT need criteria of the same. But to attract big enterprises that already have extensive IT infrastructures, cloud computing providers need to add more value to their services and would need to introduce more service innovations. Some of the big corporations use Clouds mainly as a storage space but are yet to exploit cloud's full potential. To switch from their existing IT infrastructure to Cloud, the big enterprises would demand more functionality, additional value added services and customization.
I hope the this post was able to present a broad view of the cloud computing sector from the providers' perspective. In my next post, I will discuss the current cost structure, value chain and profitability of cloud computing providers. I will try to present my ideas on what kind of product differentiation and customization would attract big enterprises to move to cloud and how a new entrant can compete successfully with the existing brand names.
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