Will Amazon Rule the Cloud? Why the Online Data Business May Be the Next Industry to Experience "Disruption"

In an April 27th, 2013 post to Quartz (that should be very interesting to anyone who's paying attention to how films circulate in the New World), Christopher Mims makes a very convincing argument that the internet's biggest bookseller, Amazon, will soon be the internet's biggest provider of computing and IT services in the cloud:

"Amazon’s competitors in cloud computing [e.g., VMWare] are in denial about how well Amazon’s strategy of being the lowest price provider will work in a space as high tech, and high stakes, as cloud computing... But this is a fundamental misreading of Amazon’s long-term cloud strategy and the process of disruption itself."

As noted elsewhere on this blog, legacy companies (like the big record companies, or the major movie studios, or - going back a few more years - newspapers) often can't compete when a new player offers a cheaper and/or more convenient alternative to their existing product. These so-called "low-end" disruptions (e.g., streaming, or YouTube, or Google AdWords) are often scoffed at or derided by the sector leaders from the Old World as technologically inferior (or even somehow a form of theft).

The incumbents often choose not to compete with the new product or service - arguing (apparently rationally - at first) that it's beneath them and there isn't any money to be made. They're often right (at first).

As Andy Rachleff wrote in a February 16th, 2013 post to TechCrunch: "[A]lmost all disruptions start out with products that are inferior to those of the incumbents." These new products initially aren't obviously improvements on the old ways - they offer an inferior product (e.g., would anyone argue that movies on YouTube are technically as good as movies in a theater?) - and they often represent an unprofitable extreme that appeals to the unwashed low-end of the market - perhaps inviting a new segment to participate, but often in ways that don't seem to threaten the relationships the legacy businesses have with their existing customers.

But - looking back at the history of disruptions - successful low-end disruptors often work when the incumbents have been offering more than their most price-sensitive customers really need.

In other words, the existing standard for what needs to be in a record album (12 radio-friendly songs, etc.) or a movie (big stars, etc.) or  newspaper (all sorts of stuff the typical reader doesn't read, etc.) may have made that product vulnerable to disruption.

If you're getting much more than you really want from the existing providers - or you've been excluded from the market (because 12 songs from some stupid commercial band or Tom Cruise's latest action picture fails to appeal or seems too expensive?) - and someone comes along and offers you an adequate product that speaks to your needs for a lot less money...

The pattern of successful disruption in the past few years has often begun when a crappy cheap online product enters the market - offering something for poor people that isn't very profitable - but then the new service starts to nibble away at low-end of an incumbent's market share by offering something that is good enough and affordable.

How is a company - that has built a reputation on quality - supposed to compete with a cheaply-priced upstart who offers an inferior (if adequate) product?

Often the decision is made in the incumbent's boardroom not to compete. (Although some established companies like the studios have tried to legislate or sue the upstarts out of existence.)

But what if the new competing company continues to grow?

What if, eventually, the disruptor is generating enough revenue to improve services (if only slightly) and the Old World companies then find themselves in a fight for their very existence?

That pattern (familiar to anyone who's been paying attention to what's happened in the book, recorded music, film and newspaper businesses) seems to be the story of Amazon's entry into cloud computing:

Derided by established competitors as a flawed and unreliable alternative - Amazon has been gaining market share in cloud computing by offering low-margin customers a service that is too affordable to pass up. Now that Amazon has market share (with clients like Ticketmaster and Yelp), Amazon has announced that they will be spending real money to make their cloud services more reliable and secure - opening up the possibility that better-heeled customers, like financial services firms and health care companies (wary of security breaches and therefore willing to pay higher prices), might soon begin using Amazon to handle online transactions.

Will other cloud computing companies be able to compete when Amazon makes those kinds of improvements?

Consider this... as reported in Amazon's most recent quarterly report, Amazon web services have "lowered prices 31 times since [launching] in 2006, including seven price reductions so far in 2013.”

As Christopher Mims writes: "In a world in which consumers are grabbing more data from the internet than ever, the cloud services that many companies rely on are an ever larger part of their budgets. In that context, Amazon’s low price guarantee may be too compelling for even large enterprises to pass up."

No comments:

Randy Finch's Film Blog:

Thoughts from a film producer about making and distributing films.