Is It Really ‘Game Over’ for Most IaaS Providers?

While there are plenty of witless headlines about cloud computing, I’ve noticed many lately that claim the competitive race for public IaaS has already been run and the winners decided. It’s little surprise that the most popular providers cited as winners are Amazon, Microsoft and Google. But to me, these are mostly sensational claims written to gain clicks or dramatic oversimplifications of a complex, competitive and still evolving market.

First of all, consider what Andrew Bohling says in his blog, The Big Cloud Winners Are… Not Just the Hyperscale Players.

“Cloud computing isn’t a race to the top of the market-share heap, and success with public cloud services isn’t just a game of scale.”

Good point. Doesn’t success for IaaS providers also come from:

  • Adding new, profitable revenue streams and customers
  • Finding ways to increase sales and margins with existing customers
  • Establishing differentiators for competitive advantage
  • Enhancing business growth on behalf of investors
  • Delivering innovative capabilities not offered by the mega-providers

There are many, many measures of success – and not all of them have to do with scale or market share.

Game Over?

Unfortunately there is a pundit around every corner claiming that the smaller providers have already failed or will fail soon:

  • They declare that it is only a matter of time before small IaaS providers must exit the market
  • They are quick to say that Rackspace has pulled out of the IaaS market when, in reality, IaaS is still at the core of many of their offerings
  • They state that the IaaS market will no longer support small providers, but then hedge, saying small providers can still compete within niches
  • They scream out that margins are too low for all but the largest providers to survive

Despite the cacophony, I simply don’t believe that Amazon, Microsoft and Google are – or will be in the next 5 years – the only winners (and looking at anything in this space beyond 5 years is sketchy at best). In fact, Google still has a way to go before it can be definitively called a winner. Yes, Google appears well positioned to grow here, but for now is the laggard among the three, which isn’t surprising given their relatively late entry to the market. And while Microsoft has established a sizeable installed base of customers in IaaS, it still trails Amazon significantly in sales.

So, even the battle among these hyperscale players is still ongoing, albeit with a huge lead by Amazon.

The Game Is Still On!

While various pundits were signing the IaaS death certificate for Rackspace, the company has been busy growing revenue 17% year-over-year. In his blog, Where Does IaaS Fit Into The Managed Cloud? Rackspace CEO John Engates writes, “IaaS is and remains a critical component in the Rackspace Managed Cloud.”

The pundits were WRONG. The company has not exited the IaaS business. And whether the company was/is seeking a buyer or not, it is the fiduciary responsibility of the board and company executives to seek the best return for shareholders. Acquisitions can be both lucrative to shareholders and a sign of success. After all, SoftLayer could hardly be considered a failure when IBM acquired it.

The current “fake cloud price war,” as the folks at ProftBricks like to call it, also does not support the argument that only Amazon, Microsoft and Google will be left standing. Companies like Digital Ocean are priced significantly lower than the hyperscale players and appear set to maintain that price advantage.

Other companies, like ProfitBricks, are able to maintain positive margins while beating the hyperscale players on price/performance ratios. Yes, prices are dropping. Yes, they will keep dropping. But, with the right business models, smaller providers will still survive and be profitable.

Listen to the Customers

The needs and preferences of cloud customers are perhaps the best indicator that smaller providers will not only survive, but also thrive. The mega providers simply can’t deliver on all the varied requirements of today’s customers, so they will not be the only ones to define and serve the public IaaS market.

Here are some of the things that the hyperscale players currently fail to deliver – and are not well positioned to deliver:

  • Bare metal and dedicated servers
  • Colocation services
  • Tightly integrated on-premises / off-premises clouds
  • A mix of CapEx and OpEx choices
  • Pricing model innovations (e.g. actual consumption based pricing)
  • Performance consistency and noisy neighbor management
  • Customization and personal services
  • Proximity to regions with sparse populations
  • Specializations for industry verticals
  • Managed services (though ecosystem partners will fill some of this gap)

There are of course many other ways to compete. For example, OnApp, a cloud management platform vendor, is enabling an alliance of integrated IaaS providers. Together they have the reach and strength of a much larger provider. Other providers are pursuing differentiation by developing services and capabilities not available from the larger providers. Still more are segmenting the market in creative ways and serving those segments with specialized services. Finally, there are many powerful international providers that have a home advantage over the big three U.S. providers in various regions of the world.

Until innovation is dead, I believe that midsize and smaller service providers will continue to find success in the public IaaS space. Some, of course, will fail. But over time, I fully expect to see many more than just the hyperscale players succeed. Meanwhile, it’s “Game On” for public IaaS providers of all sizes.

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