One of my favorite Mark Twain quotes is, “History doesn’t repeat itself, but it rhymes.” I thought of it again last week when I read about the price war going on in the infrastructure as a service space. Larry Dignon made the clever observation that he paid more for electricity in January than it cost to get IT infrastructure now that Microsoft and Amazon have decided to double down on the infrastructure game.
Call it Profit as an Option or PaaO. The whole cloud computing trend reminds me of the history of the application service provider (ASP) market a dozen years ago. Back then, applications were all client-server which meant that just about every mouse click and keystroke had to be echoed back to the host. Networks didn’t want that much traffic and servers bogged down from all the packet handling. I get tired just thinking about it. Of course, the entire system went to hell in a hand basket because no body could fit enough users on a server with acceptable performance to eek out a profit.
Today’s cloud computing is different. It has degenerated from multi-tenant, shared software and common infrastructure to paying by the drink for IT services that support conventional applications. The part of history that repeats this time is that with more Web friendly applications you can make a profit from hosting users on a server farm — if you want to.
The part that rhymes is the direction each of the major vendors is taking with regard to pricing. If they cut their prices for long enough they’ll be able to go out of business like their ASP forebears. But since we’re talking about two very large companies that know how to generate cash, that won’t happen in your lifetime. I have to wonder aloud if this kind of competition is legal. Didn’t J.D. Rockefeller do this?
The other possibility though is that someone in the executive suite will decide that not making money is just not as much fun as its opposite. If that happened one or both vendors could end up pulling the plug, which might cause a few of us to cry foul. That’s the rhyme for me, the end is the same as with ASPs but the path we traveled to get there was presumably more scenic.
Why do we do this? There are so many serious customers out there trying to make a buy decision by examining cloud computing with a microscope to ensure their precious data won’t be corrupted or stolen and the supposed adults in the room are engaging in a game of chicken.
Price wars are a common facet of business when supply is relatively high compared to demand, especially if all vendors want to increase the size of the market. They could also decide to stop flooding the market with product so that the excess capacity wasn’t burning a hole in their pockets. It reminds me of a Ron White line about being arrested on a drunkenness charge, “I had the right to remain silent, but not the ability.”
Lower prices probably will bring more companies into cloud computing, especially small companies trying to figure out a smart strategy for competing in a tough market. So that’s good. But as soon as profit flies out the window, vendors start looking for ways to lower costs and cheapen the product. That typically means less service, more self-service and the loss of who knows what — things that were once standard in a service completely gone. It will become apparent that we’re headed in that direction when Amazon and Microsoft start hiring executives with airline experience.
The thing that no one seems to get in this picture is that while IT services have become a commodity, they can’t, or at least shouldn’t, be commoditized because the switching cost is significant. IT services will for a long time be less like a true commodity and much more like a regulated monopoly or duopoly of possibly several vendors. For almost a century that’s what the phone company was — so were airlines and in many places so are electric utilities today. Ever hear of a rate setting commission? The Texas Rail Road Commission?
The regulated monopoly model might not deliver the lowest prices or choice of vendor and the style of service might seem homogenized in a regulated monopoly. But these types of organization aspire to a higher good — uninterrupted service and a fair price across a wide swath of the population.
So in my mind this price war is simply indicative of a nascent market and my bet is that in the future some form of regulation that protects customers from the downside of reckless pricing schemes will come into play and the vendors will be forced to make a profit. ASPs never got that far so that’s the real rhyme in Twain’s idea.
One of the more noticeable efforts by Meg Whitman since she became HP’s president and CEO last September has been the company’s effort in cloud computing. Last week the company announced that within two months it will begin offering cloud services. Moreover, HP has taken the important stance of trying to be different from the infrastructure as a service companies crowding the market.
The HP plan is to offer an expanding suite of applications rather than raw CPU and storage. Recently, Amazon and Microsoft have become engaged in a price war that looks like both companies are selling at or below cost, presumably to gain market share. Each company also supplies applications but the emphasis on price makes the apps something of a sideshow and I am not sure that’s the right emphasis. While this approach might be good for building market share in the short term, building a customer base is all about providing something that customers want and need, which is well beyond low prices for IT.
HP might have another advantage too. Tien Tzuo, CEO of Zuora, the billing and payments company that specializes in subscription services, tells me that HP selected Zuora for its business. That makes a lot of sense because when you are selling something more sophisticated than servers-by-the-hour, things get complicated quickly. Amazon has a lot of free apps and Microsoft is happy to sell one-time licenses, so there are some real differences between the three.
In addition to the number of seats, customers can suddenly buy a constellation of applications in different seat configurations that demand a billing system that goes beyond a single line item.
The HP relationship will not likely challenge Zuora’s infrastructure or its ability to serve many customers — the company already has well over a billion dollars worth of subscriptions under management. But the relationship does something very important for Zuora and for the subscription industry. HP, with its commitment to something beyond commoditized pricing of generic services, has taken the spotlight away from the simple price war and focused it on the challenges of managing a real business in the twenty-first century. Zuora is integral to telling that story.
Who ever said Monday is a slow news day?
Sage North America, vendor of SalesLogix and many other ERP and CRM products aimed at the SMB market, announced a partnership with Amazon today. Sage said its cloud strategy will involve hosting its SalesLogix CRM product on Amazon’s EC2 cloud infrastructure.
The announcement puts Sage clearly into the cloud computing discussion along with Microsoft and many other vendors utilizing the Internet as a transport mechanism for hosted software. EC2 will host SalesLogix software for those customers who need CRM functionality but who do not have in-house IT operations. The move potentially saves Sage customers significant annual costs as they leverage IT resources and labor from the cloud.
This solution is similar to Microsoft’s approach and, for the customer base that Sage addresses, makes good sense. Leveraging EC2 gives Sage customers the ability to access a familiar set of applications with greater convenience and better cost characteristics than conventional on-premise applications.
To strengthen its position in the cloud, Sage should now announce additional capabilities such as integrating other cloud-based applications into its solution set. Perhaps additional announcements will be made in the run up to Sage Insights, the company’s annual meeting with its business partners to be held later this month in Denver.