Infrastructure as a service: Really only a three-horse race?

Infrastructure as a service: Really only a three-horse race?

Summary: Amazon Web Services, Google Compute Engine, and Microsoft Azure are likely to be the three lead dogs in cloud infrastructure services. Why? Economics, scale, and skills.

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The chase is on to catch up to Amazon Web Services, a leading infrastructure as a service player, and Google has launched an all-out price war that Microsoft's Azure, Rackspace, and the rest of the pack will have to follow.

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It's a infrastructure as a service (IaaS) pack that's getting increasingly crowded too. IBM's SoftLayer, Hewlett-Packard, Oracle, Verizon, and a bevy of others are all playing the IaaS game.

But Bernstein analyst Carlos Kirjner is betting that IaaS really boils down to a three-horse race. Amazon, Google, and Microsoft. The other players either have economic conflict of interests or won't be able to scale in the deflationary cycle that AWS and Google are about to start in technology infrastructure.

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Kirjner was riffing on Google's recent price cuts across its Compute Engine server types. He said:

We believe the number of players who can compete at scale with AWS (i.e., beyond specialized niches) can be counted on the fingers of one hand. This is because playing in the big boys' IaaS league requires a set of assets, skills, and experiences that very few businesses have: They range from building distributed computing infrastructure including hundreds of thousands and in the not-so-distant future millions of servers, to the software development skills to create and support the literally thousands of different services and features available on that infrastructure to enterprise and government customers, to the experience base on hyper-scale distributed computing required to operate and evolve the underlying technology infrastructure with reliability and in a cost effective way.

It's hard to disagree with Kirjner that only a few companies can handle hyperscale infrastructure, but the field may be larger than he suggests. He noted IBM can't be dismissed, but doesn't have the experience or expertise — even with SoftLayer — to compete. Kirjner's key point is that IBM doesn't have the economic incentive to compete in IaaS. That final point may be on target since IBM — even with the move to ditch low-end servers to Lenovo — still sells a lot of hardware.

That economic argument can be made for many players in the IaaS space. Telecom giants — think Verizon — aren't going to get into price wars over IaaS, and will stay upstream. Oracle sees IaaS as a way to sell its cloud applications and platform. Infrastructure to Oracle is the price of admission to the cloud.

Kirjner continued:

In our view, one should expect the IaaS market to have three, and in an extreme case four, large competitors, which in aggregate should account for 60% to 80% of the market. Many others, including Verizon, AT&T, VMWare, HP, Centurylink, BT, Cisco have entered the IaaS market (or at least have issued press releases saying they were entering), probably because they recognize the vast opportunity it presents, and can do enough arithmetic to decide that a fractional market share in a very large market may still be interesting. We have very little doubt that they do not have the right computer science and engineering skills and assets to compete with Amazon, Google, and Microsoft.

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Economics frame much of Kirjner's argument. Amazon, Google, and Microsoft will have no choice but to cut prices about 20 percent to 30 percent a year, but cost of goods sold, server depreciation, Moore's Law and power consumption will also fall at the same clip. In other words, gross margins may stay stable. However, it's unclear that Amazon, Google, and Microsoft can make money on IaaS. He added:

We think the public cloud business works at scale because AWS and possibly Google Compute Engine will be able to operate at very high server utilization; high enough to drive gross profits on a per-server basis and at a large enough scale to offset the fixed costs (R&D and G&A).

Top line: Google and AWS may combine for about $40 billion in revenue by the end of the decade while cutting prices thousands of times.

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So why wouldn't some other tech giant enter the fray? Google, Amazon, and Microsoft are likely to set off a deflationary IT cycle. Few enterprises will be able to match the utilization of the cloud's big three. As a result, they won't buy servers. Many other cloud players, who happen to sell hardware, are going to blink. They won't want to contribute to the unraveling of their key businesses. "One server or switch bought and used by AWS or Google at high utilization may meet the demand that would require two servers bought by enterprise customers," said Kirjner.

Topics: Cloud, Amazon, Google, Microsoft

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  • Too soon to predict google a winner

    Google lacks enterprise features found in other clouds, so they are only suitable for small server clusters. They don't offer the customization of doing BGP from within the cloud or connecting tier one ISPs directly to your servers on their cloud. They are fine for small setups, but not suitable for enterprises (yet) and can't really be considered one of the top 3 for enterprises until they expand their features. It's too early to predict the top 3, and right now Cisco and Vmware in some ways are better positioned to take over the market. Google has engineering skills and eventually they are catch up with features required by enterprises, but Vmware and Cisco also have the engineering skills, and if you consider that doing a colo of your own private cloud with Vmware cost much less (ie: 50%) than any of the public cloud offerings, the others still have a long way to drop prices for enterprise scale.

    Google has a bad habit of making technology available, and then dropping support of it. Although they do tend to give warning (ie: a year) when they pull out a service, they would not be my first choice for moving enterprise infrastructure to in case they decide it's not worth it.
    John Lauro
  • Digital Ocean, Linode

    I think 2 major players were missed, https://www.digitalocean.com/ & https://www.linode.com/ . They are quite competitive and offer advantages over AWS depending on your application.
    Radomir Wojcik
    • Lots of players

      There are over 20 players, and the profit margins are high enough (if they don't have too wide a flux between active/inactive servers) along with open source and commercial options options that there will likely be significant niche players for some time. A company can do a profit with under 1% market share in IaaS if they can get long term contracts and the smaller players are easier to negotiate on price with 3+ year contracts. I don't see it ever being only a 3 horse race anytime soon, maybe a 10 horse race 5 years from now.
      John Lauro
  • I'd pick AWS in a heartbeat, even if it was far more expensive.

    Google and Microsoft have a long track record of fickle abuse of their customers. So they are not trustworthy at any price. Bad management rules at both companies. Look how Google has forced Google Plus on everyone at Youtube, after years of capricious and HORRIBLE changes in the Youtube interface, then crows about the number of Google Plus subscribers -- yeah, because it FORCED them. So nothing Google says or does is credible. I wouldn't buy anything from them, if you paid me to do it.

    MSFT has a 12-year track record of hating its customers, ever since Vista. Wouldn't buy anything from Microsoft, if you paid me.

    Both of these behemoths treat their customers badly, year after year. But Amazon? Just the opposite. They keep on being more attentive and improve what they do, making it easier on customers year after year. No customer is too small, for them. So honey: they could charge DOUBLE what the others do, and if I were in the market for such cloud services, I'd buy from them in a heartbeat.
    brainout
  • There's room for a lot more than three

    As has happened similarly in the web hosting industry, the IaaS market has come to be dominated by a few major players, which has taken the prices down. But in the web hosting industry, there are still many hosts that stay competitive and relevant by being really good at specific things. So ultimately, I think in the coming years, we'll a lot of the users of the biggest cloud providers migrating to companies that can offer a more customized level of service and personal touch.
    William Hayles