Amazon’s Cloud Success Means More Budget Woes for CIOs

The Marketplace section of today’s WSJ had an article entitled Tech Titans Clash in ‘Cloud.’ The basic premise was that while Amazon, Google and Microsoft have been battling it out in mobile and search, the next wave of competition is the enterprise space. The analysis had some statements that underscore the next phase of CIO budget pressures is here; now.

In particular, the accompanying video had commentary from Spencer Ante, a “respected journalist” who had some statements that will give CIOs headaches. For example, he said things like the following:

“All the Web sites out there today are running on computer servers”…that are rented…and many from Amazon.

“Amazon has the brand identity, the best technology and all the relationships; especially with startups.”

“IBM has relationships with all the big companies in the world but their technology is kinda old and they’re trying to transition to the new technology and they don’t have the relationships with startups.”

“The companies involved have a lot of pricing power”…there’s a story in the article about a startup and how these companies were vying for their business and Amazon and Microsoft were cutting prices and giving away free services…

Man-O-Manischewitz…If I’m a CIO this is the last thing I need.  The CFO and CEO read the morning paper and the next thing I know they’re telling me: 1) I need to rent all my infrastructure cause it’s cheaper; 2) My main supplier has outdated (aka overpriced) technology and 3) Startups are getting free stuff while I’m spending tens of millions of dollars with enterprise tech vendors.

This wise guy Nick Carr writes a book “Does IT Matter” and my budget gets cut. Then some college kids at Google and Facebook write Web apps that make it easy to communicate and my boss is telling me that my IT is way too complicated – and my budget gets cut again. Now the world has gone Amazon crazy and my budget is going to get whacked yet again…just when I thought Big Data was going to save me.

Today I talked about these forces with SiliconAngle’s Kristen Feledy on Morning News Desk. There’s so much hype in the market and CIOs have to be careful to arm themselves with facts and options. Learn from Amazon. Push your suppliers to be more like Amazon and embrace Amazon as a viable path for certain parts of the portfolio. But don’t get strong-armed into putting the corporate family jewels in the service without really doing your homework. Here’s the video clip:

And here are some highlights from Q&A discussion:

How large is Amazon’s lead and why are things in the cloud heating up now?

Amazon invented the modern concept of cloud computing in 2006 when it launched AWS and it has a clear lead in that space. But its lead is not insurmountable by any means. The market today for cloud services is in the tens of billions but the total available market (TAM) is absolutely huge. In addition, Amazon is trying to expand its served market and hence it’s turning up the rhetoric on the traditional enterprise players; trying to position them as outdated and overpriced, while it positions itself as “the savior.”

People Don’t Typically Associate Google and Amazon with Core Enterprise Computing…Can they Compete with the Traditional Players?

The big question is can the enterprise players compete with Amazon and will they get disrupted. The answer in my view is yes and yes. The reality is that selling to the enterprise is really a different game. Microsoft has a strong enterprise presence but of course selling infrastructure is new. At the same time companies like IBM, HP, Oracle, Dell, Cicso, VMware, EMC and others have a huge base to protect and will get creative to protect that base. VMware and EMC for example, under the direction of Paul Maritz, recently announced The Pivotal Initiative, which combines Greenplum, Pivotal Labs, and 600 employees from VMware’s vFabric, Cloud Foundry, GemFire, SpringSource and Cetas organizations. It’s the organizational instantiation of Cloud Meets Big Data. I see these types of companies replicating the benefits of Amazon and trying to compete on the basis of SLAs, choice, vertical industry specialization and belly-t0-belly white glove service.

The bottom line is traditional enterprise tech companies will compete on differentiation at attack Amazon’s weak spots.

Amazon has Been Aggressive on its Prices – Will Competitors use the Same Game Plan?

Amazon makes a lot of noise about the fact that it has cut service pricing 25 or 26 times since inception. But this stat is somewhat misleading. Every enterprise vendor cuts its price per unit of compute or storage every quarter thanks to Moore’s Law. But Amazon has been smarter about advertising this fact and implying that frequent price cuts = lower costs. But it’s not necessarily true. One interesting example in the WSJ article was Zynga, cited as a startup that got off the ground using AWS. Ironically, as analyzed on Wikibon, Zynga bailed on AWS and built its own private cloud to lower its costs. Why? Because as we’ve seen, when companies reach critical mass, renting is more expensive than owning.

How Large is the Cloud Computing Market?

The numbers are all over the place. The WSJ article cites IDC data that says 2012 public cloud services are a $40B market. It also shows a Gartner chart that says “Cloud Infrastructure Services” topped $5B last year. I would estimate that infrastructure as a service (IaaS) on the public cloud is a $2.5-$3B market with Amazon holding a 65-70% share. The market is growing at 70-100% per annum. But the real opportunity comes when you consider the TAM opportunity for IaaS, PaaS and SaaS. The market is measured in the trillions and that’s why this space is so hot; that’s why Amazon spends $1B per year on capital infrastructure and why the enterprise players aren’t sitting this one out.

How will the Move to Public Cloud Infrastructure Impact CIOs

IT organizations are under tremendous pressure to cut costs and the “Amazon Effect” increases that pressure. The reality is many of the successful public cloud examples are characterized by a single application accessed by millions of people; whereas the traditional enterprise is made up of hundreds or even thousands of apps accessed by thousands or maybe tens of thousands of users. These are different worlds where the former is all about scale and simplicity and the latter emphasizes service levels, reliability and security.

CIOs should first embrace the notion that the public clouds are reasonable for certain apps like test and dev. But for mission critical apps the public cloud is not typically appropriate. CIOs must take a portfolio view with some portion of their apps being aligned with a public cloud like Amazon, another chunk residing in more secure, specialized (e.g. vertical industry) or regional clouds and another segment residing in private clouds.

A key consideration will be the degree to which you can apply and enforce the compliance and security edicts of your organization, which will vary and increase in complexity as you add more touch points. The Amazon answer tends to be “put it all in AWS” but that’s not practical or advisable. And while relying on one supplier may simplify life, I prefer choice, with a couple of sources that have open APIs and strong ecosystems that can adapt to changing conditions.