What the future holds for AWS and commodity cloud

Over the past several months, the news in the cloud space has been dominated by announcements of price cuts and revenue growth.

Generally speaking, as markets develop, it is very common to see increased competition lead to unit price decline and an increase in consumer options.

The cloud market in particular has seen incredible growth in the IaaS space, driven largely by commodity public clouds, which emphasise extremely low cost compute and storage services most appropriate for web-scale applications.

The best place to start when assessing the future for commodity cloud would be to analyse the three Cs: competition, commoditisation and capability.

>See also: Catastrophe in the cloud: What the AWS hacks mean for cloud providers

To speculate on the outlook for the commodity cloud market, its evolution must first be understood.

Amazon was by far the earliest mover and has become the dominant provider. It is perhaps the largest pure cloud business in the world, having built a massively scalable e-commerce software platform.

The underlying compute platform became the technological basis for Amazon Web Services (AWS), a business unit within Amazon.com. Though Amazon does not disclose financial information for AWS, Wall Street infers those numbers from the ‘other’ categories in their earnings announcements.

In its most recent earnings announcement, Amazon’s CFO Tom Szkutak disclosed that ‘AWS continues to grow very strongly’, and specifically that usage growth in Q2 was close to 90% year-over-year for the quarter.

In the same report, Amazon stated that ‘other’ revenues grew 58% year-over-year, significantly lagging the growth in volume.

This is largely because in keeping true to Amazon tradition, there have been significant price cuts this year.

Overall, AWS has dropped its prices 45 times since 2006. However, a new pattern has emerged.

In past years, AWS decreased prices for two reasons: lower costs derived from automation, innovation and volume; and to preempt competition, essentially raising barriers to entry.  

This time the reductions were in direct response to competitors’ price cuts, which is the very definition of commodity markets.

As Amazon’s cloud strategy unfolds in the context of the maturing cloud market, what lies in store for this industry giant and why is its market share likely to decline?

You can point to AWS’ reported revenue deceleration as part of a natural cycle, with the company reaching such a size that growth now requires greater and greater investment with every year that passes.

However, the strength of competition in the marketplace cannot be ignored.

Microsoft’s latest earnings announcement showed that commercial cloud revenue had grown 147% with an annualised run rate of more than $4.4 billion.

Concurrently, TRB expects Google’s cloud business to grow 84% annually to $1.6 billion in 2014.

VMware and its partner ecosystem could also pose a significant threat to AWS’s dominance. The first quarter of 2014 saw its vCloud Hybrid Service public cloud business grow by more than 100% compared to the first quarter of 2013.

Beyond these big hitters you don’t have to look far to see the emergence of service providers specialising in enterprise class clouds.

These enterprise class clouds address a fundamentally different business case and are taking a significant share of complex, high consumption applications.

These applications often require the ability to scale vertically as well as horizontally, and the users of these applications tend to have performance and service level requirements not addressed by commodity class clouds.

The majority of the remaining addressable traditional application market falls within this category.

These applications are typically the lifeblood of the order-to-cash processes core to the business with many dependencies that make them complex and costly to migrate.  

In this highly competitive emerging landscape, it is unfathomable that these providers won’t gain market share.

So, the competitive landscape is an obvious challenge for the future of the commodity cloud, but could it run into trouble in the form of what has often been considered its greatest strength, commoditisation?

AWS has done more to drive down prices in the public cloud space than any other player. It has done this through brilliant design and amazing levels of automation for specific use cases that benefit from horizontal scale.

However, there is a sting in the tail. In a market where prices decline 50% year on year, a provider needs customers to double consumption just to stay even on a revenue basis, a problem that is further complicated by a maturing customer base.

The easy wins have been won. Devops and greenfield applications will continue to be strengths for commodity cloud platforms, but it is the complicated applications and use cases that will be the real battlefield moving ahead.

Customers have come to realise that not every use case is well suited to a commodity-cloud solution.

Cloud vendors are differentiated by many factors, and cost is perhaps the least important of these. This is reflected by the market success of Microsoft, Google and others.

Commodity cloud has won the lion’s share of the cloud business to date, but what will it take to be the victor in a maturing cloud market?

Moving on from devops and the ‘low-hanging fruit’ of the cloud, the Holy Grail for CSPs now lies in the capability to seamlessly migrate complex applications to the cloud, and then deliver them securely with meaningful performance and response-time SLAs.

>See also: How to build the best hybrid cloud for your business

Reliability and predictability are of paramount importance to the enterprise market.

Adapting to established application architectures that are not cloud aware (rather than forcing a re-write), integrating into the service and help desk functions of enterprise customers, and becoming a natural extension of the IT function is more complex and of far greater value to the C-suite than saving $0.01 per hour of compute.

The providers who solve those issues will be the ones that show the most impressive growth over the next 12 months.

Commodity cloud has driven adoption a long way and now the market is rapidly moving toward applications such as ERP that require a higher level of service.

The growth that CSPs have made public in recent months shows how hot the competition has become and lays down the gauntlet for the next evolutionary stage of the maturing cloud market.

Whether commodity cloud providers like AWS and Google will continue to focus on current strengths or adapt remains to be seen.


Sourced from Sean Jennings, Virtustream

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Ben Rossi

Ben was Vitesse Media's editorial director, leading content creation and editorial strategy across all Vitesse products, including its market-leading B2B and consumer magazines, websites, research and...

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