Amazon Web Services (AWS) announced yet another cut in its infrastructure-as-a-service (IaaS) pricing (it also announced cuts in select PaaS capabilities, including the relational database service). I’ve been telling Gartner clients for years that this will never stop. Amazon.com is a retailer and at its core, AWS is a retail business. It is a mistake to look at AWS as a traditional IT services business, even though it competes against some megavendors in that space. AWS is like all retailers, ultimately about volume, not operating margin.
OK, you say, no volume, no business. True. But the incumbent IT industry megavendors are much more focused on margin, enjoying profitability between 20 (for professional services and hosting) and 40 percent (for traditional software). On its very best day a discount retailer like Amazon would dance a jig over a 6 percent margin. Simply put, if you’re Amazon or any of its component businesses, you’re not going to be undersold by any competitors that focus on value over price.
IaaS is for all practical purposes the closest thing to a commodity that exists in the cloud services market. I believe that eventually it will be a perfect example of a commodity, where service providers become price takers and there is very little room, if any, to command a premium on differentiated features and functionality. I believe that AWS itself proves this out through its increasing portfolio of higher-order, platform-as-a-service (PaaS) style offerings.
If IaaS is becoming a commodity, volume business, the logical move for value players who prefer margin to volume is up the chain to PaaS, or even software-as-a-service (SaaS). It makes a lot of sense – if you’re a company with a history of winning in the market with a differentiated value proposition, then it’d be natural for you to compete in an adjacent market in similar fashion.
Which is why I keep scratching my head over the things I see happening in the IaaS market. I see a number of large enterprise-oriented players who’d like a piece of the exploding cloud infrastructure market. They’re aiming money, and more importantly, time and leadership focus, at the IaaS opportunity. Now, these are not players from a retail background – they’re in the high-value, high-margin bucket I talked about earlier. And they think they’re going to go out and eat Amazon’s lunch by competing in the IaaS market. How likely are they to be successful?
So I keep asking myself this – why are companies with an obvious path to sustainable, high-margin growth – winning in the PaaS space – sinking so much effort into competing in the IaaS space? Do they really want to die the death of a thousand cuts at the hands of a retailer?
Or, in other words, don’t bring a differentiated knife to a commodity gun fight.