So, we’ve just seen Verizon buy Terremark and Time Warner Cable buy NaviSite. All contemplation of the deals themselves aside, is consolidation at this stage of the market good for the progress of the cloud IaaS market?
I’m inclined to think not.
We are still pretty early in the cloud IaaS market. While most service providers in the space — especially those betting on an enterprise-oriented, VMware-based strategy — have visions and product roadmaps that converge a few years out, there is still an aggressive race to introduce new features and capabilities into cloud IaaS platforms. In other words, everybody needs engineering time, and lots of it. But they also need the fire in the belly that makes people not just do their jobs, but really push themselves — to feel a genuine sense of inexorable pressure to get things out ahead of the competition, a sense of passion for what they’re doing, and the knowledge of the freedom to go do the right thing with a minimum of encumbrance.
Acquisitions, especially ones that require significant integration work, can really extinguish fire in the belly. Verizon and Terremark, for instance, need to consolidate their systems, platforms, and roadmaps. That’s engineering energy that’s not being devoted to building awesome new stuff. (Yeah, if you have enough money, you can try to do that in parallel with your integration, but you lose precious time and willpower and creative efforts on the part of your best people, who only have so many things they can do with their day.) NaviSite is getting wedged into a cable company, which is a massive culture shock that creates a distraction, potentially sends their best people job-hunting, and requires rethinking their strategy and the engineering that should support it.
VMware really needs their service providers to be awesome, because that’s key to their hybrid vCloud strategy. These acquisitions take out two of the most innovative VMware-based providers. I suspect the market’s not really aware of this, especially in the case of NaviSite. NaviSite has never really publicized some of the things that differentiate their cloud IaaS platform and make it pretty cool — for instance, NaviSite allows VM oversubscription and prioritization coupled with auto-scaling, which is great for enterprise applications (which generally require low resourcing, as opposed to, say, consumer-facing Web properties that fully consume scale-out resources).
Just one service provider being really aggressive about adding new features to its platform spurs the others to follow suit — the slower companies may need the idea (or want to wait until someone else has done it to see how it goes), and then respond competitively. The more service providers are innovative, the more the others have an invisible flogger spurring them on. So if the pacers slow down, so to speak, the entire market potentially does.
While Amazon is innovative, and its pace of feature introductions is extremely rapid, those features are also split out between Amazon’s multiple constituent customer types. And many of the VMware-based providers habitually dismiss Amazon as a competitor and thus do not feel as internally pressured to competitively match their feature set. (This is arguably a potentially fatal mistake, especially as Citrix gets serious about its ecosystem.) Consequently, though, Amazon’s not a substitute pacer for innovation amongst the VMware-based providers.
You can argue that acquisitions potentially give innovative companies a lot more money to work with, which can significantly accelerate their roadmap and business plan. This might even be the case for Verizon/Terremark in the long term. But it still comes with a near-term cost, in almost all cases.
Cloud companies, whether service providers or software, have gotten snatched up rapidly over the last two years. How many of those companies have turned out to have accelerated, not diminished, innovation under new ownership?