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Don’t Bring a Differentiated Knife to a Commodity Gun Fight

by Eric Knipp  |  March 6, 2012  |  3 Comments

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. 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.

Category: cloud  cloud-application-platforms  

Eric Knipp
Managing Vice President
3 years at Gartner
15 years IT industry

Eric Knipp is a Managing Vice President in Gartner Research, where he focuses on Web and cloud application development methodologies and trends. Mr. Knipp is based in Dallas, Texas. Read Full Bio

Thoughts on Don’t Bring a Differentiated Knife to a Commodity Gun Fight

  1. Eric,

    Aren’t “differentiated” IaaS players target a different customer, for whom capability to support their legacy apps that need reliable infrastructure is the go/no-go decision, rather than purely price?

    No doubt things are evolving toward commodity compute, but it will take time for everybody to get there and become “compatible” (and what’s entirely possible is that the guys with legacy apps today may simply skip the “design for fail” IaaS and go straight to SaaS).

    Massimo wrote an excellent piece on this recently:

    — Dmitri

  2. Eric Knipp says:

    While you’re certainly right to point out that most existing applications won’t benefit from a forklift into a commodity cloud service, I think you both underestimate the potential for commodity clouds to support the more enterprisey requirements and overestimate the attractiveness of a forklift migration in general. I believe tha the real growth story in cloud services isn’t from migration of existing workloads, it is from workloads that previously didn’t make economic sense – they couldn’t exist in the pre-cloud world. This also implies that workloads that once made economic sense for the mainstream enterprise – like running your own mail servers, or operating dedicated disaster recovery facilities – no longer do. And because of the tremendous network effects of cloud services, I believe this transition happens relatively rapidly compared to past tectonic IT industry shifts. In a nutshell: by the time the “differentiated IaaS” wannabes figure out how to compete, the market for their services will no longer be worth focusing on; meanwhile the PaaS market will slip into the hands of companies that are actually trying to own the space with differentiated services that deliver greater value while creating switching costs.

  3. Paul Parry says:

    The high-margin players will do well by continuing what they’ve been doing for years:
    1. Romancing CIO’s with fancy marketing, high-powered conferences, golf trips, stadium suites, etc.
    2. Convincing CIO’s that their products/services are “best-of-breed” and “fully-integrated,” and that the long-term risks of going with “cut-rate”, “kludged” solutions are too high.
    3. Keeping the conversation high-level and independent of the CIO’s actual technologists, who know that these so-called “best-of-breed,” “fully integrated” solutions are just as “kludged” as commodity-hosted solutions.

    Some CIO’s are good at seeing past this scheme, some are not. That’s what differentiates the market.

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