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Sunday
May262013

IaaS Wars - Lessons from the Steel Industry

One can view the oncoming price wars led by AWS, GCE and Azure as an anything-but-level playing field.  It’s a different time scale certainly, but, by analogy, the history of the steel industry business strategy is not unlike the history of information & communication technology (ICT) strategies of the internet, Web 1.0, SOA, Web 2.0 and now cloud computing.  But relying on the idea that the forms of IaaS are all fungible, interchangeable commodities will lead one to some mistaken conclusions.

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Any recounting of world economies in the past two centuries will chronicle the role of the steel industry as a fundament of the industrial age (roughly from 1850 to somewhere in the later half of the 20th century -- probably around 1970).  Such a history will also note how the means of production and the economies of Big Steel underwent huge technological change, from a labor intensive industry to one of the first automated industries, in a very short period.  From producing steel in enormous lots to the creation of vertically integrated fabricators of steel piece-parts, the nature of the industry was changed by a series of mechanized (world) wars, the arrival of personal automotive transportation, and the population's migration to urban centers. 

sub·si·dy  
/ˈsəbsidē/

Noun

A sum of money granted by the government or a public body to assist an industry
or business so that the price of a commodity or service may remain low or competitive

The importance of steel to national interests and economic dominance led to the use of subsidy as a tactic employed by aspiring economic world powers -- Japan, then India and now China -- in their efforts to accelerate the demise of the second (and most economically powerful) generation of steel companies of the US.   Along with agile, modular and 'lean' production methods which served to deliver highest quality steel in appropriate lot sizes and at exceptionally good prices, these industrial enterprises sought to accelerate their rise to the top through the use of 'dumping'.  The upstart national industries -- subsidized and nationally protected -- started selling large amounts of product at prices below cost.  This contest would eventually destroy those companies that were less economically sound (because of their reliance on outdated production approaches or facilities) or those newly tooled companies already saddled with debt which had neither access to patient investment nor to national subsidy. 

From Big One to Big Three and arrival of Cloud Dumping

With AWS now clearly the undisputed leader in IaaS -- the Big One -- are we now about to see internal subsidization by Microsoft and Google in their respective infrastructure services?  The answer is clearly 'yes.'  After starting their approach to cloud computing through platform services, both Microsoft and Google have now truly launched infrastructure services … six years after AWS' introduction.

The Big Three IaaS offerings (AWS, GCE and Azure) have been established at major cost in capital equipment, the dedication of the best architecture and development talent on the planet, and incredible attention to the operation, administration and management (OA&M) of the services.  When a company with the stature and resources of Microsoft or Google decides to go for position in an industry segment, their investment strategy is to take the long view.  That includes setting aside serious amounts of money for the continued operating costs and expansion of their infrastructure services.  

Is this 'cloud dumping' or just the patient investment by digital powerhouses who can afford it?  I'll vote for the former, since along with their investment in a nascent set of services, the impact on the rest of the infrastructure competitors and the IaaS customers has some major implications.  This not only becomes a waiting game that will demonstrate the dedication, patience and depth of the Big Three's treasuries.  This is also a cleansing action for the industry.

In the battle for turf among what, arguably, will become the Big Three, what happens to the smaller IaaS providers -- the fast followers, the specialist infrastructure services?  It puts serious economic pressure on the second tier of less well-heeled competitors. They must consider their option to move out of the commodity IaaS markets and move into specialty areas, to find themselves bulldozed, or to end as the assets in industry roll-ups.   

If the IaaS segment takes its future history from the steel industry, there would be little to recommend getting into or remaining in the business for the likes of Rackspace, Joyent, GoGrid and those carriers like Verizon which have put Terremark in place.  But this is where I believe that IaaS does NOT have to repeat the industrial history of steel.  The IaaS industry is more  malleable and more capable of major differentiation.  Furthermore, IaaS is, ultimately, NOT about the delivery of commodity services.   

The error of IaaS fungibility and other ways oligopolies might be disrupted

- IaaS offerings are not fungible and interchangeable -- or at least, not as fungible as pundits would have you believe.  They are not as easily commoditized as electricity, water, petroleum or telephony.  In recognizing the variations in demand and use cases for IaaS, the industry should find interesting opportunities.  A recent article by Owen Rogers and Willam Fellows of the 451 Group uses the analogy of hotels and hotel rooms as a better analog, and I agree.  Just as there are significant variations in functionality, amenities, location and, of course, price involved in the use of a hotel room, so are there variations in the commercially viable infrastructure services.

- The lessons learned from the partially regulated airline industry may be more instructive in both the benefits and pitfalls of oligopoly and the advantages of smaller, regional / specialist services which apply different processes and metrics to establish a winning offer.  In fact, there are probably so many interesting lessons to take home from an look at the airline industry, that I propose we go there next.

- A final point worth noting before leaving the steel industry: The lessons of the steel industry have not yet played out because the steel industry itself is going through yet another transformation. New forms of technology and process, which utilize 'steel-the-commodity' in ways never before seen in mass produced manufacture, are about to confound and disrupt the steel industry.  By analogy, we can point to similar upsets coming to the realm of infrastructure services. There are lessons yet to be learned as to how the means of production and the organization of business can be as disruptive to the present kings of the hill in IaaS.

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