Lessons from AWS Part I: The Cras of the Boa Constrictor

The cloud industry is often portrayed as a race between Amazon’s AWS, Google’s Compute Engine, and Microsoft’s Windows Azure. However, the reality is at least so far more AWS and also-rans. The lesson is scale and the classroom is Walmart.

For all the recent announcements from Google and Microsoft, both are still emerging for AWS in terms of available features and ecosystem. In fact, not only does AWS offer products that match all the latest features that were generally available from its two competitors, it outperforms them by a significant margin. Although Google and Microsoft have some third-party companies providing additional services on top of their cloud, none of the struggles for the spread third-party ecosystem are around AWS.

Google’s network strength due to its global fiber footprint and Microsoft’s SSD-driven storage capabilities are formidable. The same goes for both companies’ safes. But they won’t be enough to catch AWS. The reason is this: while most customers use AWS for its basic computers and storage services, as more companies migrate more workload to the cloud, they will likely want to buy as much capacity from a single vendor as possible. There are several motivations for this, ranging from costs and integration to security and governance. This gives AWS the kind of invincible advantage that Walmart still commands.

Is there a target against AWS’s Walmart?

In the 1980s, Walmart invested more in technology than any of its competitors. This gave the company overwhelming advantages in warehousing and distribution. As it learned more about its customers, Walmart expanded its sourcing and merchandising benefits. The company then plowed the cost benefits into discount prices that no other retailer could match. In fact, there were instances where Walmart could sell certain products under it, it cost some of its competitors to buy the same product.

The result was a sad story in retail road killings. When Walmart opened new stores, flocks of discount customers went out of business while others merged unsuccessfully in an effort to cut costs. As Walmart diversified into the supercenter format, scores of supermarket and drug chains felt similar pains.

Target was the only retailer of comparable scale. It succeeded in maintaining a strict focus on quality and fashion to distinguish itself from behemoth. It also followed this formula into the super centers.

The point of this is that in a commoditized business where scale is critical, the key to competing against the 800-pound gorilla is differentiation. And in the cloud it’s going to be on the quality of the service, service offerings (black or geographical) or platform (read: OpenStack, but more on this in Part II). Joyent’s recently announced price cuts to and server cutout to match AWS rings hollow and are likely to end in tears. In his honor, Joyent also offers a few dozen configurations that aren’t available on AWS – yet.

But over time, trying to compete with AWS on pricing is like trying to fight a boa constrictor. With four data centers in total (three in the US and one in Amsterdam), Joyent will be crushed. Its plans for additional data centers in other regions do not provide the scale it needs.

And after the last two quarterly results reported by Rackspace, they will suffer the same fate as well. During his conference call, the CFO said: “Don’t be surprised if we constantly lower prices on certain products. We are a price plus-shop.” This phrase could return to Rackspace in a big way. For it is insane by cloud providers to try to compete for crude pricing with AWS.

Cloud providers can either sell against AWS power outages with better reliability, or they can try to differentiate between service offerings. In the latter, it probably requires some specialization. An example would be to allow customers to scale up processor threads, memory, disk and flash independently of each other, depending on the workload needs.

This type of flexibility would require excess infrastructure and have greater management complexity. But offering customers dynamic configurations would represent a value-added service that could command a premium price, especially for workloads that don’t scale well horizontally across virtualized server disks, as they do in a larger virtual footprint.

This would be similar to what category killers like Staples, AutoZone, PetSmart or Sports Authority did. Focus on one of Walmart’s times and try to battle it out on either choice or service. For Google and Microsoft, the alternative is the target strategy. They both have the resources to take it – even as the number 2 and number 3 players. The others can only hope that they do not end up as Kmart, which was later merged into Sears.