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Has The Cloud Become Too Big to Fail?

If Amazon, Google, or Microsoft stumbled in the cloud, there could be government intervention.

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In a recent weekend edition of the #CIOChat tweetchat, the question was raised about what the CIO’s role would look like in 5 years. The discussion focused on many different areas. One area was that the CIO would become more of a service broker, as more and more applications move to the cloud. The responsibility discussion becomes less about controlling/owning iron/hardware/space, which has been the traditional area of CIO responsibilities. This prompted a secondary question for me: Has the cloud industry reached the point where it is too big to fail? Granted none of the big players in the cloud show any signs of financial trouble, but there was a time when the auto industry and the banking industry could say the same. Have we reached that tipping point? Has the cloud industry become too big to fail, and if it has, what is the impact?

Cloud Landscape, Huge Growth Coupled With Upheaval

There is no doubt that the cloud industry is growing. Spending in the Infrastructure as a Service (IaaS) space continues with double digit growth. Gartner expects a 32.8 percent growth from 2014 to 2015, which translates to over $16B. They also predict a compound annual growth rate (CAGR) of 29.1% forecasted from 2014 to 2019. While speaking at a Gartner conference in Sydney last spring, Gartner Vice President and Analyst, Lydia Leong, discussed how the IaaS marketplace is rapidly consolidating around a small number of market leaders. “The sky is not falling — customers are getting great value out of cloud IaaS — but the competitive landscape is shifting,” Ms. Leong said.

A key challenge for the competitors is the significant investment in resources (hardware, physical space, staffing) that is needed to be competitive in this space. Hewlett-Packard’s recent departure from the public cloud was the first high profile vendor to leave the competition. Fortunately, while HP is a large vendor, they were late to the game in the public cloud space. They had trouble getting traction against the three 800lb gorillas (Microsoft, Amazon, and Google). HP had already been scaling back their public cloud push, and provided existing cloud customers with tight integration and migration services to the Microsoft and Amazon platforms. Their exit made people sit up and take notice. Being a large company does not guarantee success in this space.

The Rule of Three

About a decade ago, I read ‘The Rule of Three: Surviving and Thriving In Competitive Markets’. The authors, Jagdish Sheth and Rajendra Sisodia, discuss how mature markets and industries tend to evolve into two major segments: generalists who service the largest portion of the customer base, and specialists who provide niche capabilities for customers at both the high and low end of the markets. They describe the space in the middle as ‘the ditch’. Anyone caught in ‘the ditch’ will either be swallowed up or fall by the wayside (HP, for example, fell in the ditch). In the generalist category, the authors suggest that eventually three players will dominate the space, controlling a large percentage of the business. I am sure we can all think of examples of this scenario, whether it be the auto industry, financial, or retail. The upheaval in the cloud space that Gartner refers to is coalescing into a version of this model. In the generalist segment, I doubt anyone would argue, the cloud has its big three: Microsoft, Amazon, and Google. The big three have a combined capacity that far exceeds the total capacity of the other 12 competitors combined.

So, Back to The Question

So has the cloud become too big to fail? What would the risks and challenges be if a major cloud vendor were to stumble? What are the considerations? One of my colleagues, Zach Slayton, VP of Digital Technology Solutions at Collaborative Consulting had this to say: “If one major vendor has a significant stumble and there is flight from that vendor to one of the other gorillas, can they handle the scale? It would be a high class problem for the receiving vendors but likely a problem nonetheless.” Besides just the capacity issue, there are other potential risks and impacts. Each vendor has their own custom features and offerings. This is the classic vendor lock-in scenario, but with a twist. In the past, you still owned and controlled the hardware. In the public cloud, that is not the case. The migration and transition costs to another vendor and/or platform would be significant. Resources, code migration, re-platforming, testing, validation testing, data migration, all would be costly and time consuming. Then there is the potential domino effect in both directions. On one side, similar to the auto industry concerns, the various vendors and suppliers (both hardware and software) for a failed cloud vendor could be impacted financially, lost sales, outstanding billings, etc. On the consumer side, businesses that rely on the services of companies hosted in the failed cloud vendor are at risk of service interruption while the providers find alternatives.

My Answer: Yes, But No, The Sky is Not Falling

I do think the cloud is too big to fail. If for some unforeseeable reason one of the big three were to stumble, I think there would be government intervention, similar to the auto and financial industries to mitigate the risk and potential damage. The impact of not intervening would be huge, across the board, globally and economically.

That being said, there is no sign of any problems that would lead to the public cloud industry failing. As I quoted Lydia Leong earlier, the sky is not falling, the cloud is providing tremendous value to its customers. The big three continue to provide new innovations and features that provide tremendous business value. As technologists, part of our job is to understand potential risks inherent in technology, and to think about worst case scenarios. The cloud is a ubiquitous part of our lives, both on a personal and business level. It is a critical component in continued business innovation and growth, and is not going anywhere. Don’t let the fear of the sky falling prevent you from moving forward to leverage the reward and benefits the cloud can bring your business.

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Published at DZone with permission of Ed Featherston. See the original article here.

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