The public cloud business will face severe economic
challenges in 2014 and 2015, as the business model collapses. Three converging
trends will rob the market of profits. First, the barrier to entry, that is,
the cost of the technology that makes up public cloud, will continue to drop,
following Moore’s Law. Second, the steady increase in personnel costs will
attack margin performance. Finally, the commoditization of cloud services will
inhibit brand loyalty. Cloud consumers will not want to become locked in to a
specific cloud provider. Any attempt to distinguish one cloud from another
weakens portability.
This will result in an economic model we are quite familiar
with: airlines. As the larger, more
mature airline companies sought better margin performance, they sold their
planes and leased their fleets back from leasing companies. The airlines do not
own the planes or the airports: they own information about customers, routes,
demand, and costs. The largest cost airlines face is staff, and as staff
longevity increases the cost of personnel steadily grows. So the airline
business over the post-deregulation era consists of a regular cycle:
1. Mature
airlines enter bankruptcy
2. The industry consolidates
3. A new
generation of low-cost airlines arises
All players experience a calm period of steady growth as lower
aircraft cost, better fuel efficiency, debt relief from bankruptcy, and lower
personnel costs from younger staff make the rejuvenated industry profitable for
a while.
Then the cycle starts again.
One significant difference between airlines and public cloud
is the difference in the cost improvements each sector faces. Airlines improve
costs in small amounts – a few percent in fuel efficiency, a few dollars more
revenue from luggage, from food, increasingly extravagant loyalty programs, and
so on. But technology costs have no lower boundary: Within ten years an
individual consumer could buy a single computing platform with more storage and
processing capacity than most current public cloud customers need.
It will be as though the aircraft leasing companies could
lease each passenger their own plane, bypassing the airlines entirely.
So early entrants must cope with collapsing prices just
when their potential market moves to a lower cost ownership model. Time-sharing
met its market’s needs for a brief while – that moment when early demand for
computing capacity far exceeded the consumer’s price range - then disappeared.
Public cloud
computing will dissipate within five years.
