The Economic Failure of Public Cloud

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.