Lessons from AWS Part I: Crushing 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, at least to date, is more like AWS and the others. The lesson is scale and the classroom is Walmart.

Despite all the recent announcements from Google and Microsoft, both still lag behind AWS in terms of available features and ecosystem. In fact, AWS not only offers products that match all of the latest features that its two competitors have made available to the general public, but exceeds them by a significant margin. Also, while Google and Microsoft have a few third-party companies that provide additional services in addition to their cloud, neither is a match for the extensive third-party ecosystem that surrounds AWS.

Google’s strength in networking due to its global fiber footprint and Microsoft’s SSD-powered storage capabilities are formidable. So are the cash reserves of both companies. But they won’t be enough to catch AWS. Here’s why: While most customers use AWS for their basic compute and storage services, as more businesses migrate more workloads to the cloud, they may want to buy as much capacity as possible in one go. supplier. There are numerous motivations for this, ranging from cost and integration to security and governance. This gives AWS the kind of unbeatable advantage that Walmart still has.

Is there a goal for AWS 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 advantages into sourcing and merchandising. The company then invested the cost advantages in discount prices that no other retailer could match. In fact, there were instances where Walmart was able to sell certain products below what it cost some of its competitors to buy the same product.

The result was a sad story of retail outrages. As Walmart opened new stores, scores of discounters closed, while others unsuccessfully merged in an attempt to cut costs. When Walmart diversified into the supercenter format, dozens of supermarket and drugstore chains felt similar pain.

Target was the only retailer with a comparable scale. It succeeded by keeping a strict focus on quality and fashion to set itself apart from the giant. He also followed this formula in the supercenters.

The point here 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, that will depend on the quality of service, the service offering (variety or geographic), or the platform (read: OpenStack, but more on that in Part II). The recently announced price cuts by Joyent and the server division to match AWS ring hollow and are likely to end in tears. To their credit, Joyent also offers a few dozen configurations not yet available on AWS.

But over time, trying to compete with AWS on pricing is like fighting a boa constrictor. With four data centers in total (three in the US and one in Amsterdam), Joyent will be crushed. Your plans for additional data centers in other regions won’t give you the scale you need.

And judging by the two most recent quarterly results reported by Rackspace, they, too, will suffer the same fate. On his conference call, the vice president of finance said, “Don’t be surprised if we’re continually lowering prices on certain products. We’re a premium store.” That phrase could come back to haunt Rackspace in a big way. Because it’s crazy that cloud providers try to compete with AWS on raw compute pricing.

Cloud providers can sell off AWS outages with higher reliability, or they can try to distinguish themselves in service offerings. In the latter, it will probably require some specialization. An example would be allowing customers to scale processor, memory, disk, and flash threads independently of each other, based on the needs of the workload.

That kind of flexibility would require excess infrastructure and engender 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 across virtualized server slices as they do across 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 aisles and try to outdo the giant on selection or service. For Google and Microsoft, the alternative is the Target strategy. Both have the resources to try, even as No. 2 and No. 3 players. The others can only hope they don’t end up like Kmart, which later merged with Sears.