What do IBM, Dell, HP, Oracle and SAP have in common?
All are mature technology companies - the youngest is Dell formed in 1984 - and they all banking on cloud computing
getting them out of the doldrums.
There are a few things wrong with that idea.
First, it was cloud computing that got them into trouble in the first place. Hardware sales, particularly servers, fell as
companies switched applications and processing to the cloud.
Cloud hosted applications disrupt high-end software. It challenges high-margins, undermines the need for infrastructure
and support than allows software giants to get away with huge costs.
Oracle, originally a software company but since buying Sun Microsystems with a large hardware business, is in a more
nuanced position. It lost server sales to cloud computing while its software business is challenged by nimble,
commoditised cloud-based apps. SAP faces just the app challenge.
Second, the old school companies have enjoyed relatively high margins in at least parts of their businesses. Even Dell's
commodity hardware margins were higher than the wafer thin margins Amazon squeezes from its IaaS - infrastructure as a
service - business.
Amazon makes money because of scale. Huge scale. According to Gartner, the company has five times the IaaS capacity of
the next 14 competitors added together.
The economics of scale mean each additional customer is cheaper to serve and sheer market size cuts the cost of
acquiring customers.
Amazon's scale means it sits bestride the cloud market like a colossus.
Third,Amazon has a huge first-mover advantage. That's always a problem when any new technology comes along. It's a bigger
problem than usual with the cloud where being first means being ready to meet demand while others are still building
capacity.
It means learning how to make savings - Amazon has dropped cloud prices 40-odd times in eight years of operation. Do
IBM, Oracle and SAP really want to follow Amazon down that path?
It also scores because it doesn't have any legacy. There's no existing business or customer contracts to protect. Apart
from anything else, this means Amazon is quick to innovate, there's nothing to lose from moving fast. And that's scary
for competitors.
None of the would-be cloud giants can move without pain. In many cases the pain involves converting high-value,
high-margin products and services into commodities. There's no path around this, but it will make it harder for them to
bite the bullet.
Fourth,Cloud computing leaves little room for differentiation. IBM, Oracle, HP and SAP all think they can add value, perhaps
they can do a little around the edges, but on the whole, customers aren't willing to pay for it when the alternatives
are almost as sophisticated, but an order of magnitude cheaper.
To sum up:The big IT companies have little alternative to head to the cloud, their customers are going there with or without them.
Whether they can maintain customer relationships, add value and continue to prosper is far from given. You'd have to
pick that one or more of the brands, IBM, Dell, Oracle, HP and SAP, isn't going to make the transition.
[digitl 2014]