Public Cloud Economies of (Web-)Scale Aren’t About Buying Power

Posted on by Randy Bias


As you no doubt heard this week, Rackspace has announced the intention to focus on managed cloud.  Inevitably this brought observations from many about RAX, and others, ability to compete effectively against the web scale public cloud giants: Amazon, Microsoft, and Google. One of the commenters was Mike Kavis (twitter link), a long time cloud pundit and someone who’s opinion I respect. Mike wrote up a fairly interesting article that he posted on Forbes that I encourage you to read in full. Unfortunately, Mike falls into one of the older cloud tropes that I thought was well and truly dead. Today I seek to clarify and hopefully amplify much of what he said.

First, we need to address the so-called “economies of scale” that large public cloud providers enjoy. Simply put, economies of scale are structural cost advantages that come from sufficient size, greater speed, enhanced productivity, or scale of operation. Unfortunately, many folks, including Mike, fall into the trap of assuming that “economies of scale” == “buying power”. Buying power can be an element of achieving scale, but it is seldom a structural or sustainable advantage, certainly not against other large businesses who can command similar quantities of capital.

No, the real economies of scale that are relevant here are the tremendous investments in R&D that have led to technological innovations that directly impact the cost structures of Amazon Web Services, Google Cloud Platform, and Microsoft Azure. Here are some examples of what I mean:

This is just the first three items that are A) public and B) come to my mind without a lot of additional research. There are hundreds of other innovations. Most of these innovations share a central theme: reduction of cost through greater efficiency or being able to deploy lower cost hardware. For example, Google’s G-Scale Network uses inexpensive Taiwanese ODM switches.

As I have mentioned previously, the rate of innovation and development at these public clouds is where the true economies of scale reside.

Much of this is alluded to when Mike covers the level of investment in infrastructure and R&D from Amazon, Microsoft, and Google.  Unfortunately Mike mixes infrastructure investment (CapEx) with R&D investment (OpEx).  We actually don’t know what the levels of R&D investment are at the big three, although we know that they literally have thousands of developers at each working diligently on new capabilities.

And this is where we go off the rails because Mike throws IBM’s hat in the ring as a real contender because they are planning to invest $1.2B in new datacenters. This is actually uninteresting and mostly irrelevant when it comes to measuring the probability of success in the public cloud game. New datacenters and hardware won’t provide a true structural cost advantage. That can only come through investment in R&D and a proven track record of innovation in public cloud, neither of which IBM is clearly succeeding in. Perhaps they will and perhaps they are a true public cloud contender, but it’s hard for me to see that given that so much of this is about a cultural and organizational structure that can encourage innovation.

What does it take to change? As many of you know, I poo-pooed Microsoft’s chances for quite a while because I had no belief in their eventual success at delivering online services. Mostly because I felt the organization as a whole struggled with the operating system boat anchor and couldn’t let go. Of course this was before Satya Nadella took over the helm and declared a focus on cloud and mobile. In essence he empowered and enabled the Online/Live  teams to become the new Microsoft. The Live teams have learned “web scale” the hard way, over many many years and through the spilling of much red ink. See this article from 2011 on MSFT’s Online services operating income.  Microsoft has spent 10 years and many billions of dollars to become a credible player against the likes of Amazon and Google.

In that light, how can anyone else even pretend to the throne without similar levels of investment? Buying a hosting company is not going to get you there. This isn’t a game of buying power or outsourcing. It’s an innovation game and that’s it. The number of players who can pull this off are vanishingly small.

You want “economies of scale?” You’re going to pay for it and at this point it’s probably too little too late.

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