cloudalps (hidden peaks)

High Tech Economics – implications from a global perspective.

Platforms – why the concept worked for Microsoft and how Google is porting it into the cloud

In essence, “platform” in the IT industry stands for some common foundation that is used by many independent providers (ISV, SI, ..) but typically controlled by just one or few companies (through a formal consortium or by contractual agreements). In the last few decades, large dominant companies have been established based on such platforms (IBM:Mainframe, Microsoft:Windows) that resulted from their R&D efforts. Their critical differentiation allowed them to orchestrate (i.e. control) evolving “value networks” and draw significant economic rents.

Microsoft, incorporated 1975, is arguably the most successful and instructive case of how an entirely new platform is built from scratch and extended into a dominant business that delivered $174bn of net income over the last 21 fiscal years. Over the longer term (>5y) such profits can only be sustained if the participating members of a value network continue to prosper and therefore have reason to continue supporting the rents extracted by the platform owners. Thousands of ISVs and hundreds of hardware vendors including e.g. Dell only exist because the PC has been so successful which led them to create billions of additional profits thereby strengthening the PC ecosystem and namely Microsoft.

What has been true for the many software companies (ISVs) created in the Windows ecosystem applies to those in the iOS ecosystem – however it is critical to understand that these are different companies, simply because paying 30% revenues (and therefore a multiple of profits) to Apple makes little sense to ISVs that run an established business for one or more decades. On the other end, the platform leaders become busy defending their position – both commercially and in terms of innovation lead. As long as the paradigm (e.g. the concepts of the mainframe, the PC, the AppStore, etc.) on which the leader has built its business remains unchallenged, it is hard for any competitor to challenge that leader.

Cloud Computing or Online Business (in the Web 2.0 sense) qualifies as a developing paradigm shift and hence old and new competitors position themselves to play a significant role, e.g. generate higher profits than those of a contributing member of a platform. Not only does a general platform leader in Cloud Computing not exist yet, but the web was originally  seen as a level playing field where thousands of independent “web services” would interact and deliver according to the requirement of customers. More recently, incumbent ISVs and service providers have positioned cloud computing as a mere extension of virtualized IT while targeting their traditional customer base of large, mature companies.

Google – the undisputed leader in online advertising – is building an unparalleled Cloud Platform which is seldom fully understood. While  its position during its first decade of existence was built as a consumer play (with the most eyeballs tracked in the most accurate details to attract the most advertising spend), Google’s visible ambitions today exceed consumer online search by far. Whatever Cloud Computing will turn out to be over the next 2-5 years (as per Gartner), it will leverage the gigantic scale of the web datacenters, access to individuals and firms ideally including a billing relationship, mobile devices, cloud-specific software development tools and experts.

Besides technological innovation, the biggest driver of Cloud Computing adoption will be Globalization or more specifically the entrance of new competitors from the Eastern hemisphere in most markets of the West. These new ventures from Asia and India will come without any legacy in terms of IT, supply chain and other infrastructure. The young entrepreneurs running them will be used to Web Services, mobile access and above all “frugal engineering”: highly efficient, functional design and exceptional value. It is hard to argue that anyone but Google is leading in that sort of services already.

[this was planned to be a short post that precedes a longer paper that I am currently writing – please excuse that it got lengthy]

Filed under: Cloud Computing, Online & Digital Lifestyle, Software

Does Microsoft actually challenge itself in the Cloud?

Today, the Wall Street Journal commented on tomorrows expected announcement of the availability of Office365, Microsoft’s integrated Cloud offering that includes all of Microsoft Office plus the cloud-equivalent of server applications like Microsoft Exchange for mail, calendaring and so forth []. The bottom line of the WSJ is that first and foremost, Microsoft is about to cannibalize itself.

At the scale of Microsoft’s software revenues in Office and Windows, it is not trivial to see the upside potential of cloud computing for the company. Much of what will come in through Office365 will come from existing customers that move to the cloud from their own datacenters in an attempt to gain some of the (Shared) economies of scale of running Microsoft’s software. This is a challenge both commercially – as the margin to Microsoft of running its software itself is bound to be smaller than the margin of just shipping  its code – and technically becasue the hundreds of millions of Microsoft Office seats require huge datacenters and internet pipes to be run centrally.

In developing economies, start-up and small businesses however, Office365 might very well generate actual incremental revenues for Microsoft.

With the choice of running their licenses themselves or let Microsoft do it, customers are actually the ones that are being challenged here: how many take the risk and move Microsoft applications out of their datacenter and into the cloud? Assuming that Office365 offers at least what current cloud competitors’ offerings do – and that should be a safe bet – this also translates into a challenge thrown out by Microsoft to its cloud competitors, including Google. With the existing concerns for privacy and security that run high in certain countries like Germany, the challenge also includes the public perception of cloud-based productivity applications like Office365.

While strategically, Office365 will be a challenge for Microsoft over the longer-term, the short-term challenge mostly hits its competitors, partners and customers.

Filed under: Cloud Computing, Software

About Thomas Rupp

Economist & MBA focused on leveraging Disruptive Technologies in IT and Telecommunications, mostly for Enterprise clients. More than 15 years at Microsoft, currently as Global Program Manager for Cloud Support Transformation. Sloan Fellow 2010 (MSc in Management) at Stanford Business School. Ultra Marathoner, Foodie, Diver and Audiophile.