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What Movers in the Cloud Stand to Win in the $444B SMB Market Space

The likely technology vendor winners will be those firms that have built the strongest end-user customer relationships

While much discussion of the cloud assumes the needs and concerns of large enterprises will determine how the cloud evolves, in fact AAPL, MSFT, DELL, AMZN signal that the migration of the fragmented $444B annual SMB tech spend from small datacenters to the cloud will redefine the industry far sooner and on a more sweeping and final scale than presently anticipated. The move of the SMB may determine the winners and losers long before the enterprise has made a significant investment.

While "smokestack" and "brick and mortar" firms remain highly susceptible to "oil price shock," ecommerce firms like AMZN increasingly remain highly dependent on the efficiency of the Internet in order to ensure growth and profitability. Unlike many other participants in the cloud computing space, Amazon has hundreds of millions of end users and millions of businesses already using its ecommerce interface to purchase and sell goods. Is Amazon playing in a much larger game and other participants see only the shadows of these moves, not the body or the head of this organism? What can the launch of Kindle, mobile computing, and Amazon AWS teach us about the present and future dynamics of the cloud marketplace? Does Amazon, like Google, perceive the current inefficiencies of the Internet and computing as potentially slowing or capping its growth? How will the cloud impact the way present and incumbent vendors do business in the small- and medium-sized business market space? Why is the SMB market a critical battle that may determine the winners and losers in the cloud? Who will be the winners and losers in this high-stakes game? Is corporate IT an incumbent service provider or the actual customer in this new world? Is the business unit going to own the technology services relationship going forward? It's going to be a wild ride! Let's look at some of these questions.

Once Amazon put the "cloud" horse on this multidimensional chessboard, the marketplace forever changed. While one might argue that teaching consumers to purchase things on the Internet took 10 years, clearly in the cloud and datacenter space, change ripples or waves through the system in an order of magnitude more quickly. At Cloud Expo on June 8, 2011, at the CEO panel, Treb Ryan of OpSource stated that just six months from now the industry will have moved forward in a meaningful way and that issues in the foreground now would not be in the foreground then. Currently I see less discussion of the small and medium business marketplace, and more focus on the cloud and the enterprise. In six months, I think we will all realize that the migration of the SMBs to the cloud will largely determine the winners and losers in what I've termed an "Extinction Event" as it conjures up the kind of massive ecological event that resulted in the extinction of the dinosaurs.

Surveys tell me that I am wrong. Why do I ignore such important and painstaking research? For one thing, the survey results I see reflect opinions and fears, but don't provide much insight into "Who" is being surveyed or the depth of the participant's actual experience with the cloud. At the Cloud Expo New York CEO Power Panel, Treb Ryan noted that many potential customers have yet to actually "spin-up" an instance in the Public Cloud and get a hand-on sense of what the service really is. If people with no actual experience of the cloud are widely represented in these surveys, then there's room for rapid change in attitude as people become more personally familiar with cloud services.

Surveys also report that small and medium-sized businesses will be the first firms to move to the cloud. Research I haven't yet seen presented along with these surveys is the context that implies just how significant the SMB market is in the evolution of cloud. Presently the SMB market is highly fragmented and it's extremely labor intensive and inefficient to serve SMB customers. Big vendors mostly serve these customers through the channel, or have organized in order to be able to serve these customers profitably. Another bit of data I don't often see included in the forecast that SMB will be first is that the SMB tech spend is a $444B annual spend. What if you could capture 10 percent of the SMB tech spend as these firms move to the cloud? What if you could capture a third of it? If cloud does nothing else than disrupt the SMB technology marketplace, it will still reorganize the technology industry as we know it today.

Amazon.com as Destroyer and Builder of Markets
The widely overused yet apt term "creative destruction" comes to mind when I think of Amazon.com's role in ecommerce. In every line of business from its genesis to today, Amazon.com has begun by applying ecommerce technology to redefine an existing industry. Amazon may start by taking on the brick and mortar tasks, yet over time increasingly seeks to replace physical commerce activity with the activity of third-party participants who actually interact with customers, deliver physical goods, and perform necessary personal services. In other words, Amazon creates a marketplace, demonstrates success, than moves to profit by selling other market participants the Amazon.com software services that enable the business. Amazon moves to exit the business of moving physical objects as quickly as it possibly can. Amazon seeks to sell the ecommerce application to other businesses that use that system to serve Amazon's customer base.

What Business Is Amazon.com Really In? How Does Cloud fit into This Puzzle?
Rich Wolski at Cloud Expo pointed this out to me by simply stating that Amazon's real business is being a SaaS provider of an ecommerce application. If delivering ecommerce services is Amazon's core business, then what is Amazon's Cloud business? And how does what Amazon.com do in the Cloud really relate to Amazon's core ecommerce business? If we think about the much-cited example of the invention of the telephone, the telephone itself wasn't worth anything until a network of communications could be built. In order to monetize the telephone, Bell had to build out the necessary infrastructure. In recent history, in order for Amazon to extinguish physical books and enable the ecosystem for ebooks, Amazon had to invent the Kindle. Think about the Kindle and how it has fostered mobile tablet form factor computing as you handicap the expected outcome of Amazon's emboldened move to remake the business Internet.

Create the Climate and Ecosystem Necessary for Amazon to Achieve Hypergrowth and World Domination (Exaggerated, but Maybe not so Much)
Amazon's cloud strategy achieves several key objectives:

  1. Disrupted the datacenter market in terms of service delivery, quality, provisioning, size of a viable datacenter, and cost. In other words Amazon invented the cloud. Rich Wolski validated my opinion of this the other day.
  2. Disintermediate the major vendors of datacenter compute, network, and storage inputs so as to ignite innovation and destroy the viability of current production and pricing models.

Presently, IBM, Intel, HP, Oracle sell to mid-market firms through an ecosystem of distributors and partners collectively called "The Channel." However, in the cloud phase ignited by Amazon's disruptive move, the Channel will cease to participate in this ecosystem. Cloud datacenter requirements will determine order size, configuration and delivery. These types of orders can be fulfilled directly by the manufacturers and do not require a Channel to mediate between the manufacturer and the consumer. Intel could, in theory, manufacture and deliver industrial-sized datacenter compute / network / storage units. At the conferences I've attended one area of consensus is that the compute architecture will be Intel. Maybe this is why Amazon AWS is nurturing Nvidia GPUs for floating point intensive workloads. In any case, I expect to see more compute vendors enter the datacenter space because the order size and volume might make it feasible for chip manufacturers smaller than Intel to deliver the compute component, but I don't really know how anyone can surpass Intel in terms of volume. Even, so, with the scale of the mobile build-out, Intel's position in the ecosystem is no longer a certainty in this new ecosystem. Presently Cisco offers PODS, which combine compute / network / storage in a pluggable shipping container.

What and How Will the (Fewer) Cloud Datacenters Buy?
Rather than buying individual servers, network components, and cable datacenters in the cloud era, purchase large "pluggable" blocks of compute and storage directly from the manufacturers. In this phase, mid-market firms no longer buy a significant volume of compute or storage because the small and mid-market firms will move first and rapidly to the cloud. Once the mid-market fully commits to cloud, there will be no turning back. Public Cloud changes the role of corporate IT from being the "locked-in" service provider, to one of many possible technology service providers. Given the highly manual and labor-intensive means of production in most present-day SMB technology shops, in-house IT seems like the equivalent of "cottage industry" weaver.

Prior to the application of scale and automation that ignited one of Earth's most disruptive events, the Industrial Revolution, individual "weavers" were able to make a living by producing cloth in their homes using hand looms. At the dawn of the Industrial Revolution, these hand weavers were no longer able to compete with automated factories, and had to move from the country to the city and find work in these factories. Similarly, everyone else who participated in the cottage industry / ecosystem had to follow the weavers into the city. Perhaps part of what we see moving before us is the "industrialization of the Internet." Similarly, I see computing and technology workloads moving from SMB "cottage" datacenters into automated and scaled up "cloud" datacenters. We will witness this industrialization of the datacenter in this first wave.

As a result of these SMB workloads moving, the industrial datacenter, the cloud, now becomes the consumer and customer and mediator of technology goods and services. As a result, pricing power by incumbent compute and storage vendors will diminish. New relationships with yet unknown vendors will form and thrive. The new customer, the industrialized cloud datacenter, has different needs and will purchase and consume differently, and will maintain a laser-sharp focus on efficiency of operations and capital. This new customer is very different from any customer previously served by technology vendors.

As cloud datacenters capture and increase share of the $444B SMB technology spend, significant restructuring seems inevitable. While manufacturers such as AAPL, MSFT, IBM, HP, DELL, CISCO, and EMC could realize substantial costs savings through consolidation of products into fewer, larger, and more-focused solutions, this shift from selling to consumer-sized businesses to selling to larger cloud datacenters will require significant adjustment. It's also a great opportunity for new firms to participate and for incumbents to change the share or mix of products sold. The types of products demanded will now be defined by the requirements of cloud datacenters. Imagine the kind of purchasing power held by Walmart, yet applied to a much narrower basket of goods of services. Think about this.

When we see Microsoft, Dell, Apple, and Amazon building out cloud datacenters, it's not because they think the cloud is cool, or that it might work. It's because they believe that in order to keep their customers they need to own the cloud services their customers demand. These firms are building out cloud infrastructure because if they don't, they fear extinction.

Without a cloud datacenter, somebody else controls the relationship between you and your customer. These same firms coincidentally have focused intensively on understanding and serving their customers, both consumers and SMBs. Because they are attuned to their customers, these firms understand earlier than others the ramifications of the Cloud Extinction Level Event.

Who Will Win? Customers Will Win. Roles Will Change.
The likely technology vendor winners will be those firms that have built the strongest end-user customer relationships. As firms seek to move to the cloud, they will most likely choose to work with vendors that are trusted and familiar and seem like a good fit. In the SMB space, firms that have strong SMB customer ties such as MSFT, AMZN, AAPL, and DELL may be best positioned to migrate their existing SMB customers to the cloud. The firms that win the small and medium-sized business cloud hold a very strong advantage to leverage this scale and experience and to define the industry, the standards, and the rules in this new marketplace.

More Stories By Brian McCallion

Brian McCallion, founder of New York City-based consultancy Bronze Drum focuses on the unique challenges of Public Cloud adoption in the Fortune 500. Forged along the fault line of Corporate IT and line of business meet, Brian successfully delivers successful enterprise public cloud solutions that matter to the business. In 2011, while the Cloud was just a gleam in the eye of most Fortune 500 firms Brian designed and proved the often referenced hybrid cloud architecture that enabled McGraw-Hill Education to scale the web and application layer of its $160M revenue, 2M user higher education platform in Amazon Web Services. Brian recently designed and delivered the JD Power and Associates strategic customer facing Next Generation Content Platform, an Alfresco Content Management solution supported by a substantial data warehouse and data mart running in AWS and a batch job that processes over 500M records daily in RDS Oracle.”

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