Cloud Computing Economics - There Is No Free Service

Cloudonomics Journal

Subscribe to Cloudonomics Journal: eMailAlertsEmail Alerts newslettersWeekly Newsletters
Get Cloudonomics Journal: homepageHomepage mobileMobile rssRSS facebookFacebook twitterTwitter linkedinLinkedIn

Cloudonomics Authors: Lori MacVittie, Skytap Blog, David H Deans, Shelly Palmer, Tim Crawford

Related Topics: Cloud Computing, Cloudonomics Journal, Microservices Journal, Business Intelligence


Cloud Computing: David and Goliath Rival Companies

How innovative companies are responding to a consumer-technology integrated world

The future is already here and cloud computing is changing shape. Over the next few years the tech industry will become an even more volatile marketplace. The disruption will come from the smaller companies that will be able to adapt faster and grow their market share at the expense of mid- and large-sized companies with the help of cloud computing. That is the pattern of recent years and it is set to continue.

The question that a CIO needs to ask is why do companies like Blockbuster go out of business when they planned to lead the DVD home delivery market - and companies like Netflix succeed? How could it happen so quickly? The reason is clear: Netflix was customer-friendly, fun and at its core a good idea.

Netflix operated at a loss given how much it paid to the United States Postal Service, but now those figures are reversed. Netflix started its subscription service in 1999. Ten years later - as recently as 2009 - it offered a collection of 100,000 titles on DVD and surpassed 10 million subscribers. On February 25, 2007, Netflix announced the billionth DVD delivery. Today the company is worth $2 billion. If there was ever a company to hit Malcolm Gladwell's ‘tipping point' demarcation of runaway success and word-of-mouth consumer enjoyment, Netflix was it. (Incidentally, I am not a company sponsor.)

Similarly, why did Borders go out of business while Amazon thrives? Amazon dictates terms to the book publishing industry and is rumored to be releasing its own tablet to rival the iPad. At what point did Amazon cease to be solely a bookseller and become a multi-national tech company? Well, when it set up Amazon Marketplace, for one. Amazon always understood that as long as people went to its site, it would make money. Hence why Amazon pushes the Kindle so hard and at a loss. Amazon knows something about business that the rest of us often miss - the long-term rewards of customer access, and the value it creates. In other words: market share.

Of course, success can sometimes be explained because companies like Netflix and Amazon have smart business models, and because consumer habits have changed. But the main reason is that they were built on an idea that overtook the cultural zeitgeist - they were prophetic. DVDs are now mailed to the home, an ingenious idea, but a simple one. Importantly, though, this business model could only have occurred once people were fully transitioned from VHS to DVD. It wasn't a miracle, but a market opening with changing habits capitalized on by a small player. Blockbuster missed the boat.

Similarly, people once said they would never buy clothes or electrical goods online: so Amazon began with books. Now it sells everything - and, more important, the consumer buys everything. In a word: prophetic. These companies saw the future.

So How Can You and Your Business See the Future?

The future of global business is cloud computing; a natural composite of your personal documents and computing systems in group form - so you, the individual, can access them anywhere and everywhere. (Look up and see the clouds. Have access.)

First, let's understand how a company becomes large or a "Goliath." A large company grows from one of two avenues: organically or by acquisition. During either expansion, a company will acquire an increasing number of systems to handle orders, sales, HR, inventory, warehousing, etc. Or they will buy an ERP like SAP that does all of this. In terms of infrastructure, most multinational companies have these systems housed in costly global data centers with regular backups, etc.

A large company then becomes obsessed with the systems that they have created. They spend time and money managing their own bureaucracy. Like being trapped in Kafka's Castle, this causes the managers and decision-makers to become engulfed with systems management rather than concerned with threats to their fundamental business. In this environment, how much time is really spent on watching rivals and channeling good ideas into the business?

The result is what I like to call the ‘David and Goliath' complex - a fight for market share where size can be a bruising obstacle. Big companies fail to see the threat before it hits them, and directly in the head - like Goliath attacked by a seemingly small foe.

But like piranhas, the small competitors can have an overwhelming effect, especially when consumer habits are fickle. A threat could be small at first, but literally take a large company down in a few years. The key problem is that the large company cannot adapt to or capitalize on social change like a small company. A Goliath cannot fight back because its own weight - its costly systems and infrastructure - gets in the way of the ability to adapt.

The "David and Goliath" Complex
This is a short story about two TV stores and a prospective customer. One, David-QuickMart, is solely an online TV store. QuickMart cannot afford any infrastructure investment, so instead he uses cloud computing to create a simple mobile phone app that allows people to instantly send location-aware coupons from their TVs to the app. The idea is simple, but powerful. Now to capitalize.

The other store, Goliath-Enterprises, is a traditional bricks-and-mortar TV manufacturing company with a sales website. They have invested heavily in physical infrastructure, buildings, and their computer operating systems.

Let's say the consumer, Bob, wants to buy the latest television but wants a deal. Bob doesn't like Goliath-Enterprises' online site, not because it's online, but because he would rather discuss and touch the product. Most consumers still shop in this way for TVs. But Bob now hears from a friend about an app that details the best value TV for both high street and online stores. So Bob walks into Goliath-Enterprises' store and uses the mobile phone to snap one or more barcodes of the latest TV - this is how the app works, by tagging barcodes with pre-loaded price information. Bob then learns that "David-QuickMart" has the TV for a lower price. This occurred because when Bob took the photo, the app transmitted a coupon that allowed an instant discount on the TV. The result? Not only does Bob buy the TV from David instead of Goliath, but he tells his friend about the app.

This is how Goliath responds....Goliath-Enterprises has been smart and invested heavily in business intelligence. Now the vice president has noticed David, this small but worrying rival company. So he raises an emergency meeting with the IT team headed by ‘Brain Box' Brian. The VP explains that David is a small competitor, but Goliath is still losing money! Is there any way Goliath can stop this from happening? The VP informs Brian that Goliath is already developing a similar mobile app, but perhaps too late? The VP adds: "Why doesn't Goliath create a mobile app that provides the consumer with an even more functional coupon, so people will shop in the Goliath store instead of walking out? We could instantly save them money and offer discount packages of our old inventory that will drive people back into Goliath stores."

‘Brain Box' Brian shrugs and literally sneers at the feeble attempt of the business person to understand the computer systems. He takes a long drink of hot coffee before responding - that in order for IT to do this they must interface system X, Y and Z to extract the inventory. "We would then need to back up the interfaces over multiple data centers. We'd also need to add a support on the flux capacitor engine and 1.21 Gigawatts to power the mobile app. That could take months." This is not what the VP wants to hear. Brian adds that the cost of these operations wouldn't have the ROI for such a small loss. The VP gets confused and believes that this is a bigger deal than he first thought and we better not touch the system that we trust....

One year down the line multiple David-QuickMart applications have appeared for all inventories of Goliath-Enterprises. Meanwhile ‘Brain Box' Brian starts the ‘Mission to Mars IT project,' but Goliath has run out of time and money to respond. David-QuickMart increases its market share in a classic Darwinian way - by taking it from Goliath-Enterprises.

Furthermore, David-QuickMart patents its app and sells it to other developers: it does not want to become a Goliath itself, but control the market through licensing - another smart idea that can be run from the cloud. As long as the systems remain flexible and off-site, David-QuickMart will never have too many overheads in terms of data storage and can concentrate on sales and what it does best: creating enhanced access to the consumer, and understanding the value of good ideas.

So, shouldn't CIOs be worried about cloud computing? Only if they don't take time to discover how innovative companies are responding to a consumer-technology integrated world.

More Stories By John Shaw

John Shaw is an expert on cloud computing and was cited in InformationWeek for his contribution to a panel on hybrid/private/public clouds. He is a serial entrepreneur and CEO of Nimbo, a successful cloud computing company headquartered in New York. You can read more articles from John Shaw at

Comments (0)

Share your thoughts on this story.

Add your comment
You must be signed in to add a comment. Sign-in | Register

In accordance with our Comment Policy, we encourage comments that are on topic, relevant and to-the-point. We will remove comments that include profanity, personal attacks, racial slurs, threats of violence, or other inappropriate material that violates our Terms and Conditions, and will block users who make repeated violations. We ask all readers to expect diversity of opinion and to treat one another with dignity and respect.