In the midst of its rapid evolution, the cloud market is both commoditizing and differentiating at the same time. Commoditization is gradually expanding from infrastructure services to higher levels of the value chain. This forces smaller cloud service players to differentiate if they wish to remain in business – but how?

Gearshift Group participated in ITEA 3’s multinational EASI-CLOUDS project that provides some answers to this question. The project also created a useful overview of the cloud market and business models. But first, let us approach the problem from a broader perspective.

Good old strategy frameworks revisited

Michael Porter has famously argued that firms that pursue industrywide strategies need to either pursue differentiation or cost leadership, whereas firms that serve a particular segment need to work in their focus. If firms does not follow this prescription, it risks becoming ‘stuck in the middle’ without a clear direction.

In an established market, it is easy to map the key players into Porter’s framework where they occupy the same positions year after year. However in the relentlessly evolving cloud market, it is less clear how segments will evolve, where significant commoditization will hit next, and what customer needs will fuel differentiation strategies in the future. Still, Porter’s framework from the early 80s provides insights on the big picture.

Commoditization pushes markets to evolve

In commoditized markets, cost leaders are set to triumph. Selling cloud infrastructure as a service (IaaS) is a good example of a cloud service that is largely commoditized. From the perspective of many (but not all) cloud consumers, it is largely irrelevant if their web pages run on Amazon’s or Microsoft’s servers, or where their non-critical data is stored as long as the price if right. Subsequently, in this market, large players are locked in a “race to zero”, a spiral where one player’s dramatic price decrease is quickly followed by a competitor’s larger price decrease.

Arguably, the companies with the largest economies of scale will survive in this game, despite constant ‘Moore’s Law’ decreases in hardware costs also make significant price cuts possible. Further, the cloud service commoditization game will unlikely end with IaaS, but gradually move itself up the cloud value chain.

Game over for smaller cloud infrastructure service providers?

Does this mean that the game is lost for smaller cloud infrastructure service providers who neither have high volumes nor broad geographic reach? Time will tell, and perhaps the cloud infrastructure market has not (yet) fallen under complete direct competition like things might initially seem. Nonetheless, all this creates a push for smaller players out of their focus or cost leadership strategies to think about ways to differentiate their offerings in the eyes of their customers, or to find a new area of focus.

So what are the ways out of Porter’s ‘stuck in the middle’ scenario? What kinds of new offering should small cloud infrastructure providers develop? What kinds of partnerships should they form? In the next edition of this blog, I will examine how cloud brokerage and cloud federation may help these firms to improve resource utilization and increase the top line by more easily gaining access to broader markets.