Analyzing the Cloud Computing Industry

Amazon Web Services (AWS) Cloud Computing Industry

(I) INTRODUCTION
Industry Definition & NAICS number: 541519
Main industry rivals (main incumbent companies competing in the industry): Main industry rivals are Microsoft, IBM, Salesoforce, SAP, Oracle, Google, ServiceNow, Workday and VMware (Evans, 2017).
Main industry supplier groups:
The main industry supplier groups are Infrastructure-as-a-Service (Iaas), Platform-as-a-Service (PaaS), and Software-as-a-Service (SaaS) (Au-Yeung, Chu, Enfante, Logan & Saelee, 2016).
Main industry buyer groups:
Main industry buyers are Military, financial, health, e-commerce, and any company that needs to store or process data, which is virtually every corporation in today’s digital era.
(II) PORTER ANALYSIS
(A) Threat of Entry (Based on Strength of Barriers to Entry)
1. Limit Pricing: Pricing depends on services rendered. If a single website is hosted, pricing can be as little as $1-$3. For larger contracts, such as hosting the Pentagon’s data, pricing can be in the billions of dollars. The field is competitive, so this gets a 5 score and a 10% factor.
2. Capital Costs: Capex for the top tier cloud computing services is between $2 and $15 billion. AWS spends approximately $12 billion (Jhonsa, 2018). This is because the industry is rapidly growing and AWS like its competitors must expand quickly and maintain space for servers. Spending is a must, so this gets a 5 score and a 10% factor.
3. Incumbent Dedicated Assets: 65% of all assets are dedicated to services in the industry—assets are needed for expansion, and every company in the cloud computing industry is needing to expand in order to stay competitive; so another 5 score and a 10% factor.
4. Restrictive Government Policy: Currently, government policies are non-restrictive. As Lebeda, Zalatoris and Scheerer (2018) notes: “Since 2009, plans and policies were developed for the use of cloud technology to help consolidate and reduce the number of data centers which were expected to reduce costs, improve environmental factors, enhance information technology security, and maintain mission support for service members.” The EU, however, is currently cracking down on cloud computing with its laws. The new European law oversees “how companies store data and requires them to alert authorities within 72 hours of a breach. If companies don’t comply, they can be fined 4 percent of their global revenue or 20 million Euros — whichever number is higher” (Newcomb, 2018). Policy can be a deal breaker, so a 5 score here and 15% factor.
5. Supply-side Economies of Scale: Cloud data centers have lower costs per server, based upon purchasing power (Golden, 2010) but there is a need for expansion in a hurry as competition increases. Score=5, 15% factor.
6. Barriers Independent of Scale: Entry is difficult: a cloud computing company must have a “strategic business analysis, investment requirements, patents, knowledge assets, etc., and the competitive edge to compete with other IT companies” (Au-Yeung et al., 2016, p. 13). Score=5, 10% factor.
7. Customer Switching Costs: As Seroter (2016) notes, there are many downstream switching costs: companies have to spend on “new training for staff, changing hosting or support providers if the new technology is incompatible with their model, and purchasing new tools to administer the new asset,” and there are locked in costs as well that customers must navigate; so here is score of 5 and 10% factor.
7. Demand-side Economies of Scale: Demand-side economies of scale are growing rapidly as cloud computing services are increasingly needed in every industry. Big Data warehousing is something every corporation now needs in the digital age. Therefore, this is a 5 score and another 20% factor.
8. Concluding Discussion of Threat Posed by Barriers to Entry: There are numerous factors that require serious consideration as a barrier to entry and all are equally important for the most part. However, one of the biggest barriers is government policies, which essentially dictate the kind of operation—and this is true in the EU, China and other parts of the world. Demand side economies of scale, however, is the other big factor. Still, as Au-Yeung et al. (2016) note, “Cloud Computing does not have much entry barriers; instead it reduces the barriers of entry to new start-up companies because of its low expense and expertise which are needed in traditional IT” (p. 20).
(B) Supplier Power
1. Concentration Ratio of Supplier Group Relative to Concentration Ratio Incumbents: Supplier groups are high relative to the concentration ratio of incumbents. So there is no dearth of supplies and no real risk of supplier groups negotiating higher fees. This score is minimal at a 2 and a 5% factor.
2. Strategic Importance of the Supplier Group to the Industry (and vice versa): Every supplier group is important to its industry and vice versa. The cloud computing industry is relatively new and still growing, so it remains to be seen how these relationships will transpire over the coming years and decades. Currently the score for this factor will rate a 4 and a 10% factor.
3. Costs of Switching from One Supplier to Another: The cost of switching from one supplier to another is not going to be considerably high unless trade wars turn to hot wars and disrupt supply chains substantially. Socio-economic risk factors should always be considered. Thus the score for this factor is a 4 at a 10% factor.
4. Threat of Forward Integration by Suppliers: This threat is minimal, particularly AWS will likely control distribution in the near future. The score on this is 1 with a 5% factor.
5. Extent to Which the Suppliers Products are Differentiated: Differentiation is not particularly important at this point as every company is in need of the same supplies to drive growth. Score is 1 and factor 5%.
6. Availability of Substitutes for the Suppliers’ Products: Substitutes for the suppliers’ products are available. Once build-out is achieved, however, the product requirements are less significant overall. Score for this factor is 2 and factor 5%
7. Concluding Discussion of Threat Posed by Supplier Power: Supplier power is not a considerable threat as there are a range of suppliers available and plenty of competition among them. Traditional IT and open source coding are the only viable alternative solutions and these require considerable internal staff for maintenance (Au-Yeung et al., 2016). The biggest threat would be switching from one supplier to another.
(C) Buyer Power
1. Concentration of Buyers Relative to Concentration Ratio of Incumbents: Cloud computing is gaining in popularity in virtually every industry. This is an opportunity for dominant players to secure their market share by developing relationships with clients for the long term. Score is 5 with a 10% factor.
2. Market/Industry Growth Rate: The market is intensely growing as more and more companies rely on Big Data and data processing. Cloud computing provides all the solutions for these industries and the industry is thus poised to continue growing exponentially, as AWS sales shows. Sore is 5 with a 10% factor.
3. Are there are a Few HighVolume Buyers: There are several high volume buyers, typically in government. Military needs, health needs, administrative services needs, and law enforcement needs are all just a few examples of why governments are high volume buyers. Score is 5 with a 10% factor.
4. Are buyers Strategically Important to the Suppliers (e.g. Incumbents): Buyers are strategically important to suppliers, which is why there is such competition to win government contracts. Score is 5 with a 10% factor.
5. Are Suppliers (e.g. Incumbents) Strategically Important to the Buyers: Suppliers are also strategically important to buyers, as the Pentagon has recently shown by demonstrating a preference for AWS over Oracle. Score is 5 with a 10% factor.
6. Is Capacity Added in Large Increments? Capacity is certainly added in large increments, as AWS has shown in recent years. The need to grow is surpassed only by consumer demand. Score is 5 with a 10% factor.
7. Threat of Backward Integration by Buyers: There is little threat of backward integration by buyers as they simply lack the staff and infrastructure needed for cloud computing. The industry is specialized; thus, score is 1 with a 2% factor.
8. Are the Products Differentiated? The products are not differentiated as it is a service-based industry and the service is primarily of the same quality, as no company can afford to be surpassed by another in terms of quality. Score is 1 with a 2% factor.
9. Concluding Discussion of Threat Posed by Buyer Power: The threat posed by buyer power is minimal as buyers are reliant upon the specialized services and infrastructure provided by the cloud computing industry. To manage their own data needs would require more training and maintenance than most companies are willing to spend. Additionally the concentration of buyers to incumbents is high, so there is much more demand than in the beginning and it is only growing.
(D) Threat of Rivalry
1. Industry Concentration: The industry is concentrated among a handful of big players, including AWS, Google, IBM and Oracle. All of them are vying for big contracts, but smaller companies are also making inroads. Score is 5 with a 15% factor.
2. Demand Conditions/Industry Growth: Industry growth is accelerating quickly and the demand for services is high. Areas like China, however, are problematic because of distrust the government has for outsider companies. Thus international growth is complicated. Score is 5 with a 10% factor.
3. Exit Barriers: Exit barriers are low: As Au-Yeung et al. (2016) note, “There is a low exit barrier percentage for cloud computing because customers are locked-in to the cloud computing company when they decided to subscribe to their products” (p. 22). Score is 1 and factor is 5%.
4. Commitment to Preserving Market Positions: Every competitor is committed to preserving market positions and on growing them. This is makes this factor a particularly high risk as increasing market share is thus more difficult as a result. Score is 5 with a 15% factor.
5. Diversity of Competitors: Competitors are diverse in terms of size, with small, medium and large competitors offering cloud computing services. Each will have appeal for specific buyers, so diversity brings competition but also solutions to niche markets. Score is 5 with a 10% factor.
6. Degree of Product Differentiation: Au-Yeung et al. (2016) state that “in addition, not only is it difficult to differentiate companies from one another, it is also difficult to distinguish the different, yet very similar products. As a result, the rating for rivalry among existing firms is a high competitive force” (p. 23). Score is 5 with a 15% factor.
7. Fixed Costs/Variable Costs Ratio: Fixed costs exist for IaaS because of the need to compete with traditional IT, but variable costs exist for Saas and Paas (Au-Yeung et al., 2016). Score is 2 with a 5% factor.
8. Is Capacity Added in Large Increments: Capacity is typically added in large increments. Au-Yeung et al. (2016) state that “for cloud computing, capacity is measured in the forms of storage, CPU cycles, network bandwidth, or workload memory capacity,” (p. 17) and the needs for all of these are constantly growing. Score is 5 with a 15% factor.
9. Concluding Discussion of Threat Posed by Rivalry: Rivalry exists at a high level and competition is fierce. This is a high threat level for the industry and the biggest factors are industry concentration and the commitment of rivals to preserving their market share.
(E) Threat of Substitutes
1. Price/Performance of the Substitute: Au-Yeung et al. (2016) note that “the main competitor against cloud computing is traditional IT and Open-Source Computing. With new entrants introduced into the market, new “as-a-Service” products and services are being researched and developed” (p. 23). The score for this 5 with a 10% factor.
2. Buyer’s Costs of Switching The buyer’s cost of switching is considerable with downstream costs and locked-in costs, so it is disadvantageous to switch. Score is 1 with a 5% factor.
3. Concluding Discussion of Threat Posed by Substitutes: Substitutes are not a huge risk until contracts expire or until industry standards change. This could occur with new innovative solutions, which is why locking companies in now is important.
(F) Conclusion: Overall Level of Threat to Industry Profitability: The threat to the industry in terms of profitability is low for the big market players already with significant market share. For small players seeking entry into the market, there is still plenty of demand and niche market companies could still profit handsomely for supplying cloud computing services to smaller buyers as opposed to big market buyers.
AWS is in a prime position to continue to profit substantially: its size and position in the industry make it one of the top players and its good relationship with the Pentagon puts it in a position to capture a lucrative cloud computing services contract over the next several years. Other players like Oracle are competing for just this type of contract but establishing the clout, reputation and relationships are pivotal to gaining access.
Smaller companies require inroads to smaller buyers and can profit from new demand from small, regional or local buyers just now updating their infrastructure and moving to cloud computing to handle their data needs. Whether governmental restrictions will play a significant factor in the U.S. remains to be seen. Currently there are major regulations in the works in the EU and restrictions in China, which is the biggest market globally.
The nature of the service makes and the arrival of the digital age means that cloud computing is going to remain in demand for years to come barring an unforeseen revolution in IT services or in data management. It is unlikely that companies will engage in backward integration or that suppliers will engage in forward integration as the expertise needed for either is too significant. For the time being, AWS and other cloud computing providers are in a good position to continue to profit from increasing demand in the industry. This demand is unlikely to drop off in the near future as data warehousing, processing and security features are not going to be the specialties for any buyers or suppliers. This means that the industry is not only still in a growth phase but should continue to expand as new markets open where government restrictions are minimal.
References
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