Cloud computing, in theory, is exceedingly profitable because of recurring revenue and deep customer entanglement. However, the CEO of collaboration service Box believes the proliferation of applications ultimately means lower returns to vendors and resellers.
The cloud computing model, on paper, is extremely profitable: Revenues increase over time and scale of delivery decreases costs.
The reality is very different. Vendors and solution providers are finding it difficult to build revenue and profits through cloud services.
Conventional wisdom says cloud computing takes time to accrue revenue. True, but the reason cloud businesses are struggling to amass the mountains of treasure that Microsoft Corp. and Oracle Corp. did in the halcyon days of software licensing is because there are so many options.
At least that’s the perspective of Aaron Levie (pictured), CEO of collaboration service Box Inc.
“I don’t know that we should expect the same kind of economics as you saw from Oracle in its heyday and IBM in its heyday,” said Levie, who was speaking at the Bloomberg Next Big Thing Summit in Half Moon Bay, Calif. “The upside remains the same. The unit economics and how profitable you’re going to be is going to be a little different.”
Levie’s perspective is valid. His company is a market leader in collaboration, services that give users the ability to move content through the cloud to multiple parties and devices. But Box isn’t unique. It competes with myriad companies ranging from Microsoft to dozens of startups.
Service function and value will vary from vendor to vendor, but the broad availability of such services means a greater distribution of spending among customers. This equally translates to solution providers that represent these products; their customers have numerous choices, and that distracts from focusing on a select few for adoption.
In the conventional market maturation model, the number of suppliers will consolidate to a select few through mergers and acquisitions, as well as general attrition. That may still happen in cloud services. However, cloud computing is lowering the barrier-to-entry to new providers.
While Levie didn’t state it in his remarks, he likely would have said that this lower barrier-to-entry means the market will see a steady influx of suppliers to replace the ones that cycle out. Hence, the broad distribution of choice that makes it harder for any one vendor to build top-line revenue.
It’s an interesting concept: Cloud computing means persistent over-distribution of supply. If this is how the cloud market plays out, companies like Box will have an increasingly hard time becoming the next Google Inc.
Does this problem translate to solution providers? It’s a problem, but not necessarily the same as it is for vendors. Over-distribution of services means solution providers will have numerous choices for partnership. There’s no rule that says a solution provider has to pick just one service; they can offer any number of services. The challenge is managing those relationships without incurring costs.
Chances are conventional market consolidation will ultimately clean up the cloud market in the same way it happened with traditional hardware and software segments. However, the pace at which consolidation happens is likely going to be slower because of the low barrier-to-entry.