Cloud Computing - Part 4 - Business Ecosystems and Value Capture

http://cloudcomputingexpo.com

I will be attending the 7th International Cloud Computing Expo at Santa Clara, CA next week.
My blog will have some posts reflecting the experiences in this convention.

This is part four of a series of posts before the conference that will serve as a good basic introduction to the benefits, challenges, and risks associated with Cloud Computing technologies and business strategies.

I have been a lead user and user-innovator of computer technology for about 20 years. My MIT SDM education has provided me with powerful frameworks by which I can better study the strengths and weaknesses of technologies and their interaction in the greater business landscape.

A core part of the SDM program involved the study of technology dvelopment/deployment and business strategy. The next four foundation-level posts are directly based upon a series of four papers that I prepared as part in course 15.965 - Technology Strategy for SDM, during Spring 2009 [1]. These papers focused on a study of the different technological and business opportunities associated with Cloud Computing.

Please note that these blog posts aim to bring the discussion to a level that is more understandable to the general technology-saavy public. A thorough examination of the technology and strategy associated with Cloud Computing technologies would easily qualify for a doctorate thesis.

The Cloud Computing Ecosystem Key Groups

Most modern technological products and services exist in a complex business ecosystem framework that extends far beyond the traditional scope of manufacturer and consumer. The business ecosystem framework for cloud computing consists of several key groups:

• End Users - Most end users of cloud computing services, as discussed in the first and second papers of this series[1][2], must see improvement in key values in which Cloud Computing will be measured. Otherwise, there will be no incentive to adapt the technology. Any loss aversion from traditional alternatives must be avoided or made irrelevant when compared to the new technology.

• Network Administrators - Depending on the particular adoption policy of a corporation, Cloud Computing may not extend throughout a corporation’s computer network and only reach the data center / server level. In this case, the actual network administrators are considered the actual end-users and have focused needs and concerns that must be addressed by a Cloud Computing provider before being adopted.

• Computer Hardware Manufacturers (OEMs) - These companies offer workstation and/or server equipment to their clients, including individual corporations, separate data centers, and cloud computing data centers. Existing and future partnerships will dictate what opportunities in these disparate areas of the ecosystem can be successfully leveraged to maximize market share and survivability.

• Internet Service Providers (ISPs) - While not directly associated with the technology of Cloud Computing, ISPs provide the means by which the end users or network administrators are able to access the services associated with Cloud Computing.

• Cloud Computing Platform Providers - Depending on a particular Cloud Computing Architecture, there may be a top-level interface that an end user accesses lower level applications and services in a Cloud Computing framework. Alternatively, if the framework is modular and based on à la carte offerings, this top-level interface may only be a standardized graphical user interface among each option.

• Cloud Computing Applications and Services - These are the actual components that make up each cloud computing framework. The key objectives assigned to each component, especially for à la carte frameworks, help to distinguish the target business sectors of the framework. The most integrated architectures will blur the distinctions among services and offer a seemingly all-encompassing package to the end user.

• Business Partners - In order for a framework to dominate parts of a business ecosystem, partnerships must be formed among companies and organizations. These partnerships, which most often are vertically formed through an architecture, allow a synergistic relationship, leveraging the specialties of differing organizations into a common framework or product.

• Business Complementors - As described by David Yoffie and Mary Kwak in the September 2006 Harvard Business Review article “With Friends Like These”, and adapted into Figure below, the management of complementors, businesses that separately supply services to the same customers are a key component to business ecosystem strategy. These businesses often have the opportunity to leverage off of each other’s ecosystem position and strategy to further their own interests. Complementor arrangements can be fleeting since the parties often have misaligned interests due to their differing positions in the ecosystem. A mutually beneficial ecosystem can quickly change into a conflicting arrangement.

• Non-Business Organizations - Organizations that are not focused on business partnerships can provide a strong influence in the formation of some business frameworks in the Cloud Computing ecosystem. These relationships are often seen in open-source communities, which foster a collaborative form of product development. Academic institutions, which often give greater value to the sharing of knowledge epitomized by scientific research, are often involved with these organizational relationships.

• Two-Sided Market Complements - Separate from the business partners described above, some Cloud Computing frameworks are structured for a two-sided market. As a result, the adoption of a framework by one side of a market is directly related to the existence of adopters on the other side of the market. The Cloud Computing platform provider serves as the intermediary between these two sides. Caution must be exercised by the platform provider to balance both sides of the relationship to maintain increasing returns to scale.

  Complementor Management Strategies; Adapted from [3]

 

An INTRODUCTION to the Cloud Computing Ecosystem

 Since most cloud computing applications are in the very early stages of adoption, there is not a wide variety of history in the technology. Previous business strategies involved focused efforts in remote storage, media access, or common services such as webmail. However, as Cloud Computing as a unique business model has matured and attracted the attention of major corporation, major architectures, both modular and integrated, have been developed to incorporate this technology.

As can be seen in Exhibits 1 and 2 below, there are six major Cloud Computing service architectures that are competing for dominance. Each architecture is fundamentally different from one another, reflecting not only the types of clients it is targeted to serve, but also the technical background and business philosophy of its developers.

• Amazon.com – Amazon Web Services - Amazon’s modular cloud computing solution is focused on specific services that have been designed for businesses and is considered a specialist in this segment of the ecosystem. Other than the coordination among services, there is no focused platform. The architecture is designed to serve B2B two-sided markets with the seller paying Amazon for services. Due to the focused, yet comprehensive offering in these services, complementors are not very important. However, IBM Blue Cloud is a potential future rival in these services. Microsoft Azure, with an integrated platform, will offer a long-term threat. 

• Yahoo! – Commerce and Small Business Services - Yahoo, who offers home-user focused web applications such as e-mail or job searching, has begun to offer limited services to small businesses. While they were a leader in the use of the internet in the late 1990s among home-users, they are being eclipsed by Google.

• Hewlett Packard (HP) / Intel / Yahoo! – Cloud Computing Research Initiative - Uniquely, these companies have formed a partnership with HP and Intel called the Cloud Computing Initiative that is focused on sharing storage and computing capacity among academic institutions. Many applications and services have been developed with assistance from the open source community. Complements are critical for this project to survive in the long term.

• Google – Google Apps and Google App Engine - Google Apps has focused on time management and communication applications that leverage the architecture that Cloud Computing can offer. Google App Engine provides a programming interface that facilitates the programming of webapps. Since Google is not a major software developer, it will require a constant variety of complementors to maintain dominance in the long run. Microsoft Azure, an integrated platform, will have build-in complementors that will directly threaten Google’s position in all ecosystems, but primarily in the business sector.

• International Business Machines (IBM) – Blue Cloud - IBM’s modular framework, developed from the continuing development of their Tivoli division, aims specifically at the server market. They aim to leverage their relationships in the server market and specialize in offering an alternative to local Data Centers. Accordingly, their services are structured towards the needs of a network administrator.

• Microsoft – Windows Azure - The industry is awaiting Microsoft’s entry into the Cloud Computing “arena” with Windows Azure. It will be an architectural innovation since it will be the first major integrated operating system designed to work primarily with cloud computing resources. As a result, Azure has the opportunity to be both a vertical integrator as an application interface and a horizontal frontend platform for end-users. Microsoft will need to leverage their existing user base and their application developer partners to assure that the combination of a two sided market (application developer / application user) and complementors are sufficient to gain dominance in the ecosystem. However, Microsoft is in the strong position that it could use its vast financial resources to form additional partnerships and wait for adoption of Azure in the ecosystem.

Major Cloud Computing Service Architectures

Cloud Computing Ecosystem (Select Services)

The computer ecosystem is at the edge of a radical change in architecture due to the maturing of Cloud Computing. Initially, Cloud Computing was the venue of many varied services that offered limited offerings. Gradually, major leaders have come to dominate some types of services such as Google for personal productivity and organization and Amazon for B2B Services.

However, IBM Blue Cloud and Microsoft Windows Azure herald a radical change in the architecture of the ecosystem in which the focus of the computing hardware and software is no longer located with the user, but at a central hub “in the cloud”.

This could raise the importance of the telecommunications industry to an even higher level of importance than during the “dot com boom” of the 1990s. These companies will not just be the “gatekeepers” of access to the rest of the world as in the past, but also to our own hardware and software. Essentially, the telecommunication companies are the ultimate compementors of the Cloud Computing industry. If the infrastructure is unable to handle the additional communicative load, it will form a bottleneck that will prevent large scale adoption of cloud computing.

The discussion of Cloud Computing will take a deeper dive into the issues that affect IT operations and business strategy in the next part of this series:

Cloud Computing - Part 5 - A Disruptive Technology?

Refernces:

[1]    Atencio, Charles, “Demand Opportunity of Cloud Computing with Personal Computers”, 15.965 - Technology and Strategy (Massachusetts Institute of Technology, Spring 2009)
[2]    Atencio, Charles, “Technological Innovation of Cloud Computing with Personal Computers”, 15.965 - Technology and Strategy (Massachusetts Institute of Technology, Spring 2009)
[3]    Yoffie, David, and Kwak, Martin, “With Friends Like These – The Art of Managing Complementors”, Harvard Business Review.