---
Hi Jim,
Not quite how I remember the conversation. Factors involved in adoption - efficiency in provision, increase in demand (price elasticity effects, long tail of unmet demand, evolution of higher order systems), rate of innovation of new services (ecosystem effects), ability to take advantage of new sources of wealth (development speed, reduced cost of failure), inertia (16 different forms) & competitor actions. When talking about the shift of infrastructure from product to utility then all these factors come into play.
Efficiency of Amazon's provision. Do remember that since IT is price elastic and Amazon has a likely constraint e.g. acquiring land and building data centres then Amazon will certainly have to manage its pricing carefully i.e. if it dropped pricing too quickly then demand could exceed supply. So, you need to consider future pricing as well. In all likelihood AWS EC2 is operating at 60%+ margin but this will reduce over time.
Increase in demand. One of most amusing cloud 'tales' is the one that it'll save money. Infrastructure is a million times cheaper today than 30 years ago but has my budget dropped a million fold in that time? No. We don't tend to save money, we tend towards doing more stuff. This is Jevons Paradox. What we need to be mindful of is that our competitors will do more stuff. Which is why you need to be careful about future pricing. If your IT budget is 2% of total budget and your competitor has a 10x advantage then you might shrug it off as a small part of the budget. But, your competitor is likely to end up doing more stuff and suddenly (just to keep up) you'll find you're spending a lot more than 2%.
Rate of Innovation of new service. There are numerous ecosystem games to play in a utility world (such as ILC) which enables a provider to simultaneously be innovative, efficient and customer focused. This seems to be happening with Amazon as all three of those metrics appear to be accelerating. This provides direct benefit for the users of that environment in terms of new service release.
Ability to take advantage of new sources of wealth. Key here is speed and reducing the cost of failure both of which a utility provider offering volume operations of good enough but standard commodity components provides.
Inertia. We all have inertia to change (loss of previous investment, changes in governance / practice, loss of social capital, loss of political capital etc - 16 different forms in total). There will be a counter to any change
HOWEVER ...
The competitive pressure to adapt are often not linear but have exponential effects. If an adaptation gives competitors greater efficiency, increasing access to new services, increases their ability to take advantage of new sources of wealth then as more of your competitors adapt then the pressure on you mounts. This creates the Red Queen Effect (prof van. valen).
As a result these forms of change are not linear but exponential. It can take 10 years for such a technology change to reach 3% of the market and a further 5 years to hit 50%. Because of inertia to change and due to its non linear nature many companies (especially competing vendors) get caught out. However, in all such markets there are usually small niches that remain.
There is also no reason why commoditisation has to lead to centralisation. Many of the forces can be countered. Unfortunately due to the incredibly sucky play of often past executives within competitors then in this case centralisation (to AWS, MSFT and Google a distant third) seems very likely. Some of those past executives were warned in 2008 about how to fragment the market by creating a price war with AWS clones forcing demand beyond Amazon's ability to supply due to the data centre constraint. It's shocking that they were so blinded that they've got large companies into this state.
So,
1) Will infrastructure centralise to those players of AWS, MSFT and GooG? Yes plus clones of those environment. Competitors have shown pretty poor strategic play in the past and this is now the most likely outcome.
2) Will everything go to public infrastructure clouds? No. There will be niches. There is also inertia to the change but the pressure will mount (Red Queen) as competitors adopt cloud. The change usually catches people out due to its exponential nature.
3) Is it just price? No. Multiple factors involved. Price is one of those factors.
4) Why is Walmart building a modest sized private cloud? Probably because it's concerned over Amazon's encroachment into its own retail industry. In all likelihood they will end up adopting Azure or GooG over time.
