Understanding and Improving IaaS Strategy

The infrastructure as a service (IaaS) market is continuing its rapid growth phase, gaining more competitors every month. Some of the companies are fresh new startups, while others – like hosting businesses and communications service providers – existed before the term cloud computing gained widespread popularity in the last few years. Datacenter infrastructure vendors and even booksellers (OK, maybe just Amazon) are also getting into the act. However, all of these varied companies still have one thing in common. Regardless of their heritage, they all must drive increased consumption of their services to obtain higher profit.

IaaS is a competitive market and, like other competitive markets, the players must choose the best strategies and corresponding operational models for success. There are of course innumerable strategic approaches to consider. Each business must consider questions including: customer needs, segmentation of customers, their own unique capabilities, strengths and weaknesses of competitors, and many others. They must also select a strategy, typically built around some variation or mix of low price (offering lowest prices per unit of value), high differentiation (offering unique capabilities), and focus (selling to a more narrow group of customers).

James Urquhart, author of the CNET Blog, Wisdom of the Clouds, wrote an interesting and informative piece here on some of the differentiators to consider when evaluating cloud computing services, including IaaS, PaaS and SaaS. He rightly points out that some vendors announce “cloud” offerings that seem to have only a faint connection to cloud computing and fall dramatically short of providing real differentiators. This approach by vendors is problematic in at least a couple ways.

In some cases, I believe, there is simply a weak attempt by the vendor at trying to associate an offering with one of the latest hot buzzwords. Those can be a bit annoying, but *hopefully* most people will determine the true capabilities before any major harm is done. In other cases, often where an offering has real and perhaps even some strong capabilities, I believe there is a lack of strategic thinking (and positioning and messaging…) on the part of the IaaS vendor. These cases may be worse for both the vendor and their customers. They indicate a confused or possibly even conflicting strategy which leads to an increased risk of failure of the vendor and unfortunate consequences for customers.

I would suggest Amazon Web Services is following a low price strategy with EC2, and doing a pretty good job. Doing a good job in part because their strategy, operational model and positioning appear aligned. Here is a fairly representative statement from Amazon: “You pay only for what you use, with no up-front expenses or long-term commitments, making AWS the most cost-effective way to deliver your application to your customers and clients.” The most cost-effective. Not the most differentiated or the most focused. Amazon is not claiming the most secure, the most compliant, the best hardware, or the best service. They are claiming lowest cost. This does not mean Amazon is the “best” IaaS provider. It means they are trying to offer the lowest cost.

The strategy problem often begins when new IaaS vendors get confused with their own strategy. They may see Amazon with its large lead in number of users along with its low cost approach, and try to imitatiate it. Imitatiate is a word I just made up to indicate a combination of imitate and differentiate, meaning imitate EC2’s low cost and also differentiate on features etc. “We’ll be super low cost, AND we’ll also run on the best hardware, offer the greatest control of the infrastructure, ensure the highest levels of compliance, and provide the most stringent SLA.” This is a bit of an exaggerated example, but clearly not a good recipe for success. There are some inherent conflicts in trying to be both low cost and high differentiation. Paradoxically, these vendors typically fall a bit short on both price and differentiation.

A far better approach is for the IaaS vendor to select a clear and consistent strategy based in part on customer needs and in part on their unique capabilities. There is more to consider, but these two are key. Based on customer needs and unique capabilities, it may make better sense to emphasize focus or differentiation rather than low cost. To reemphasize, whatever the chosen strategy, it had better meet the needs of a significant group of customers, and the vendor must have an operational model (including equipment, processes, marketing, sales, etc.) that supports that strategy and is based on unique capabilities they bring to the table.

One area of customer need and differentiation that seems to be gaining traction is security and compliance. It is nice to see a number of IaaS vendors spending time and resources here. These vendors should not need to worry about being the lowest cost provider if they are to emphasizing security. Customers should be (and based on many conversations, actually are) willing to pay a premium. There is clear opportunity for vendors that implement a differentiation strategy around security and compliance. However, they must really have some additional, valuable capability and deliver it! And, they should be careful not to shoot themselves in the foot by trying to compete on too low price at the same time.

Choosing a focus strategy is likely to make sense for many IaaS vendors. First, it is worth pointing out that focus typically comes on top of low cost or differentiation. In other words, a vendor could choose to offer low cost IaaS for a particular customer segment. Or, a vendor could choose to offer differentiated services for a particular segment. In the case of the example above, where the fictitious vendor was trying to be both very low cost and highly differentiated, an alternate approach would be to take a focused, low cost strategy. Specifically, the vendor could seek very low costs (comparable to that of EC2), but offer it to a narrow market segment, perhaps development and test.

IaaS vendors must understand the role of low price, high differentiation and focus when developing their strategies. There is no single best approach for all vendors. However, each vendor is likely to face advantages and disadvantages based on their choice. Further, not choosing a clear strategy or letting the strategy become muddied may be the worst choice of all.

This blog post has discussed IaaS vendor strategy and how some of these vendors can improve by clarifying their strategies. Of course IaaS customers should benefit as well. When selecting an IaaS vendor, customers should be sure to understand the vendor strategy as characterized above. Is it a low cost, high differentiation or focus strategy? Or is it an infeasible hybrid? Customers should also make sure it is clear and that the vendor is actually consistent with their own strategy. And, finally, customers should make sure the vendor strategy is well aligned with their own unique needs.