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I expect most of you know the fable of the scorpion and the frog, but if you don’t, it goes like this (quoted from Wikipedia):
“A scorpion asks a frog to carry him over a river. The frog is afraid of being stung during the trip, but the scorpion argues that if it stung the frog, both would sink and the scorpion would drown. The frog agrees and begins carrying the scorpion, but midway across the river the scorpion does indeed sting the frog, dooming them both. When asked why, the scorpion points out that this is its nature. The fable is used to illustrate the position that no change can be made in the behaviour of the fundamentally vicious.”
Over the weekend, there was some commentary on AWS in fight of its life as customers like Dropbox ponder hybrid clouds and Google pricing. Amazon turned in slightly declining quarter-over-quarter revenue on AWS, although significant year-over-year quarterly growth, as explained in Sign of stress or just business as usual? AWS sales are off slightly.
“Could Amazon Web Services be feeling the heat from new public cloud competitors? Maybe. Maybe not. Second quarter net sales of AWS — or at least the category in which it is embedded– were off about 3 percent sequentially to $1.168 billion from $1.204 billion for the first quarter. But they were up 38 percent from $844 million for the second quarter last year. In the first quarter, growth in this category year over year was 60 percent. So make of that what you will.”
Could Amazon’s nature be catching up with it, or is it just operating in a more competitive market? A set of emails went around from some of the CEOs of our companies talking about this followed by a broader discussion on our Foundry Group EXEC email list. It contained, among other comments:
- AWS is not the low price provider.
- AWS is not the best product at anything – most of their features are mediocre knock offs of other products.
- AWS is unbelievably lousy at support.
- Once you are at $200k / month of spend, it’s cheaper and much more effective to build your own infrastructure.
While we are in the middle of a massive secular shift from owned data centers to outsourced data centers and hardware, anyone who remembers the emergence of outsourced data centers, shared web hosting, dedicated web hosting, co-location, and application service providers will recognize many of the dynamics going on. Predictably in the tech industry, what’s old is new again as all the infrastructure players roll out their public clouds and all the scaled companies start exploring ways to move off of AWS (and other cloud services) into much more cost effective configurations.
Let’s pick apart the four points above a little bit.
1. AWS is not the low price provider. When AWS came out, it was amazing, partly because you didn’t need to buy any hardware to get going, partly because it had a very fine grade variable pricing approach, and mostly because these two things added up to an extremely low cost for a startup relative to all other options. This is no longer the case as AWS, Microsoft, and Google bash each other over the head on pricing, with Microsoft and Google willing to charge extremely low prices to gain market share. And, more importantly, see point #4 below in a moment. Being low priced is in Amazon’s nature so this will be intensely challenging to them.
2. AWS is not the best product at anything – most of their features are mediocre knock offs of other products. We’ve watched as AWS has aggressively talked to every company we know doing things in the cloud infrastructure and application stack, and then rather than partner eventually roll out low-end versions of competitive products. We used to think of Amazon as a potential acquirer for these companies, or at least a powerful strategic partner. Now we know they are just using the bait of “we want to work more closely with you” as market and product intelligence. Ultimately, when they come out with what they view of as a feature, it’s a low-end, mediocre, and limited version of what these companies do. So, they commoditize elements of the low end of the market, but don’t impact anything that actually scales. In addition, they always end up competing on every front possible, hence the chatter about Dropbox moving away from AWS since AWS has now come out with a competitive product. It appears that it’s just not in Amazon’s nature to collaborate with others.
3. AWS is unbelievably lousy at support. While they’ve gotten better at paid support, including their premium offerings, these support contracts are expensive. Approaches to get around support issues and/or lower long term prices like reserved instances are stop gaps and often a negative benefit for a fast growing company. I’ve had several conversations over the years with friends at Amazon about this and I’ve given up. Support is just not in Amazon’s nature (as anyone who has ever tried to figure out why a package didn’t show up when expected) and when a company running production systems on AWS is having mission critical issues that are linked to AWS, it’s just painful. At low volumes, it doesn’t matter, but at high scale, it matters a huge amount.
4. Once you are at $200k / month of spend, it’s cheaper and much more effective to build your own infrastructure. I’ve now seen this over and over and over again. Once a company hits $200k / month of spend on AWS, the discussion starts about building out your own infrastructure on bare metal in a data center. This ultimately is a cost of capital discussion and I’ve found massive cost of capital leverage to move away from AWS onto bare metal. When you fully load the costs at scale, I’ve seen gross margin moves of over 20 points (or 2000 basis points – say from 65% to 85%). It’s just nuts when you factor in the extremely low cost of capital for hardware today against a fully loaded cost model at scale. Sure, the price declines from point #1 will impact this, but the operational effectiveness, especially given #3, is remarkable.
There are a number of things Amazon, and AWS, could do to address this if they wanted to. While not easy, I think they could do a massive turnaround on #2 and #3, which combined with intelligent pricing and better account management for the companies in #4, could result in meaningful change.
I love Amazon and think they have had amazing impact on our world. Whenever I’ve given them blunt feedback like this, I’ve always intended it to be constructive. I’m doubt it matters at all to their long term strategy whether they agree with, or even listen to, me. But given the chatter over the weekend, it felt like it was time to say this in the hope that it generated a conversation somewhere.
But I worry some of the things they need to be doing to maintain their dominance is just not in their nature. In a lot of ways, it’s suddenly a good time to be Microsoft or Google in the cloud computing wars.
I’m mid 2011 I wrote a post titled Competition. Things in my universe had heated up and many of the companies I was an investor in were facing lots of competition. It’s 18 months later and there’s 10x the amount of competitive dynamics going on, some because of the maturity, scale, and market leadership of some of the companies I’m an investor in; some because of the increased number of companies in each market segment, and some based on the heat and intensity of our business right now.
I wrote a few more posts about competition but then drifted on to other things. But I came back to it this morning as I find myself thinking about competition every day. Yesterday, I was at the Silicon Flatirons Broadband Migration Conference hosted by my friend Phil Weiser. I go every year because it’s a good chance for me to see how several of the parallel universes I interact with, namely government, academics, broadband and mobile carriers, incumbent technology providers, and policy people think about innovation in the context of the Internet.
News flash – most of them think about it very differently than I do.
One thing that came up was the idea of creating the best product. This has been an on and off cliche in the tech business for a long time. For periods of time, people get obsessed about how “the best product will win.” Then, some strategy consultants, or larger incumbents, use their market power to try to create defenses around innovation, and suddenly the conversation shifts away from “build the best product.” And then the entrepreneurial cycle heats up again and the battle cry of the new entrepreneur is “build the best product.”
This isn’t just a startup vs. big company issue. I remember clearly, with amazement, the first time I got my hands on an iPhone. Up to that point I was using an HTC Dash running Windows Mobile 6.5. It was fine, but not awesome. I remember Steve Ballmer in a video mocking the iPhone.
We all know how this story has played out.
I remember a world when Microsoft and RIM were dominant. When Apple and Google didn’t have a product. And when people talked about “handsets”, WAP, and we squinted at our screens while pounding on keyboards that were too small for our fingers. Next time you are in a room full of people, just look around at the different phones, tables, and laptops that you see.
In my startup world, the same dynamics play out. Building the “best product” doesn’t only mean the best physical product (or digital product). It doesn’t just mean the best UI. Or the best UX. It includes the best distribution. The best supply chain. The best customer experience. The best support. The best partner channel. The best interface to a prospective customer. I’m sure I’ve left categories out – think about the idea of “the best complete product.”
This is getting more complicated by the day as technologies and products increase in interoperability with each other at both the data, network, application, and physical level. That’s part of the fun of it. And being great at it can help you dominate your competition.
Give me the best product to work with any day of the week. But make sure you are defining “product” correctly.
An email was forwarded to me this morning that had the following text in it (I’ve anonymized “The College” but it’s a large, well-regarded four year university.)
The College is Going Google! What does this mean? How will it impact teaching and learning at The College? Many K-12 school districts are using Google Apps for Education, providing their students with access to Google productivity tools as early as primary school. Students coming to The College in the next five years may never have opened Microsoft Word, but will be familiar with sharing, collaborating, and publishing with Google tools. Are you ready?
I spend time at a few universities, including MIT and CU Boulder. I’m teaching a class this semester at CU Boulder with Phil Weiser and Brad Bernthal called “Philosophy of Entrepreneurship.” We had our first class last week – Brad Bernthal led so Phil and I sat in the back. I noticed a bunch of students with their email open during class – almost every one of them was using Gmail.
A meme went around a few years ago that kids using Facebook would never use email and that Facebook would replace Microsoft Outlook and Gmail. This never really made sense to me, especially since I’d already heard that text messaging would replace email, and then I heard that X would replace email, and now it was going to be Facebook. As much as email frustrates us, it’s still by far the most ubiquitous comm channel.
But as someone who switched completely from Microsoft Exchange to Google Apps a few years ago, it seemed clear to me that Microsoft was going to come under incredible pressure on this vector. Office 365 was one of Microsoft’s reactions to this, but I still haven’t met any company that uses Office 365 as it’s primary infrastructure, although Microsoft has a nice site called NowOnOffice365.com that lists a bunch.
Now, it appears that Google is taking a page from the Apple playbook and focusing on higher education. Apple did this magnificently in the 1980′s when I was in college and did this again in the past decade. Jobs was always focused on universities – I still remember “computers are bicycles for the mind” and the 50% discount off of retail promotion that MIT had in 1984 or 1985.
I don’t focus on market share dynamics (I’m sure there are teams of people at Microsoft and Google focused on this) but the anecdotal evidence I’m seeing is powerful. And when The College switches to Google Apps because the students coming to The College are already well steeped in it and “may have never opened Microsoft Word”, something really interesting is going on.
If your organization is on Office 365, I’d love to hear from you in the comments to understand how you are using it. Are you using document collaboration via SkyDrive, or just Office 365 as the backend service for Email instead of Exchange?
If you are a college student using Microsoft Outlook instead of Gmail, tell me why.
I’ve written before about the Kinect Accelerator and Microsoft Accelerator. On Monday, the Microsoft Accelerator for Windows Azure companies were announced. The program begins this week and ends in mid-January. Since the program is powered by TechStars, it’ll follow the standard TechStars timeline, finishing up with a demo day at the end of the program.
This is a global class. The companies included in this group hail from from Australia, Germany, San Diego, San Francisco and Los Angeles to join the program in Seattle. I’m psyched to see what these companies build for and on top of Microsoft Azure.
Meet the ten Microsoft Accelerator for Windows Azure companies that made the cut:
In July I wrote a post where I was Searching For A Collaborative Writing Tool. I got a bunch of suggestions – some people suggested their startups, some suggested Google Docs, and one person (a friend who works for Microsoft) suggested Microsoft SkyDrive . Amy and I were deep in working on Startup Life: Surviving and Thriving in a Relationship with an Entrepreneur. We were trying to use Scrivener but that wasn’t working for two writers so I moved us to Google Docs. But I knew that wouldn’t be great because I’ve struggled with long documents in Google Docs in the past, especially since eventually we had to move to Microsoft Word for our publisher (Wiley) anyway.
Two weeks ago I decided to move everything to Word as we started the final push to getting the publisher draft out (which is due on 10/12/12). As part of this, I decided to give SkyDrive a try and see if we could both work on the document at the same time in Word.
We’ve been using it for two weeks and it is awesome. Stunningly awesome. Perfect. We can work in the browser and that’s fine for short things, but the beauty is we can download the doc into Word and it automagically keeps our edits in sync on the server. We can both work in Word – online or offline – at the same time and when we connect all the changes get updated to the server and then pushed down to our individual copies of Word. In short, it does exactly what you’d expect it to do. And – we are both using Word on the Mac – which is solid and a nice surprise to me that any of this really works on the Mac given my generally miserable Microsoft + Mac software experience.
I’m blown away. I also can’t believe no one knows about it or is talking about Microsoft SkyDrive. I can’t believe Microsoft isn’t promoting it front and center. Or maybe they are and I’m just missing it.
The only annoying thing is that it works better in Safari than in Chrome on the Mac. Somehow that doesn’t surprise me, but everything else about SkyDrive does. What a fun discovery.