When Do the Storms Arrive in the Saturated Cloud Hosting Space?

The cloud hosting space is saturated with Fortune 100 companies looking to up their investment in what is already an overly-invested industry.  With the likes of Amazon (Web Services), Microsoft (Azure), HP and IBM (Softlayer) already providing cloud services, it means two things now that Google (Compute Engine) has jumped into the deep end of the pool: lower prices and a willingness to move downstream for customers.

Given the capital-intensive aspect of this business, what is the ROI of this business?  I would have stipulated that it is close to breakeven.  ProfitBricks, a German based provider of cloud hosting, produced the graph below highlighting the profit margin in cloud hosting. They report that the price erosion since 2006 has happened more slowly than technology efficiencies (as measured by Moore’s Law), resulting in profit margins staying the same or increasing depending on where you are in the hosting lifecycle.

Amazon Web Services (AWS) is the market leader in cloud hosting.  They approached the cloud hosting space with significant resources, a service that matched off with the consumer’s requirements, and extremely competitive pricing.  Netflix is their biggest customer (experiencing double-digit growth) and they rely on AWS because they can scale as Netflix grows; Amazon is constantly innovating; and the price is very competitive. And if it isn’t competitive today, it will be in two weeks time.  Ultimately, it was the pricing pressure vis-a-vis their competitors which allowed AWS to capture a significant portion of the cloud hosting market in a very short period of time.

After reviewing some of the technicals above, why would you fund a startup focused on cloud hosting?  Digital Ocean has the answer to that question.  They believe the small business and developer customers are underserved because a majority of the cloud hosting resources are focused on the enterprise customers.  They might be right, to a certain extent — today.  In the future,  the crowded cloud hosting enterprise market will ultimately force the big market makers to smaller markets so that they can generate revenues and maintain top-line earnings for their  shareholders.  It will be interesting to watch if the Digital Ocean bet has legs to stand on or will be washed away in the cloud hosting storm.

from Douglas MacFaddin’s Tech Market Page http://dougmacfaddin.org/when-do-the-storms-arrive-in-the-saturated-cloud-hosting-space/

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Published by: Doug MacFaddin

Douglas Willis MacFaddin was born June 16, 1961 in the Miamisburg Hospital to Patricia Ann MacFaddin and Richard Willis MacFaddin. My mother’s maiden name is Morrison and she is the youngest of seven children who were raised in Lycippus, PA. My father was the second of four children and was a twin. He was raised in the town of Viola, DE. At the time of my birth, my father worked at the Mound Laboratories in Miamisburg, Ohio in research. Mound was an Atomic Energy Commission facility for nuclear weapon research during the Cold War. My mother made a home for our family. My father passed away in 1991 and my mother is currently living in Avon, CT. Doug MacFaddin is the oldest of five children (Doug, R. Stuart, Anne Marie, Megan and Mary (Heather)). I lived in Ohio for two years, spent the next seven years in Murrysville, PA (outside of Pittsburgh), moved to Little Silver, NJ and relocated my senior year in high school to Avon, CT. My four siblings currently live with their families in Avon, CT and are members of St. Ann’s Church. I attended Mother of Sorrows School in Murrysville, PA. In NJ, I attended Little Silver Point Road School, Markham Place School and Christian Brothers Academy (CBA) in Lincroft, NJ for three years. My senior year, I attended Avon High School and I then spent the next four years at Union College, Schenectady, NY. I received a BS in Industrial Economics and graduated in June 1983. While at Salomon Brothers, I was asked to attend a two-week seminar for Public Finance at the University of Michigan in 1986. In Little Silver, I was involved in Troop 126 where I achieved the rank of Life Scout and was both a Patrol Leader and a Senior Patrol Leader. I also was an alter boy at St. James Catholic Church and spent summers a the Ship Ahoy Beach Club in Seabright, NJ and caddying at the Rumson Country Club. At Christian Brothers Academy, I wrestled for the varsity squad for three years. I took second in the districts my junior year and went on to the regionals. I also ran on their cross country team freshman year and was part of the CBA Colt team that hasn’t lost a duel meet since 1973. My senior year at Avon, I won the wrestling States (S). I went on to wrestle at Union College and qualified for the Div III nationals twice (1981, 1982) and was co-captain both years. My senior year at Avon, CT, I also won the States (S) in pole vaulting. It was the first time Avon High School had a state champ in two sports in the same year. During my four years, I earned nine varsity letters between wrestling, track and football. In 1979, I was accepted into The National Honor & Merit Scholars Society. Upon graduating from Union College, I accepted a position at Salomon Brothers Inc in August 1983. I was an analyst in their Public Finance department at One New York Plaza. I lived in Park Slope, Brooklyn and spent the next four years working at Salomon Brothers. As a result of Black Monday, October 19, 1987 the Public Finance Department of Salomon Brothers was jettisoned to conserve capital. By November 1, 1987, I was working at Dean Witter Reynolds in the new Public Finance Department made up of many of my former Salomon Brother’s colleagues. The new Department was located on the 57th floor of 2 World Trade Center.

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