As published in The Observer
Cloud computing drives profits for the most successful companies in the world. But what does it take to lead the cloud and, by extension, make technology a true competitive advantage? Access to global logistics and cheap, long-term capital can’t hurt.
A Shifting Balance of Power
Cloud computing, expected to grow from $273 billion in 2018 to $623 billion in 2023, took the information technology market somewhat by surprise. Most businesses, and even tech leaders, struggled to see the disruptive power of remotely hosted infrastructure. And yet, a mere decade in, we now live in a cloud-dominated world.
How did this happen, and why are there so few winners? Looking at the current kings of the cloud—Amazon, Microsoft and Google are miles ahead of everyone else—there are three distinct capabilities at play:
- Capital: A willingness to turn massive amounts of capital expenditure (CapEx) into operational expenditure (OpEx).
- Operations: The ability to manage the life cycle of complex equipment everywhere in the world.
- Infrastructure Automation: An unwavering focus on a developer-led consumption model.
Dozens of companies—from equipment-makers like HP, Cisco and Dell to telecom operators—have capital and operational capability in spades. And yet, they have struggled with the developer experience, failing to anticipate the shift from an IT-focused world to one dominated by fast-moving software.
As a consequence, only a small number of companies lead the cloud computing market and (by extension) an increasing number of related verticals.
The Have and Have Nots of Technology
One of the hidden byproducts of this transformation is a widening gap between the rich and the poor, at least when it comes to technology.
The few companies that have caught the public cloud wave are, in fact, clouds on the side. Not only do they reap sizeable profits from their cloud computing divisions, but they have also acquired expertise that will serve them far into the future.
What skills am I talking about? Underappreciated ones like supply chain management, silicon design, data center operations, systems engineering and the management of globe-spanning networks—exactly the kind of seemingly mundane tasks that most enterprises are actively outsourcing to these public clouds.
Pair this capability with unmatched influence over the software ecosystem, and it’s clear how dominant just a few companies have become, not just at cloud computing but also at technology innovation in general.
All Leading Companies Are Tech Companies
Why does it matter?
Technology prowess is the new kingmaker. Look a few years into the future, and you’ll find a consolidated group of companies competing to lead their respective industries. In order to truly compete, they will need to be 100% technology enabled. From mobility and financial services to entertainment and retail, market leaders will all use tech as a “weapon.” Access to innovation across the entire stack will be table stakes.
Cloud computing may drive rich profits for Amazon or Microsoft today, but the impact of AWS and Azure is far greater than just making money. Their unmatched ability to deploy infrastructure technology enables them to compete in basically any market, while at the same time siphoning capabilities away from potential competitors.
Supporting a New Model
Is the game over? Is the technology world set to be dominated far into the future by a handful of mega-internet businesses? Despite the massive advantages enjoyed by today’s hyper-scale and web-scale leaders, trends point to the viability of a new model.
These trends, which range from silicon to latency, can be summarized in one word: specialization.
With experiences like immersive VR, smart cities, autonomy and personalized medicine driving the economy of tomorrow, we can expect a bumper crop of infrastructure contradictions such as “bespoke and large-scale” or “built for a handful of companies and meaningless to everyone else.” This is in contrast to the last wave of the cloud, which was defined by fairly generic workloads.
To quote computer science pioneer Alan Kay: “People who are really serious about software should make their own hardware.”
The Benefits of Non-Verticalized
In order to support the next wave of use cases, custom infrastructure at global scale will be required. But the current cloud is essentially an 80% of the bell-curve product. Unless you’re the federal government, there is no button to press for customization.
Luckily, we have some other models to build upon.
Unlike the highly verticalized approach used in today’s public cloud, most mature and capital-intensive industries (think luxury hotels, airports and telecommunications) thrive in a non-verticalized model. This allows various layers of the supply chain and capital stack to do what they do best. Even with very unique requirements, inefficiencies and risks can be squeezed out.
If becoming technology enabled requires capital, operations and automation, then in a non-verticalized world, we need to find outstanding sources of each. Fortunately, money and logistics are often found together.
The Digitization of Real Estate
Not many people outside of finance know about REITs. Despite the obscure acronym, real estate investment trusts (created in the early 1960s) now own approximately $3 trillion in gross real estate assets and make up 31 of the S&P 500.
REITs are structured differently under U.S. tax law, and the advantage is simple: lower taxes. For many investors, REITs have provided a steady return profile with very low risk.
In recent years, REITs have moved beyond financing bridges, roads and condos to other types of assets: namely technology. In addition to a long string of data center providers becoming REITs (industry leader Equinix became a REIT in 2012), we’re starting to see it go the other way as well. Shared real estate companies like Crown Castle and SBA Communications are flexing their muscles in the evolving edge computing space, and longstanding REITs, like Brookfield Partners, are aggressively deploying capital to “digitize” their holdings.
A recent announcement by Sidewalk Labs (a venture of Google’s parent company Alphabet) and the Ontario Teachers’ Pension Plan about their new technology infrastructure venture is just one example of how these forces are coming together.
The Next Big Thing is dead. Long live the Next Big Thing. That’s how CompTIA describes the “anticipation, intrigue and magic” of emerging innovations in its 2019 IT Industry Outlook Report.
My prediction is the “Next Big Thing” will sit on top of increasingly specialized infrastructure. Top companies will need to develop, deploy and manage their technology opinions at global scale. And unlike the giants of today, they won’t have a multi-billion dollar cloud computing cash cow out back to leverage.
If armed with a way to interact with elite developers, big money can reshuffle the deck. In fact, taking advantage of a non-verticalized model could allow enterprises to deploy bespoke infrastructure at a cost basis that is on par with their hyper-scale competitors. This would, quite simply, change the game.
In order to make it happen, we’ll need to connect all the dots: intellectual property, logistics, global operations, connectivity and capital. But with a non-verticalized approach to infrastructure automation, we can unlock a sleeping giant.
Dear Big Money—welcome to Big Tech.