

Alibaba Has a Computing Cloud, and It’s Growing, Too - mcenedella
http://bits.blogs.nytimes.com/2014/08/04/alibaba-has-a-computing-cloud-and-its-growing-too/

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nostrademons
I wonder how the economics of the cloud industry will eventually play out.
Right now, it's enormously profitable, because Amazon is the clear market
leader and there're some fairly significant switching costs.

However, building out the cloud infrastructure is a side-effect of being any
Internet business that achieves reasonable scale. And once you do that, it's
both relatively inexpensive and quite profitable to enter the IaaS market and
resell some of that additional computing capacity to other smaller firms.
Cloud computing is almost totally undifferentiated; you're selling basic
computing resources (CPU, RAM, disk) for money.

My hunch is that cloud is going to become like the airline industry. An
oligopoly with periodic price wars. It has the same "high fixed cost, low
marginal cost" economics as airlines, the same need for _some_ baseline
technical knowledge but not enough that you can differentiate on product
quality, and the same price-sensitivity. It's possible that the switching
costs of migrating your data between cloud providers might put a barrier on
competition and preserve some profit margins, but I suspect that any well-used
service will be able to migrate their data out for a small fraction of their
monthly bandwidth costs.

The airline industry is wonderfully beneficial to consumers, but it's been a
dud for investors and operators over its 100-year history.

~~~
jyu
Or it could end up being more like cereal.

 _Yet, in other fields—like cereals, for example—almost all the big boys make
out. If you 're some kind of a medium grade cereal maker, you might make 15%
on your capital. And if you're really good, you might make 40%. But why are
cereals so profitable—despite the fact that it looks to me like they're
competing like crazy with promotions, coupons and everything else? I don't
fully understand it._

[http://old.ycombinator.com/munger.html](http://old.ycombinator.com/munger.html)

