It’s ASP All Over Again

Posted: March 14, 2012 in CRM, Economics
Tags: , ,

One of my favorite Mark Twain quotes is, “History doesn’t repeat itself, but it rhymes.” I thought of it again last week when I read about the price war going on in the infrastructure as a service space.  Larry Dignon made the clever observation that he paid more for electricity in January than it cost to get IT infrastructure now that Microsoft and Amazon have decided to double down on the infrastructure game.

Call it Profit as an Option or PaaO.  The whole cloud computing trend reminds me of the history of the application service provider (ASP) market a dozen years ago.  Back then, applications were all client-server which meant that just about every mouse click and keystroke had to be echoed back to the host.  Networks didn’t want that much traffic and servers bogged down from all the packet handling.  I get tired just thinking about it.  Of course, the entire system went to hell in a hand basket because no body could fit enough users on a server with acceptable performance to eek out a profit.

Today’s cloud computing is different.  It has degenerated from multi-tenant, shared software and common infrastructure to paying by the drink for IT services that support conventional applications.  The part of history that repeats this time is that with more Web friendly applications you can make a profit from hosting users on a server farm — if you want to.

The part that rhymes is the direction each of the major vendors is taking with regard to pricing.  If they cut their prices for long enough they’ll be able to go out of business like their ASP forebears.  But since we’re talking about two very large companies that know how to generate cash, that won’t happen in your lifetime.  I have to wonder aloud if this kind of competition is legal.  Didn’t J.D. Rockefeller do this?

The other possibility though is that someone in the executive suite will decide that not making money is just not as much fun as its opposite.  If that happened one or both vendors could end up pulling the plug, which might cause a few of us to cry foul.  That’s the rhyme for me, the end is the same as with ASPs but the path we traveled to get there was presumably more scenic.

Why do we do this?  There are so many serious customers out there trying to make a buy decision by examining cloud computing with a microscope to ensure their precious data won’t be corrupted or stolen and the supposed adults in the room are engaging in a game of chicken.

Price wars are a common facet of business when supply is relatively high compared to demand, especially if all vendors want to increase the size of the market.  They could also decide to stop flooding the market with product so that the excess capacity wasn’t burning a hole in their pockets.  It reminds me of a Ron White line about being arrested on a drunkenness charge, “I had the right to remain silent, but not the ability.”

Lower prices probably will bring more companies into cloud computing, especially small companies trying to figure out a smart strategy for competing in a tough market.  So that’s good.  But as soon as profit flies out the window, vendors start looking for ways to lower costs and cheapen the product.  That typically means less service, more self-service and the loss of who knows what — things that were once standard in a service completely gone.  It will become apparent that we’re headed in that direction when Amazon and Microsoft start hiring executives with airline experience.

The thing that no one seems to get in this picture is that while IT services have become a commodity, they can’t, or at least shouldn’t, be commoditized because the switching cost is significant.  IT services will for a long time be less like a true commodity and much more like a regulated monopoly or duopoly of possibly several vendors.  For almost a century that’s what the phone company was — so were airlines and in many places so are electric utilities today.  Ever hear of a rate setting commission?  The Texas Rail Road Commission?

The regulated monopoly model might not deliver the lowest prices or choice of vendor and the style of service might seem homogenized in a regulated monopoly.  But these types of organization aspire to a higher good — uninterrupted service and a fair price across a wide swath of the population.

So in my mind this price war is simply indicative of a nascent market and my bet is that in the future some form of regulation that protects customers from the downside of reckless pricing schemes will come into play and the vendors will be forced to make a profit.  ASPs never got that far so that’s the real rhyme in Twain’s idea.

So, what did you think?

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