Google (NASDAQ:GOOG) and Amazon (NASDAQ:AMZN) are out at each other in a new invisible battlefield: Computer horsepower. Cloud computing has been around for quite a long time (since 1984, at least the concept) but its potential has only recently been discovered. Despite the buzz around the concept, very few people understand the underlying framework, which is ironic since most people have already used it. Simply put, cloud (another word for internet) computing is using other people's server to run your network/application for your organization, remotely. Prime examples are Gmail and drop box. It essentially reduces the hassle and cost of the end user by outsourcing the entire IT department to the service provider; e.g. Amazon or Google.
Amazon is the pioneer, providing cloud computing services since 2004, but Google has recently caught on (began last year June). Google has the largest storage capacity in the world, which has made Amazon push harder, especially in terms of pricing. Amazon's EC2 provides IaaS (Infrastructure as a Service), outsourcing IT needs along with the hardware, while Google's App Engine provides PaaS (Platform as a service).
Cloud computing's target market is extremely large, the global corporate sector. The race is on between the two tech titans; Microsoft (NASDAQ:MSFT) wants a piece of it too. It is vital for mobile app and online video, which in its own right is a booming business. At this point in time Amazon leads the cloud servicing industry by a fair margin with its AWS, followed by Microsoft and HP, but Google is growing much faster given its expertise in data storage and computer power, although still in the testing phase. Google is providing customers a piece of its 14 years of computing infrastructure with the best data center in the world.
Value Preposition & Business Model
The business model is relatively simple but the value preposition is irresistible. Tech companies primarily rent out a portion of their computing power (storage, data analysis) and in return charge a nominal monthly charge, which is much lower than maintaining a company-wide internal cloud, almost 50% lower, according to McKinsey & Co.
According to cloud infrastructure capital expenditure is expected to top $13 billion by 2014, while last year it was $7 billion. Although no public disclosure has been made by the companies, an estimate suggests that only last year, the cloud services market size was $40 billion in revenue. Amazon has the largest market share of 70% pocketing $2billion in revenues last year according to Wall Street estimates.
The major challenge for the tech companies is that they must establish their clientele base quickly in order to provide services for the long run, locking in immense profits. The competition got fierce last summer when Microsoft pitched in with more bite-sized offering, very similar to AWS, increasing efficiency and reducing cost in terms of more power per gigabyte. Google also introduced its Google App engine intensifying the race for greater market share in arguably the fasting growing markets in the developed world.
A price war was initiated with Google dropping prices by 20% to 9.5 cents per gigabyte; Amazon soon matched the price to only see Google cut the price further to 8.5 cents per gigabyte. To gauge the extent of price competition, it is important to note that Amazon later announced that it had cut cloud services prices for AWS 25 times so far. New start-ups are a major market segment for Google, which has placed considerable emphasis on it, along with Microsoft.
Google differentiates itself in terms of performance and reliability, a strategy aimed at targeting long-term clients. Current users of the beta version of Google's app machine are satisfied by the service, but the question remains; will Google be able to sustain its performance once it enters the real world? Analysts have conflicting opinions, but the positives for Google are considerable. It has the Data center fire power, software tools to utilize that power and human resource to unleash its potential. On the downside critics argue that Google's forte, i.e. search engine and advertising, will not allow it to come out of its stronghold. The other problem is that Google has to gain reputation amongst the business sector to increase its presence.
Amazon has already spent $7.3 billion on CAPEX in the cloud computing services over the last five years and is a major force in the segment. Google on the other hand, although a tough competitor, will have to provide a wider range of services to compensate for its late entry into the industry.
The tech industry is in a transitional phase in terms of profitability. The cloud computing market has massive potential for growth and sustainability. The industry depicts a competitive oligopoly, with a couple of giant tech companies going after maximum market share, with intensive price war. The end result would be greater economic benefit for the society and the business community at large. The cost of cloud servicing is significantly lower than the traditional method of internal clouds, making new start-ups a key component of the target market. The industry will unravel in the coming years and provide massive economic profits for the providers alongside end users. At the moment, the pie is large enough for these giants to share, and future growth should not be hindered; however, we have an exciting battle going on at the moment, which should provide plenty of opportunities.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.