centralization there as well. Skype is one of the few decentralized cloud applications we see in widespread use. I believe there is lot of business opportunity to uncover in this space.
Let’s take a concrete example: customer acquisition costs. For centralized cloud applications this is in addition to the already prohibitive data center costs. Let’s use the manufacturing industry as an analogy, the cost of goods is usually only a fraction of the price customer ultimately pays. The rest of the money goes into getting the product from factory floor to the point where the target customer actually pays for it. Then there is the important issue of how much something is worth to a customer—it determines the maximum price you can extract from target customer. If the cost of goods + channel costs + profit margins aren’t within the price customer is willing to pay, there is no market for the product. Now, imagine if you could take a large chunk of the money you’ll be spending on a data center to scale your cloud application centrally and instead go for a more decentralized design and thereby lower your “cost of goods.” This creates money-on-the-table for the channel to get your application to its target customer. This could be all the difference between no market and a viable market for an application or a service.
I’m a big believer of decentralized systems in general. Decentralization by definition is more chaotic and most of us struggle with chaos, so there is a natural drive towards centralization. Centralization brings order and control. However, decentralization is the only thing that ultimately scales. The Internet—its power comes from the fact that it is decentralized. No one person or organization controls it. It spreads organically and through natural economic drivers. It is however a chaotic place. The Open source movement – again the same answer. It might come to some as a surprise that Microsoft succeeded in establishing a huge Windows franchise through a highly decentralized strategy across OEMs, ISVs, and VAR/Channel partners! Yet again, it is a bit of a chaotic world when you compare it to, say, a closed system like the Apple Mac. If you don’t believe me, go ask anyone on the Windows team. From outside, it might seem like Microsoft controls it, but in reality the Windows ecosystem today controls what Microsoft does more than the other way around.
It is worth observing that all decentralized systems do have a central core of some sort. Standard specifications like TCP/IP, HTTP, and HTML are at the core of the Internet. Linux is at the core of Open Source movement. Windows is at the core of Microsoft’s ecosystem. Initially, each of these systems came into existence as part of solving specific problems that the implementers were focused on. However, what ultimately made these systems successful was the focus on attracting more and more people to start using the core in different ways to solve their own problems. Solving more problems created more solutions and solutions generated revenues. A virtuous economic cycle ensued.
Not surprisingly, at Symform, we are creating a decentralized cloud system. It is not just decentralized technology; it is also being deployed and monetized through a decentralized business model—a partner network with revenue opportunity. We know it will be chaotic but we love it because we believe it will enable a large number of people to generate highly lucrative economics for themselves. And we hope that in doing so, we would ignite another commercially viable ecosystem.
Power of cultures
In The Innovator’s Dilemma, Clayton Christensen explains why organizations get specialized and contextualized and find it hard to break the mold. The power of cultures is strong. It is often said that most organizations develop a DNA early on, and it is hard if not impossible to change. We are going to see some of the effects of this in the new paradigm of cloud computing as well. Amazon has the culture of an e-retailer. It deeply understands how to sustain and grow a business with razor thin margins by tightly managing costs, deeply understanding demand/supply and inventory management. Furthermore, they have years of know-how under their belt on how to run highly reliable and efficient internet services. This DNA makes them one of the strongest players in my books for offering efficient, cost-effective, and reliable data center services.
Contrast this with Microsoft. As noted earlier, Microsoft’s DNA is a decentralized platform ecosystem, productivity applications, and developer tools. It knows high margin software economics. And as can be evidenced with the lukewarm success it has had with Internet services, it does not have the DNA for running a high capex/opex services business with razor thin margins. Given this, it is hard for me to make the bet on Windows Azure (the name isn’t helping either). As an ex-Microsoftie, I hope they surprise me.
Google is a more difficult one to analyze from a culture perspective. On one hand, like Amazon, Google really knows how to run some of the most efficient data centers. Furthermore, they are creating & exposing their platform exactly how I believe platforms should be created—by first building killer applications and then taking the common layers of those applications and exposing them as utilities for other applications to take advantage. On the flip side though, Google seems to be too secretive as a culture, and creating a platform ecosystem requires being a much more open and embracing culture to gain trust and attract others to your party. Insularity can be a huge barrier to adoption. Additionally, Google has a lot to learn about mobilizing a commercially viable ecosystem. Today, practically all of its revenues come from search advertising. An application platform business will require demonstrating to developers how they make money by adopting Google’s platform.