Cloud computing market into the Red Sea, big manufacturers can profit?

Just because a market is large does not mean it is profitable. Investors may be excited about short-term revenue growth, but at some point they will become impatient if they do not generate profits. Amazon's latest quarterly earnings story is a good example.

What the financial data reveals is that cloud computing services-the business of leasing data storage and computing power to other companies-looks like a storm of rain that is ready to explode, and losses to investors ' portfolios.

Before studying this unpleasant future, let's look at Amazon's financial data. On July 25, after Amazon reported less than market expectations – net losses reached $126 million trillion, more than twice times what analysts had previously predicted – the company's shares fell 11%. Although Amazon's revenue soared 23% to 19.3 billion dollars, the company's costs rose by more than 24% to 19.4 billion dollars.

In 2014, Amazon lowered its Amazon Web services (AWS) rates. In a conference call, Amazon Chief Financial officer Tom Scoutac Tom Szkutak said: "We have a very substantial price reduction." "Unfortunately, Amazon did not disclose revenue from its AWS business, but analysts were" widely expected to generate 506 billion of dollars in annual revenue next year, "Wall Street Journal reported.

This reminds me of the concept that Michael Porter, a strategic management guru at Harvard Business School (HBS), Michael in his 1980 book Competition Strategy (Competitive strategy)--five forces that shape an industry's profit potential. As I've observed for Porter, those forces-rivalries between existing competitors, threats from new entrants, individual bargaining power among buyers and suppliers, and threats to alternative products-can turn a seemingly attractive industry into a minefield of prosperity.

The PC industry in the 90 's was one such example. It was a large and fast-growing industry that left most of its profits to suppliers, such as Microsoft and Intel, which formed alliances that almost monopolized the supply of computer core components.

Computer makers have made fierce price competition, and buyers, mainly of large companies, have used their strong bargaining power to put downward pressure on prices. In addition, the entry threshold of this industry is very low, so there will be start-up companies to join in, and through the price to compete for market share.

Similar forces are playing a role in the cloud computing industry, which produces $100 billion trillion in output. International Data Corp. (IDC) predicts that cloud computing will grow by 25% in 2014, making the industry look attractive on the surface, which is large and fast growing. However, the industry has a fierce competition from Microsoft Azure and Google Internet services.

In addition, the latter-or big companies or start-ups in deep pockets-are entering the market. New competition companies include Verizon Communications (Verizon Communications), Cisco Systems (Cisco BAE), IBM, and VMware. Startups, including digital Ocean, Joyent and Contegix, have been focusing on niche markets through innovation, the Wall Street Journal reported.

The Wall Street Journal reported that Amazon had slashed prices by 28% to 51%. According to the Cloud Times website, Google's Computing engine (Compute Engine) service is also cutting prices, its permanent disk storage solution (persistent disk) price per gigabyte dropped by 60%. The Wall Street Journal suggests that lower prices are cutting AWS's profit margins, which are thought to be higher than the profitability of Amazon's core E-commerce business.

That's because Amazon has a huge lead in terms of market share, and that position could be eroding. Investment bank Evercore estimates that Amazon has a 37% share of the 9 billion-dollar IaaS (Infrastructure-Services) market in 2013, far ahead of Microsoft (11%), Google (10%) and Rackspace (4%).

But in 2014, Microsoft was fast catching up. Gartner, a consultancy, says Microsoft is bringing strong competition to the market leader AWS. Microsoft's vision of infrastructure and service platforms allows its customers not only to provide independent products, but also to extend and seamlessly interact with Microsoft's infrastructure and site applications.

This rivalry between companies will put downward pressure on service prices. And, given the risk of outsourcing your business to other companies-the latter likely to have a security breach or a service outage-the client company is likely to continue to have no constancy in its choice of cloud computing services.

Finally, the investment that cloud service providers need to sustain rapid growth and change technology is likely to squeeze profits, just as newcomers continue to pour in and rob new customers by cutting prices.

Rackspace is the only pure cloud computing company in the industry, and its financial position is not rosy. In the past 12 months, the company's revenue has risen by 17%, but its net profit has fallen by roughly the same margin, with Rackspace's net profit margin of only a paltry 5%.

In addition, Barron's report says the list of investors interested in the company has been shrinking since Rackspace announced a search for strategic investment in mid-May. Barron It makes me wonder if it's smart money don't want to go into cloud computing services This "Red Sea" (refers to many enterprises, many Huo products are concentrated in the market for "massive bleeding" type of price competition, the result is the blood-stained market.

Some people may benefit from cloud computing, but it looks as if cloud operators are fighting for the industry's dwindling profits.

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(Responsible editor: Mengyishan)