Research study report from the team at Wikibon.org goes in-depth on Amazon’s Web Service (AWS) plans to attack the enterprise market.
Can Amazon win in the enterprise? SiliconANGLE and Wikibon are on the case. Here is a detailed report from Wikibon.org – a must read if you are looking at Amazon in the enterprise market for Software-led Infrastructure (SLI).
What is Shadow IT?
AWS has had a long standing leadership position at the low end of the enterprise market where the company owns the “Shadow IT” market.
AWS is currently the preferred solution for stealth IT, or as it’s called in the business, “Shadow IT.” Shadow IT is a pain in the butt for CFOs and company lawyers because it creates risk for audit related law claims. On the other hand, “Shadow IT” is an innovation enabler where speed of design and deployment often spawn new innovation and new technology and business solutions. Some argue (myself included) “Shadow IT” is organic innovation and is good for a company’s growth, which is why I believe most CIOs have implemented a “don’t ask don’t tell” Shadow IT policy.
At the AWS re:Invent conference in November 2012, Amazon put forth a compelling story as to how it intends to permanently alter the enterprise computing landscape generally and infrastructure services specifically. Executives from Amazon were clear that they had no intention of mimicking the business models of traditional enterprise service providers, rather they intend to disrupt the current order and bring Amazon’s low margin retail mentality to enterprise IT.
Why Shadow IT works
As a result, IT organizations are using “Shadow IT” to improve agility, simplify IT operations and lower costs. While prudent CIOs will focus on data governance, privacy, security and other organizational risks associated with moving to the public cloud, the reality is that intensified partnerships with cloud service providers are likely in their future. Recent Wikibon research shows that successful cloud service providers will not try to take Amazon head-on in the infrastructure-as-a-Service (IaaS) space. Rather they will put forth a clear value proposition to CIOs that delivers business value through a partner ecosystem. The most appealing to enterprise IT customers will come from services that are either industry-focused and/or best-of-breed and offer significantly better shared risk models than Amazon.
The nuts and bolts of methodology
Research for this study consists primarily of in-depth interviews with approximately twenty-five customers and cloud service providers. The focus was on companies providing or considering outsourced infrastructure services (e.g. IaaS). Also included were Software-as-a-Service (SaaS) players to understand their infrastructure requirements; however, this group was not a main area of focus. Other areas included an analysis of service contracts for both Amazon AWS and other cloud service providers (CSPs).
Key Points in the Wikibon research:
- What is the impact Amazon AWS is having and will have on enterprise infrastructure deployments going forward;
- What is Amazon’s strategy and its applicability for CIOs at mid- and large-sized organizations;
- Look at the risks associated with moving to Amazon’s AWS and assess the viability of alternatives – both internal and external
Select Quotes from Wikibon Research
Amazon’s aggressive entrance as a horizontal player in the enterprise IaaS market will put new demands on organizations to further cut costs and improve agility. While prudent CIOs will focus on data governance, privacy, security and other organizational risks, enterprise service providers will not take Amazon head on…rather they will put forth a clear value proposition to CIOs that delivers business value through a partner ecosystem. Success will come from services that are either industry-focused and / or best-of-breed.
Amazon competes by bringing a low cost, low margin retail mentality to computing and then introduces new features and function at a very rapid clip into its infrastructure. This serves to expand its total available market (TAM) and drive more customers. Amazon touts that it has lowered prices 23 times since 2006 (about once every quarter). In concept, because the price of compute and storage drops every quarter this seems like a natural progression. The key is because of Amazon’s buying power and massive scale; it is able to pass this savings on to customers at a consistent cadence.
Amazon is able to point to a huge AWS customer base (hundreds of thousands in over 90 countries) with some blue chip names. Netflix is the poster child of customers running on AWS, notwithstanding that it competes directly with Amazon’s Instant Video service and has suffered some prominent AWS outages recently. Nonetheless, Amazon can tout firms like Shell, Adobe, IBM, Samsung, Dropbox, Newsweek, New York Times, Washington Post and many government agencies as clients. While impressive it’s important to note that very few of these larger customers rely extensively on Amazon AWS for infrastructure (as does Netflix), rather they often are niche shadow IT initiatives within organizations. As well, customer churn is reportedly as high as 20% annually.
Nonetheless, Amazon is actively courting enterprise IT customers and building an ecosystem of partners, many of whom compete with Amazon directly or indirectly. Amazon positions itself as a savior of the enterprise that is being gouged by infrastructure players and the logical way to do IT in the future.
How Amazon’s Competitors are Responding
Our findings show that Amazon’s IaaS competitors are not trying to take Amazon head on. Rather they are attempting to replicate the benefits of Amazon’s value proposition while at the same time bringing specialized capabilities to the market. Specifically:
- Differentiation is the key to success and focus is the key to differentiation
- SPs are focusing on a set of customers and/or a market segment that allows them to achieve economies of scale
- Successful SPs are taking an ecosystem approach where the participants each bring value to the table – multiple SPs are collaborating to achieve scale while at the same time preserving differentiation in their respective segments
- Amazon competes broadly and horizontally across all verticals – Successful SPs targeting enterprise customers are focusing on selected verticals (e.g. financial services, media, Healthcare) and/or certain domains (e.g. startups, mid-sized co’s, compliance, etc)
The customers we spoke with were generally mid-to large sized shops which indicated that while their companies often outsourced infrastructure to Amazon, this occurred for mostly test and dev purposes or for niche initiatives driven by lines of business. As well, for more strategic project, customers indicated they often outsourced to service providers other than Amazon. These customers cited several considerations in choosing a cloud service provider:
- Data placement is really important: 1) Access to cheap communications is vital – either proximate or multiple carriers on site where at least one can offer a good deal to ensure the cost of data transfer is low; 2) Shipping data (e.g. MPLS) is very expensive and time consuming.
- Latency Rules! – If you’re going to run a database application, you need low latency
- Leading edge SPs are appealing to customers and differentiating with backhaul (i.e. connecting resources) to provide access to data and minimize the cost of data movement.
- By consolidating data in one place and in one industry sector, customers are migrating to SPs that can find opportunities in data analytics within these specific industries and domains.
- Security remains the #1 concern: Customers are drawn to SPs that provide sophisticated (private) networking within their ecosystem which avoids all the issues with public cloud network access.
- Hybrid Cloud adoption is rising but hybrid cloud via federated applications is limited. Customers are migrating toward SPs that can help develop hybrid cloud strategies that meet the compliance and governance edicts of their organizations.
- Tier 1 Apps are moving to the cloud: Customers are attracted to SPs that offer IOPs and capacity as independent solutions; allowing customers to pay for each independent of the other. We found some instances where all-flash arrays are an enabler and create additional value add.
- SLAs remain a sticking point. Customers expressed concerns about Amazon specifically and cloud providers generally with respect to the SP’s shared risk tolerance. In other words, customers are concerned less about the size of refunds for downtime and are more concerned about the SLA as a proxy of the SP’s confidence in their ability to deliver on an SLA.
CIOs should tread lightly
Amazon AWS is impressive and has changed the way the industry thinks about enterprise infrastructure. It’s catalyzed an entire trend around so-called “Private Cloud” and forced organizations to improve agility and become more efficient. Moreover, it’s created a new class of cloud service providers that are geared up to better serve the enterprise. In particular, we’re seeing the emergence of cloud service providers that are adding value in specific industries, bringing more robust and complete solutions in certain areas (e.g. backup, DR, networking) and engineering their offerings to serve applications beyond test and dev—Amazon’s clear sweet spot.
The decision to outsource infrastructure to the public cloud, while perhaps trivial for a smaller business or a funded startup, is not simple for many mid-sized and large organizations. There are several areas of caution and consideration we recommend that CIOs investigate prior to making any moves to the cloud generally, but Amazon specifically, including:
- Amazon is a horizontal player competing on the basis of scale. The company is not about high touch.
- Amazon’s SLAs have been described as “we’ll do our best – if we don’t please send us an email.” Think of an SLA as a proxy for shared risk and degree of SP flexibility. Will the SP change terms and condition language in an SLA? If not it’s a red flag.
- Amazon’s premium SLA pricing is a complex matrix of options that underscores its aversion to high touch business models. This is a warning to CIOs and should be understood carefully before strategic commitments are made.
- Can the service provider support a wide variety of enterprise apps beyond test and dev. The SP saying it can is not an indication—dig deeper and study use cases carefully.
- Amazon is not collaborative. Amazon’s security/auditing practices are a caution. Is the SP willing to share threat matrixes, establish shared goals, define incidence, customize reporting and generally comply with organizational edicts?
- How transparent is the SP with respect to policies, where data is placed, security data, etc.
- What is the SPs track record with outages and how has it responded? Amazon has had some high profile outages. Other SPs may have as well, but they probably weren’t as well publicized.
- What kind of access does the SP provide to its professionals? Can the SP be a consultant and trusted advisor?
- What other business processes need to be in place to move to a cloud SP? How complex are these? For example, when you write an app on Amazon, you have to consider latency management, location management, SLA management— all through Amazon’s API – are you ready for this complexity?
For additional details, read the complete research at Wikibon.org