Cloud computing is consolidating, raising the risk of customer lock-in
Barely a decade into the cloud revolution, consolidation is already setting in, and the implications for customers aren’t good.
That’s according to a new report from Forrester Research Inc. The three areas of greatest consolidation are currently in the base-level computing and storage known as infrastructure as a service, desktop applications delivered via the cloud and customer relationship management. The three largest providers in those markets already collectively hold 70 percent or more of subscription revenues and are unlikely to see their market shares decline, Forrester said.
However, not everything is consolidating so quickly. Markets for electronic purchasing, supply chain management, human resources and financial management systems are still wide open. What’s more, the authors point out, far more money is still being spent on on-premises software than on cloud services.
One of the report’s more striking findings is that Amazon Web Services Inc. and Microsoft Corp.’s Azure will capture almost three-quarters of all public cloud revenues in 2017. Microsoft, Google Inc. and Adobe Systems Inc. together own nearly 90 percent of desktop application market share.
In the CRM market, an oligopoly of Salesforce.com Inc., Microsoft and Oracle Corp. together hold a nearly 70 percent share of all software as a service subscription revenues for salesforce automation and customer service applications. Marketing automation is similarly dominated by those three companies.
Forrester foresees significant consolidation coming over the next three years in the areas of e-purchasing, human resources and financial management. However, some markets are going the other way. Researchers expect the e-commerce server market to become less concentrated as new competitors enter.
And some categories may not move to the cloud en masse anytime soon. They include business intelligence, product lifecycle management, enterprise content management, manufacturing resource management and governance/risk/compliance. Those categories of software are still purchased mostly for on-premises deployment.
A different kind of consolidation
Marketing consolidation is nothing new in the computer industry, but it’s happening at a faster rate in the cloud for several reasons. One is that the challenge of building a customer base doesn’t require the kind of big sales teams and marketing budgets that were necessary when software was delivered on-premises. Dominant vendors also have the advantages of economies of scale, which enables them to reduce operating costs and acquire customers more quickly. Finally, investors reward growth in the cloud market, which encourages vendors to pursue it ahead of profitability, at least for now.
For customers, consolidation so far has been more of a problem than a blessing, Forrester said. In contrast to the common perception that cloud services enable ease of switching, the analysts asserted that the risk of lock-in is actually greater in the cloud. Buyers of on-premises software have more options than cloud buyers to resist captivity. “For example, they can skip upgrades or turn to third-party maintenance providers to cut fees in half,” the report said. “Clients of SaaS vendors don’t have these options; if they stop paying the vendor, they lose access to the apps.”
As dominant cloud vendors consolidate their market share, some are likely to increase prices, reduce research and development investments and generally cut back on innovation. They’ll also make it more difficult for customers to migrate data to other services.
There are corresponding rewards, however. Lower barriers to entry may discourage incumbents from resting on their laurels and force them to be more competitive. As a whole, cloud services are still getting cheaper, though that trend that may not continue indefinitely. Vendors of both cloud platforms and applications, such as Microsoft and Oracle, can also offer attractive integrated prices and packaging.
Another plus is that IaaS providers are also showing no signs of trying to lock their customers into proprietary platforms, as Microsoft did with Windows in the 1990s. “Today’s cloud platform leaders don’t seek to divide and conquer developers by preferred environment anymore,” the authors wrote. However, they are using proprietary services such as AWS’s Lambda and IBM’s Watson to exert a form of lock-in at a different layer of the application stack.
Customers can protect themselves by avoiding long-term SaaS contracts and keeping their options open to migrate elsewhere, Forrester advised. It helps if customers dedicate people to negotiate contracts and think about contingencies. Customers of public cloud platforms, in particular, should work with at least two vendors so that they can shift their business on a workload-by-workload basis. Having a private cloud as a backup doesn’t hurt either, the authors said.
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