Cloud, Commoditisation & Consolidation

POV - Cloud infrastructure companies are likely to become commoditised & then consolidate

#cloudcomputing #SaaS #PaaS #IaaS

- As cloud infrastructure becomes more standardised,

- providers will face pressure on margins &

- will need to either consolidate

- to survive or focus on specialised niches

- Larger players benefiting from economies of scale &

- integrated ecosystems

- are likely to acquire / absorb smaller ones

Let the games begin!

1. All such markets, cloud, servers etc, with high margins & attendant, high user switching costs & or user inconvenience, will attract more investment & players, reduce industry concentration ratios, commoditise the industry & drive prices down
2. Eventually, it will make sense to own & not buy/outsource such services, provided the volume of usage is of ‘minimum economic size’ or in multiples of it
3. However, one will see consolidation in this sector, by incumbents to maintain their hegemony
4. But the squeeze on margins is inevitable

• Moore’s law (somewhat) will apply here too. Come to think of it, what is the point for a start up to raise funds, just to give a large portion of it away, to google, meta, AWS & the like?
• Cost & barriers to entry in this industry is not high when you compare it to your ‘lifetime payout’ ( NPV of future payments) to buy/outsource such services. Something has got to give, eventually! In the long run, any pure tech play will face diminished competitive advantage. There is no real, defendable IP in it
• In the tech world, time is not a luxury one can afford

There is enough historical, empirical evidence to prove this

• Standardisation of services: Over time, cloud providers have developed similar infrastructure products (compute, storage, networking, etc.) that are essentially interchangeable, barring pricing, geographic coverage & switching costs
• Price competition: As the cloud market matures, providers face pressure to lower prices to stay competitive. Larger companies have already scaled to a point where they can afford to reduce costs, & squeezing margins for smaller providers. This is a hallmark of commoditisation
• Ecosystem lock-In: Once customers choose a provider, they often end up heavily integrated into its ecosystem, making it more difficult for them to switch. As a result, smaller cloud providers may struggle to attract customers, & the largest players benefit from increasing economies of scale. This dynamic encourages consolidation
• Reduced differentiation: As cloud offerings become increasingly similar, differentiation becomes harder to achieve. Infrastructure-as-a-Service (IaaS) providers may focus more on customer service, specialised offerings, or specific verticals, but at a macro level, the infrastructure itself remains commoditised. This creates an incentive for the bigger players to consolidate further
• Innovation shifts: Cloud infrastructure companies are now shifting focus toward differentiated services like AI, data analytics, & customised services. Infrastructure becomes a back-end commodity, while value shifts to offering services on top of infrastructure. Companies without the resources to innovate in these new areas will struggle, leading to consolidation
• Mature market & economies of scale: The cloud infrastructure market is increasingly mature. Large players like AWS & Azure have built massive infrastructures that make it difficult for smaller competitors to compete on price or scale. Consolidation will happen as smaller firms merge with or get acquired by larger companies to remain competitive
• Vertical integration by large players: As large tech companies continue to expand their cloud offerings, they integrate more vertical services (e.g., SaaS, PaaS) into their infrastructure. This strategy reduces the demand for purely IaaS focused providers, leading to a reduction in competition & further consolidation in the market