The hyperscalers, AWS, Google and Microsoft, born out of massive scale cloud services are increasingly moving into diverse areas of ICT services and are likely to be the dominant force in tech markets. In this podcast we explore the origins of the hyperscalers, their increasing interest in the edge and providing network services, as well as consideration of their wider portfolio of products and services.
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The full transcript of the podcast is available below.
A lot is spoken about the FAANG companies, Facebook, Apple, Amazon, Netflix and Google and how they dominate consumer media, communications and internet services. Personally I find them too diverse a bunch to think of collectively. Netflix is tiny by comparison to Apple. Why not include Spotify. Or Rakuten in Japan etc. It’s a bit like the obsession a few years ago with the BRIC countries (Brazil, Russia, India and China) as if Argentina, Indonesia, Vietnam and so forth can just be ignored. But I digress.
In this episode I don’t want to think about the FAANG companies and what they’re doing for consumers, but to look at the equivalent for business. There are a set of so-called hyperscalers (or web scalers) which are starting to expand from their original positions, general in cloud hosting, to try to dominate the means for delivering enterprise services, and ultimately the actual enterprise services themselves.
There are three main players: Microsoft, Amazon, and Google. One might also throw in Ali Baba as a Chinese equivalent. That leaves us with the rather unfortunate MAGA acronym, which I understand is already taken. So let’s stick with calling them hyperscalers. There are also a few areas where other companies such as IBM and Facebook also look a bit like these MAGA companies. So let’s keep the term broad.
Possibly the biggest question for most technology markets today is: what is the long term strategy for particularly these three companies and will they eat my lunch? In this episode there’s not enough time to categorically answer that question. But I want to share some thoughts about a few aspects.
What do we mean by hyperscalers? Originally the term came from the operation of very large scale data centers with thousands of services. Hence hyper-scale. That would have included the likes of Amazon, Apple, Facebook and Google which built huge data centers initially to support their own products and services. Then some of them diversified into renting space in those data centers, and other associated services.
Take Amazon Web Services (AWS) for instance. While on its way to becoming the world’s biggest e-retailer, Amazon also built, out of necessity, a huge amount of competence in databases, compute and storage, and in running scalable data centers in a cost effective way to suit their low margin business. So it was a natural step to provide those infrastructure services to third parties. It then became self-reinforcing with AWS building further infrastructure and developing additional competencies to support an expanding set of clients for its cloud storage. In the latest quarterly revenue AWS accounted for 12.1% of Amazon revenue, and the majority of the company’s operating income.
The term hyperscaler, therefore, comes from the physical data center asset. But today it’s much more. Not least because the provision of compute and storage is not just about massive cloud data centers today.
Let’s take a step back and think about the rise of the cloud. Historically everyone stored there data on premises, in their own servers. Possibly with a back up located somewhere near. On the outskirts of the little village where I grew up was the HQ of a big insurance company. Obviously they had lots of records to store. And they had an off-site back up. Specifically they bought the nearest house (about 100m up a leafy lane from their site) and turned it into an off-site back up. Every so often you would see someone wheeling a cart full of (I guess) magnetic tapes up the lane to deposit them in the house. Kinda makes sense although I’m not sure today’s resiliency planning experts would think that much of it.
Over the last 15 or 20 years one of the defining trends of ICT has been the shift of enterprises (and consumers for that matter with iCloud, OneDrive etc.) to take advantage of the availability of common shared data centers. They provide much cheaper, scalable and resilient resources. Most companies have probably now made the move to cloud hosting over on-premises.
The last couple of years, however, have seen something of a shift to the edge. Central data storage is all very well, but for some applications you need your processing and data storage near to the application. The round trip delays of interrogating a central server hundreds or even thousands of kilometres away is just too much for some applications. The most often quoted is AI, which may need to make real-time decisions. Another is AR/VR where the sheer volume of data that needs to be sent and received effectively rules out storage in a central server, at least while the speed of light stays constant.
There’s also a residual demand from some customers, typically in industrial applications, to continue with an on-premise capability, for resilience.
All of this means that any company wishing to provide cloud services probably also needs an edge strategy (with edge maybe meaning the edge device, or the customer premises, or even a helpful spot quite close to the customer such as the edge of the network, like at a mobile base station site). Either way, there’s more complexity to effectively supporting client needs now than there was 5 years ago.
I tend to use the hyperscaler term as shorthand for a small group of very large companies that were originally cloud hosting providers that seek to apply massive scale to supply storage and compute services to the enterprise market.
But they’re also more than that. Because of the need to support both cloud and edge, increasingly these organisations are looking at how they stitch the two pieces together, i.e. through network services. Also, it’s impossible to ignore the fact that all four of Ali Baba, Amazon, Google and Microsoft has other enterprise products and services way beyond cloud and edge. What do these two trends mean for their likely impact.
Of those two, let’s tackle the network services piece first, i.e. the network that connects the customer, cloud and edge together.
In Episode 3 I talked about the idea of Separation>Innovation>Explosion, the idea that if you separate the hardware and software elements of a technology field then it tends to encourage lots of innovation. Specifically, I talked about it in the context of telecoms networks.
In Episode 6 I talked about 5G and how the much reduced latency creates an interesting changing dynamic for how services are delivered, encouraging more processing to take place not on the device, or in a central data center, but at the edge of the network.
These developments are of particular interest to hyperscalers, such as AWS and Microsoft, who have been showing lots of interest recently in the world of telecommunications. Recent acquisitions from Microsoft of Affirmed Networks and Metaswitch Networks point to an aggressive approach towards developing new telecommunications services in a newly disaggregated world, and both they and others including AWS have been bolstering their edge offerings.
In a recent Transforma Insights report called ‘ The Network New Normal: how web-scalers are gearing up to take advantage of 5G, edge computing and network disaggregation ’ I looked at the development from the perspective of the likes of Amazon Web Services, Google, Microsoft and Rakuten, how they have been catalysts for this change and how they might benefit.
This is the age-old story of technology evolution shifting the playing field, creating new opportunities and threats. The web-scale companies’ interest is obvious: they want greater control over delivery of their services to enterprises. Microsoft has been the most active in pursuing the opportunities presented by the Network New Normal, establishing a strong position to innovate on new networking and edge services. The AWS approach has been much more focused on working with telecommunications network operators, although its IoT offering is still somewhat competitive. In our recent Communications Service Provider IoT Peer Benchmarking report we dug quite a lot into the extent to which Verizon, and others, were establishing very close relationships with hyperscalers to build edge capabilities at Verizon sites.
Google is even more focused on being a supplier rather than competitor to the network operators in enterprise services. However, its focus on supporting cloud-based delivery of products from existing vendors to existing service providers is rather one-dimensional and risks missing out on the opportunities presented by these new developments. The company that seems to be doing the most to single-handedly blur the boundaries is Rakuten, being at once a mobile network operator, cloud services provider and telecommunications software vendor.
Substantial changes are coming to telecommunications networks, how services are delivered and by whom. We are just at the start of the shift to a Network New Normal. As part of the shift, network disaggregation/virtualisation increasingly blurs the lines between the traditional roles of infrastructure provider, network operator and cloud services provider. At the same time the delivery of network services is seeing a big change, becoming much more distributed courtesy of edge computing and 5G. These trends present opportunities and threats for all parties, but most likely creates the biggest headaches for infrastructure vendors. Network operators will have to tread carefully to avoid web-scalers dominating the market for provision of enterprise services. Consolidation, particularly involving players in different elements of the traditional value chain, will increase.
Clearly the need to connect and manage the relationship between the cloud and edge assets and the customer is important. But let’s not forget that these hyperscaler organisations have a wider portfolio of products and services. Ultimately one must assume that the goal is to be the dominant provider of enterprise products.
Take Microsoft, for instance. Its Azure offering is only a small element of what it might ultimately deliver to end users. It has extensive offerings in communications, ERP/CRM, collaboration, productivity tools (not least the office suite) and automation. Let’s also not forget that it is the proud owner of the LinkedIn and Github communities, both of which offer substantial opportunities for turning into enterprise service platforms in some way in future. LinkedIn, for instance, is already used extensively for HR and sales purposes and it’s easy to see how it might be integrated into software specific to recruitment or customer relationship management. Beyond that it may even be used for market intelligence, using the hive mind of LinkedIn. Or perhaps for targeted consulting, e.g. offering O365 users the opportunity to tap up a specialist in a field they are looking at for a day’s consulting. The opportunities are almost endless.
And then turning to Google, it has a 75% of the handset OS market share, and 2/3 of the browser market. In terms of the ways that people, both enterprise and consumer, interact with the world, Google is generally involved. It also has a set of enterprise software, Google Docs etc. albeit far behind Microsoft.
Amazon, which really set the ball rolling, is the one that as yet lacks this kind of position in the enterprise market. Alexa for business and Amazon WorkDocs haven’t exactly grabbed the business world by the short and curlies. It has managed to steal a march on the others for consumer hardware courtesy of Echo. But for enterprise, it’s still struggling.
All of the three companies I’ve focused on here have been active in developing capabilities for IoT, recognising that these are just another extension of the cloud-edge paradigm. The IoT device is the ultimate edge location. AWS has Greengrass, FreeRTOS and so on. Similarly Microsoft has IoT Plug & Play. What’s interesting here, is that this another example of the separation of hardware and software layers, with Microsoft or AWS software enhancing (arguably replacing) that of the industrial application.
I should also mention AI. All three of these companies are sinking substantial amounts into developing capabilities there. However, it’s worth stressing that AI is not an end in itself. It exists to serve the types of applications I’ve mentioned already here. For instance natural language processing for search, or automation of some business process.
Across Applications, Business services, Operating system and Hardware as well as cloud and edge (and probably network services in future) these three (plus about half a dozen others) will increasingly dominate end-to-end the delivery of enterprise services as well as the services themselves. It feels like we’re in for a much more concentrated business services environment. Companies that today are in a relatively strong position such as Oracle, SAP and Salesforce had better watch their backs.
In this episode we have focused exclusively on enterprise services. However, it would be wrong to assume that all this movement is solely focused on the enterprise opportunity. By ramping up its edge capability, Microsoft, Google and Amazon may be able to steal a march on its competitors in both gaming and personal computing. Lower latency means a better experience for Xbox Live or Stadia. It also potentially allows Surface or even Chromebook to gain ground on Apple products.
By shifting processing out of the device and to the edge Microsoft, for instance, could provide a superior experience (e.g. content storage and sharing) and lower cost (e.g. by reducing storage and/or processing capacity on the device). The PC as dumb terminal hasn’t exactly taken off in the past, but the shift to 5G with edge processing may allow Microsoft (or Amazon or Google) to turn the tables on Apple. All three companies have been looking for the next technology paradigm shift that might mean a break in Apple’s dominance. This could be it.
Next week I’m going to stick with technology vendors, but I’m more interested in the ones who haven’t been radically reshaping the world. I want to look at some of the less successful players and particularly why they’ve failed.
I hope you can join me.
Links to some of the research that I’ve refered to in this week’s show, as well as a transcript of the recording, will be available on the podcast website at WirelessNoodle.com
Thank you for listening to The Wireless Noodle. If you would like to learn more about the research that I do on IoT, AI and more, you can follow me on Twitter at MattyHatton and you can check out TransformaInsights.com.
Thanks for joining me. I’ve been Matt Hatton and you’ve been listening to the Wireless Noodle.