The Cloud Warning

by Andrew McAfee on December 20, 2011

I read recently that Rajan Anandan, Google’s managing director for India, says that his country will be a ‘Cloud-first’ market for computing. The companies there, in other words, will go from having very little information technology (as is the case now) directly to embracing Cloud computing without ever going through the intermediary steps of mainframe-, mini-, client-server-, or PC-based computing.

Of course, Google employees all over the world are talking up the Cloud, but I think Anandan’s on to something. Just as many countries in the developing world have largely skipped over land-line telephony and moved straight from having virtually no phones at all to having tons of mobile phones, so too might something similar happen with corporate computing.

Established companies in the developing world don’t have much in common with startups in the West, except that neither type has much legacy IT — a large existing base of on-premise computing and all the people, practices, and philosophies that go along with it. And a lack of legacy means a greater enthusiasm for the Cloud. When I talk to former students who starting and running companies, they find the idea of owning a lot of servers and applications somewhere between distasteful and ridiculous.

As I wrote in my recent HBR article, a few Web-centric companies like Zynga, eBay, and Netflix are also deeply embracing the Cloud. So we see this approach to computing taking off in companies that don’t have much of an installed base of IT, and in a few older companies that perceive a sea change.

Most of the rest of the incumbents are holding back and being very cautious about the Cloud. They think it’s immature and insecure, they don’t perceive its great benefits but clearly see the massive costs of untangling their legacy spaghetti to the point that it’s Cloud-ready, and they have great difficulty justifying walking away from on-premise hardware and software, lots of which is fully depreciated, in order to write monthly checks to Cloud vendors.

The incumbents’ perspective is not ludicrous. In fact, it makes a lot of sense. Which is exactly why it’s potentially so dangerous. American industry went through a remarkably similar transition a century ago, and it didn’t end well at all for established firms.

A hundred years ago, American factories were in the process of converting from steam to electric power. It was a long, slow, uneven process. And it was led by startup companies and new buildings —  the older ones just couldn’t justify the switch to themselves intellectually or financially — it wasn’t clear why electricity was so much better, but it was clear how much it would cost to convert an incumbent.

And how did the the incumbents fare as the manufacturing industry transitioned from one power delivery mode to another? By 1935, over 40% of the big industrial trusts formed by 1905 had failed, and 10% more were limping along. Of the incumbents that survived, most became much smaller, with market shares declining by a third, on average, by the 1930s.

Many factors led to this deep shift in the balance of power in manufacturing industries early in the 20th century; electrification was one of them. Will Cloud computing be similarly important? Will it contribute to large competitive shifts not only among IT vendors, but also among consumers of technology?

The only honest answer is that we have no idea, but my gut tells me that the Cloud will be a big enough deal to contribute to competitive shifts and turbulence even in mainline, old-economy industries. Its intelligent adopters will be able to change, respond, and scale up more quickly than rivals relying on on-premise computing. Could adopters will also generally be more efficient, more analytical, and better able to capture and share what they know. In the intensely competitive business environment of tomorrow (and today), these advantages will be telling.

So I think that history is going to repeat itself. Over the next few decades the shift to the Cloud is going to trip up a lot of successful, well-managed firms in a lot of industries. There won’t be one cataclysmic event or killer app that does them in; they’ll just find themselves gradually falling behind their Cloud-enabled rivals over time (and it may take a long time) until they no longer matter. They’ll end, in other words, not with a bang, but a whimper.

Do you agree? Or do you think I’m overestimating the spread and significance of the Cloud? Leave a comment, please, and let us know.

  • http://twitter.com/chris_p_walker Christian Walker

    I’m not really sure. I think the impact is going to be different across different industries (e.g.: banking vs retail). I do think that we’re going to see a lot of hybrid installations, for a variety of reasons. I wrote a post on cloud a few weeks ago, if you’re interested. It’s just my take. http://christianpwalker.wordpress.com/2011/11/21/cloudy-with-a-chance-of-success/

  • Henry Singer

    Andrew,

    I am reminded of the following excerpt from Niccolo Machiavelli’s “The
    Prince”

    “…It must be considered that there is nothing more difficult to carry out, nor more doubtful of success, nor more dangerous to handle, than to initiate a new order of things. For the reformer has enemies in all those who would profit by the old order, only lukewarm defenders in all those who would profit by the new order, this lukewarmness arising partly from fear of their adversaries, who have the laws in their favour; and partly from the incredulity of mankind, who do not truly believe in anything new until they have had the actual experience of it. Thus it arises that on every opportunity for attacking the reformer, his opponents do so with the zeal of partisans, the others only defend him halfheartedly, so that between them he runs great
    danger.”

    I agree fully. While the factors driving forward are technology, once again it is people that hold things back.  As they say, those that ignore history are condemned to repeat it.  I hate to be pessimistic, but…. the bigger the change the greater the resistance.

  • Richard Rashty

    I was helping out a non profit organization, one that had very few employees, yet was a prime candidate for cloud computing… .the president even bragged how “cutting edge” this firm was, embracing social media, mobile devices, etc..

    After showing them how the cloud could benefit them, and mitigating the risks of the cloud……they still were “scared about the risks” of the cloud…e.g. they mentioned loss of internet connectivity and the lack of ability to work offline..Notice their “fears” were not about the cloud, but more the transport mechanisms and work behaviors…

    so I think as long as there are people who are still embracing local computing, local files, the cloud will be a tough sell, until enough people go to make it a commodity in the eyes of business people..

  • http://blogstu.wordpress.com stu

    Andrew,
    Cloud-based services are the competition that internal IT departments must benchmark against and compete with for funding. Startups (that don’t have legacy IT or the time and budgets to build their own infrastructure) have benefited from using Amazon’s services. The power plant analogy is an oversimplification; industrial machines could be updated to new power sources much easier than having companies update applications to modern architectures that can be used as a service. While the total cost of outsourcing IT may or may not be better than doing it in-house, it is opportunity to increase agility and the speed of meeting business objectives that will cause the C-level team to consider the new options.  

  • http://nwlinux.com Mark Moore

    The Cloud is a relatively new technology. Computing seems to recycle technology very quick, not to mention data formats. Not to go archaic here, but paper is the only tried and true method of data storage. Think about it, how long has paper been used to record data – since around 100BC. It does not require electricity or additional components to read it either. Cloud applications are great as a secondary, but what happens if a company ditches their hardware and software for the Cloud and it goes down or your internet connection fails? Dead in the water…The Cloud is still a baby in technology. It cannot be trusted until we reach a point of equilibrium.

  • http://twitter.com/ethanmcc Ethan McCarty

    Good point — and also, maybe obviously, the parallel between adoption of cloud in emerging markets and the adoption of wireless telephony.  Both represent a leap frog over installed hardware.

  • http://twitter.com/ethanmcc Ethan McCarty

    Good point — and also, maybe obviously, the parallel between adoption of cloud in emerging markets and the adoption of wireless telephony.  Both represent a leap frog over installed hardware.

  • http://www.jmorganmarketing.com jacobmorgan

    I think the key thing you pointed out here is:

    “Over the next few decades the shift to the Cloud is going to trip up a lot of successful, well-managed firms in a lot of industries”

    I say this because oftentimes we read and hear about things that make it sound as if the shift to cloud is going to happen in the next year or two which is just unrealistic.  Sure, we see some companies moving in that direction but this shift is too often exaggerated as something that is moving at light speed. 

    If you try telling a large financial institution or pharmaceutical that they will be shifting completely to the cloud in the next year or two chances are that conversation will end quickly and awkwardly.

    Thanks for putting a realistic timing perspective on what this shift to the cloud can actually look like.

  • http://twitter.com/SimarpalKhaira Simarpal Khaira

    Andrew,
    I agree with you. In India, lot of awareness of cloud computing is spreading among small businesses and start-ups and they are enthusiastic about trying it. Especially businesses who find it hard to afford space and infrastructure are more interested in cheaper cloud services option.

  • http://twitter.com/JamesCookSG James Cook

    Very though provoking article, do you think we are in the middle of a communication revolution?

  • http://www.facebook.com/people/Marcy-Dorna/1261808352 Marcy Dorna

    this is very interesting. Good argument for the success of the cloud in emerging markets. You haven’t answered the question of security. I am inclined to think that the cloud introduces potential problems for intellectual property. Who owns the information? Will the cloud become like Elsevier, an information clearing house, charging for access? In addition, you haven’t convinced me that the emerging markets will overtake the developed ones…just that there IT overhead will be less expensive, so generating some savings there. 

  • Martin Powell

    Interested to hear of your students reactions to the idea of having their own servers and apps. You’re spot on when you say that the existing IT heavy companies with lots of infrastructure are behaving rationally. There are good reasons for being cautious about moving to the cloud (security, service levels, accounting practices, support models,software licences…) but these will all be overcome. There will be major embarrassments and problems as the service matures but the technical, financial and legal issues will be resolved. The tricky area, as ever, will be the impact on people within organizations as they transition to a cloud model. For CIOs it means putting even more trust in a supplier to deliver a service where a failure to deliver will be instantly visible to customers. On the supplier side cloud service providers need to evolve to a point where they can offer a fully managed service that will meet the needs of even the most demanding businesses.  All do-able but having no infrastructure is a good place to be starting from.

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