Google's Move and the Cloud's Future

NEW YORK (TheStreet) -- Google's  (GOOG) announcement that it is officially a cloud service provider is not as big a deal as it first appears.

That's because Amazon.com  (AMZN) long ago made this a commodity business. Telcos, Web hosts and even computer giants like IBM (IBM) and Hewlett-Packard  (HPQ) are already looking in dismay at the shredding of their business plans resulting from Amazon's decision to price its service at cost, and focus on relentlessly pushing those costs down.

Besides, Google has been offering its Compute Engine for 18 months now, and even though it has called that a "preview period" it has already drawn some big names like message eraser Snapchat, invitation company eVite and Web site builder Wix to the offering.

The big news here is that Google is now offering a Service Level Agreement for its cloud, promising 99.95% up-time. Given the fact that Amazon has had repeated failures at its Virginia center, one of which knocked Netflix  (NFLX) offline last Christmas Eve, that's a big deal.

Google is also claiming its cloud is easier to use, that it can get an application up and running in three minutes. It has already built an impressive list of "service providers" around the service, what the market will see as re-sellers.

All of this means the present shake-out among cloud providers is only going to accelerate. It's no longer a question of supporting a particular infrastructure system because Cloudscaling makes OpenStack clouds compatible with Google, much as Eucalyptus makes private clouds compatible with Amazon.

We already know that price sells cloud. Amazon retained its market share lead in the third quarter, according to Synergy Research Group, and is now bigger than its four-largest rivals combined.

Synergy listed those main rivals as Google, Microsoft  (MSFT), IBM -- which acquired SoftLayer to get that share -- and Salesforce.Com  (CRM), whose Software as a Service offering is based on Oracle  (ORCL) hardware and software.

As Google and Amazon keep driving down their prices it becomes increasingly unlikely that any vendor without their kind of scale -- and willing to take on their pricing -- is going to make much headway.

This doesn't just impact upon vendors such as Rackspace  (RAX), which bet its future on a public cloud-based  OpenStack, but phone companies including AT&T  (T), CenturyLink (CTL) and Verizon  (VZ) -- Verizon unit Verizon Terremark recently lost the Healthcare.gov contract -- as well as HP, which now handles the government Web site.

All these players and more thought unique platforms or consulting services or public-private "hybrid" clouds or dedicated sales forces and systems could give them a profitable place in the market. In a world of self-service and commodity pricing, that looks increasingly like a long-shot bet.

There are going to be niches remaining in the cloud market. Some countries are going to demand that data be hosted locally. Some companies are going to pay the price of building their own public clouds. Moving corporate workloads onto cloud will remain a viable niche.

But the mainstream cloud business is a commodity business, a low-margin business, a business dominated by scale and focused mainly on bringing lower costs directly to customers as fast as possible.

The big profits will be in using clouds, not building them. It's what Amazon and Google are doing with their clouds that will drive their profits. That's an important lesson investors need to keep in mind as 2013 draws to a close and the future grows increasingly cloudy.

At the time of publication the author had a position in GOOG and IBM.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

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