This story develops criteria for first-mover advantage in cloud computing based on technology and market expansion.

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2 Part II: First-Mover Advantage This story develops criteria for first-mover advantage in cloud computing based on technology and market expansion. loud computing has emerged as a dominant computing paradigm supported by two main ecosystems. The first ecosystem is the rivalry among end-to-end cloud computing providers along with their suppliers and buyers. The second adds new entrants and low-cost substitutes as competitive forces. The union of both ecosystems defines the competitive landscape of cloud computing. The competitive forces of suppliers, buyers, new entrants, and low-cost substitutes illustrate technology and market dependencies at a given point in time (Porter, 1980). This synergy between technology and the market gives rise to what has been called first-mover advantage. Table of Contents Seeding the Cloud 9

3 First-mover advantage in cloud computing is a coveted treasure. But being first into the market makes sense only if one can make money at it or gain competitive advantage. Private firms, academic institutions, and researchers have wide views on first-mover advantage and the criteria needed to secure it. One school of thought advocates that being first in technological innovation, whether architecturally (transformational) or component (incremental) driven, leads to a first-mover advantage. (Foster, 1986). Another school of thought posits that a first-mover advantage is achieved with architectural innovations that build new markets (Christensen, 1992). Finally, recent research has shown that first-mover advantage is not created equal. The relative strengths of technological advancement and marketplace expansion can create a first-mover advantage that can be durable or short-lived (Suarez, 2005). Cloud computing has entered an era that is fraught with competition from technological capabilities and from marketplace demands. The following analysis makes five key points relative to first-mover advantage in today s cloud computing environment. 1. Cloud computing currently resides in a space of rapidly expanding technologies and markets, which slightly favors a short-lived rather than a durable first-mover advantage. This is fertile ground for disruptive technologies. 2. Cloud computing can be susceptible to competing architectural and component technologies, especially when technologies and markets are rapidly expanding. Here, a first-mover advantage and its type can be unpredictable. 3. Cloud computing has two distinct ecosystems, one of which is an incumbent ecosystem of current buyers and suppliers. These buyers and suppliers can integrate into the competitive rivalry of end-to-end cloud providers, but a first-mover advantage is unlikely. 4. Cloud computing also has a disruptive ecosystem of new entrants and low-cost substitutes, which establishes new markets. These two competitive forces can also integrate into the competitive rivalry, in which a short-lived or durable first-mover advantage is likely. 5. Cloud computing has alternate migration paths among its competitive forces of buyers, suppliers, new entrants, and low-cost substitutes. These migration paths can be profitable regardless of whether a first-mover advantage is established. FIGURE 1. TECHNOLOGY AND MARKET DEPENDENCIES ON FIRST-MOVER ADVANTAGE from Suarez, Half-Truth First-Mover Advantage ) Table (adapted 1: Decision Criteria for 2005, Component and of Architectural Improvements 10

4 One of the most compelling models in first-mover advantage develops its dependencies on the pace of both technological change and market expansion (Suarez, 2005). Figure 1 presents first-mover advantage in four quadrants with distinct technology and market characteristics. Look at the two extreme quadrants of technology and market dependencies, as shown in Figure 1. In calm waters, both the pace of technological change and market expansion are slow. A durable first-mover advantage can be secured in this quadrant where the critical success factors are a first-mover claim (Foster, 1986) and brand strength. Arguably, the first virtualized machines fell into this quadrant with the IBM CP-40 and CP-67 in 1966, fol- In the other extreme quadrant of rough waters, there is a frenetic pace of technological and market change. Cloud computing is currently in this quadrant along with many of its constituent parts. Winners often enjoy a short-lived first-mover advantage, relying on deep technological and marketing assets. Coupled with this is a keen sense of entry and exit strategies. Several years after the inception of the Internet, Netscape realized its first-mover advantage was short-lived, so the firm successfully positioned itself as an acquisition target for AOL for $10 billion. Similar strategies were employed by Savvis in its acquisition by CenturyLink, and 3Tera in its acquisition by Computer Associates. Virtualization firms are currently competing in this space. While VMware is widely regarded as the market leader, competitors including Microsoft and Citrix are dif- FIGURE 2. TORNADOES IN THE CLOUD - COMPETITION AMONG TECHNOLOGICAL SOLUTIONS Seeding the Cloud lowed by hardware-assisted virtualization with the IBM System/370 and VM/370 OS in IBM s brand strength and first-mover claim helped the company flourish in this space with a durable first-mover advantage. Table of Contents FIRST-MOVER ADVANTAGE: TECHNOLOGY AND MARKET DEPENDENCIES 11

5 ferentiating their offerings through automation and management tools, virtualization workloads, and vendor partnerships. The remaining two quadrants focus on where the market leads/technology lags, and where technology leads/market lags. A durable first-mover advantage can be obtained in both quadrants, although that is by no means a certainty. As an example, more than a decade ago VMware operated in a virtualization space of leading technology but lagging market. At that time, VMware s technological strength, patents, intellectual property, and financial strength helped the company to achieve a durable first-mover advantage. TORNADOES IN THE CLOUD: THE MARKET/TECHNOLOGY PERFECT STORM An interesting dynamic occurs in the quadrant where the pace of technology is growing and the market is expanding, as shown in Figure 2. This quadrant is where architectural and disruptive technologies are likely to occur, creating new markets and taking over incumbent ones tier by tier. Disruptive technologies are likely to spawn a first-mover advantage that can be either durable or short-lived. But even more interesting is that rapid advances in technology can be augmented by the synergistic effect of an expanding market; that is, technologies are born, but the market creates an environment of competition and validation among them. This is a healthy dynamic. The market seeks the optimal technological solution whether it is architectural or component oriented. The market may even serve as a catalyst to wring out incremental improvements in existing component technologies. Component improvements rarely lead to a first-mover advantage, whereas architectural improvements often do. Therefore, the competition among technological solutions in this quadrant can lead to an unpredictable first-mover advantage. Below are two compelling examples of this observation: VLSI: In the early 1990s, the performance in silicon CMOS technology appeared to have peaked. The market demanded higher performance. Gallium arsenide (GaAs) and other Type III-V compound semiconductors had electron mobilities (measured in cm2 /V-s) an order of magnitude greater than n- type silicon. Heterojunction (Al/GaAs) materials had electron mobilities three orders of magnitude greater. The performance prospects were so compelling that the best minds in semiconductor device physics at the best universities stated that the integrated circuits industry would move to GaAs substrates in a wholesale fashion no later than That didn t happen. GaAs had sufficient semiconductor processing difficulties that precluded its widespread substitution for silicon technology. Because of the market s thirst for higher performance, the industry revisited silicon technology. The semiconductor industry was able to wring out performance enhancements in photolithography, transistor design, and voltage scaling. Without the dynamic of expanding technologies and markets, it is unlikely that substantive improvements in existing silicon technology would have occurred as quickly. Cloud Computing/Hosting: The public cloud has a value proposition of offering services in a scalable, virtualized, and utility-priced manner accessible from the Internet browser. However, the market has concerns, both real and perceived, regarding security, compliance, and IT management. Against that backdrop, the industry has revisited every permutation of hosting and managed services to address these deficiencies. In addition, the industry has innovated private and hybrid clouds as new disruptive technologies to public clouds. Again, the symbiotic relationship of changing technologies and markets facilitated the vetting and validation of competing technologies. INCUMBENT ECOSYSTEM: CURRENT BUYERS AND SUPPLIERS The competitive landscape captures the ecosystem generated from technology and market dynamics. The incumbent ecosystem of end-to-end cloud computing providers, buyers, and suppliers is shown in Figure 3. Suppliers can forward-integrate into the competitive space. Buyers can reverse-integrate. IBM is a classic example of a buyer that has reverseintegrated into the competitive space of end-to-end cloud computing solution providers. It is unlikely that the competitive forces in this ecosystem will achieve a first-mover advantage. After all, these competitive forces support and sustain current businesses and customers through component (incremental) improvements. This ecosystem can generate massive profits, but it is vulnerable to alternative disruptive technologies and niche providers, which can establish new markets. 12

6 Seeding the Cloud FIGURE 3. INCUMBENT ECOSYSTEM - BUYERS AND SUPPLIERS DISRUPTIVE ECOSYSTEM: NEW ENTRANTS AND LOWCOST SUBSTITUTES FIGURE 4: DISRUPTIVE ECOSYSTEM - NEW ENTRANTS AND LOW-COST SUBSTITUTES 13 Table of Contents The ecosystem that poses the greatest disruptive threat to the incumbents is shown in Figure 4. New entrants and low-cost substitutes incubate architectural (transformational) improvements that can create new and niche markets, especially at the low end. Architectural improvements often cost far less to develop than their component counterparts (Christensen, 1992). The main difference is that architectural improvements often create new markets and have performance trajectories capable of overtaking incumbent markets tier by tier. Architectural improvements also need to be developed and incubated in a setting that is minimally influenced by the incumbent ecosystem. On this basis, the competitive forces of new entrants and low-cost substitutes in this ecosystem have a greater likelihood for a first-mover advantage, whether durable or short-lived.

7 CLOUD COMPUTING ECOSYSTEM: MIGRATION PATHS cloud providers. New entrants and low-cost substitutes can be acquired by the incumbents, which is often the case. However, new entrants and low-cost substitutes have a secondary migration path into the supplier domain, as these competitive forces have the potential to become the building blocks for future end-to-end cloud solutions. The effective ecosystem for cloud computing is shown in Figure 5, which assembles incumbent and disruptive elements. This ecosystem embodies the interaction and relative strengths of technology and the market. The competitive forces of buyers, suppliers, new entrants, and low-cost substitutes have a primary migration path into the rivalry of end-to-end FIGURE 5. EFFECTIVE CLOUD COMPUTING ECOSYSTEM 14

8 CONCLUSION While there is a paucity of data on what constitutes a composite performance metric in cloud computing, there is a wealth of data on individual performance attributes. Look no further than the competitive forces in the competitive landscape and ecosystem of cloud computing. End-to-end cloud computing providers that don t possess the intellectual assets necessary to grow their ecosystem organically often build their ecosystem through the acquisition of niche skills and innovations from new entrants and low-cost substitutes. Cloud computing is in a space where technology and markets are expanding. First-mover advantage can be short-lived or durable, depending on brand strength, financial assets, along with technological and marketing core competencies. A highly disruptive ecosystem emerges when technology and markets are expanding. At first glance, a disruptive ecosystem fosters architectural improvements and new markets, which are likely to lead to a first-mover advantage. However, disruptive ecosystems can have unintended technological consequences leading to all-out warfare between architectural and component improvements, owing to the market s insatiable need to reach a stable, technological equilibrium. This equilibrium is constantly tested by the emergence of new disruptive technologies. References Michael E. Porter, Competitive Strategy, The Free Press, New York, R. Foster, Innovation: The Attacker s Advantage, Summit Books, New York, Clayton Christensen, Exploring the Limits of the Technology S-Curve Part I: Component Technologies, Product and Operations Management, Volume I, No. 40. Fall, Fernando F. Suarez and Gianvito Lanzolla, The Half- Truth of First-Mover Advantage, Harvard Business Review, Volume 83, Issue 4. April, 2005 Table of Contents Seeding the Cloud 15