Beyond a Tipping Point

Cloud_computing_icon_svgA few weeks ago I wrote a blog called A Tipping Point for the Telecom Industry that looked at the consequences of the revolution in technology that is sweeping our industry. In that blog I made a number of predictions about the natural consequences for drastically cheaper cloud services such as the mass migration of IT services to the cloud, massive consolidation of switch and router makers, a shift to software defined networks and the consequent expansion explosion in specialized Cloud software.

I recently read an interview in Business Insider with Matthew Price, the founder of CloudFlare. It’s a company that many of you will never have heard of, but which today is carrying 5% of the traffic on the web and growing rapidly. CloudFlare started as a cyber-security service for businesses and its primary product helped companies fend off hacker attacks. But the company has also developed a suite of other cloud services. The combination of services has been so effective that the company says it has recently been adding 5,000 new customers per day and is growing at an annual rate of 450%.

In that interview Price pointed out two trends that define how quickly the traditional market is changing. The first trend is that the functions served traditionally by hardware from companies like Cisco and HP are moving to the cloud to companies like Amazon and CloudFlare. The second is that companies are quickly unbundling from traditional software packages.

CloudFlare is directly taking on the router and switching functions that have been served most successfully by Cisco. CloudFlare offers services such as routing and switching, load balancing, security, DDoS mitigation and performance acceleration. But by being cloud-based, the CloudFlare services are less expensive, nimbler and don’t require detailed knowledge of Cisco’s proprietary software. Cisco has had an amazing run in the industry and has had huge earnings for decades. Its model has been based upon performing network functions very well, but at a cost. Cisco sells fairly expensive boxes that then come with even more expensive annual maintenance agreements. Companies also need to hire technicians and engineers with Cisco certifications in order to operate a Cisco network.

But the same trends that are dropping the cost of cloud services exponentially are going to kill Cisco’s business model. It’s now possible for a company like CloudFlare to use brute computing power in data centers to perform the same functions as Cisco. Companies no longer need to buy boxes and only need to pay for the specific network functions they need. And companies no longer need to rely on expensive technicians with a Cisco bias. Companies can also be nimble and can change the network on the fly as needed without having to wait for boxes and having to plan for expensive network cutovers.

This change is a direct result of cheaper computing resources. The relentless exponential improvements in most of the major components of the computer world have resulted in a new world order where centralized computing in the cloud is now significantly cheaper than local computing. I summed it up in my last blog saying that 2014 will be remembered as the year the cloud won. It will take a few years, but a cloud that is cheaper today and that is going to continue to get exponentially cheaper will break the business models for companies like Cisco, HP, Dell and IBM. Where there were hundreds of companies making routers and other network components there will soon be only a few companies – those that are the preferred vendors of the companies that control the cloud.

The reverse is happening with software. Large corporations for the last few decades have largely used giant software packages from SAP, Oracle and Microsoft. These huge packages integrated all of the software functions of a business from database, CRM, accounting, sales and operations. But these software packages were incredibly expensive. They were proprietary and cumbersome to learn. And they never exactly fit what a company wanted and it was typical for the company to bend to meet the limitations of the software instead of changing the software to fit the company.

But this is rapidly changing because the world is being flooded by a generation of new software that handle the individual functions better than was done by the big packages. There are now dozens of different collaborations platforms available. There are numerous packages for the sales and CRM function. There are specialized packages for accounting, human resources and operations.

All of these new software packages are made for the cloud. This makes them cheaper to use and for the most part easier to learn and more intuitive to use. They are readily customizable by each company to fit their culture and needs. For the most part the new world of software is built from the user interface backwards, meaning that the user interface is made as easy and intuitive as possible. The older platforms were built with centralized functions in mind first and ended up with a lot of training required for users.

All of this means that over the next decade we are going to see a huge shift in the corporate landscape. We are going to see a handful of cloud providers performing all of the network functions instead of hundreds of box makers. And in place of a few huge software companies we are going to see thousands of specialized software companies selling into niche markets and giving companies cheaper and better software solutions.

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