Cloudonomics: The Business Value of Cloud Computing, + Website

Consolidation and Concentration

Some believe that within a few years, only a handful of cloud providers will exist. Ultimately, this argument is based on an assumption of significant economies of scale and related factors, such as innovation and branding. If two providers can merge and drive their costs lower, they can undercut the competition and gain market share. Eventually, the industry would end up with a few players or only one mega-corporation (if not for antitrust regulation and countries’ desires to nurture their own domestic participants).

But, as I’ve argued, although there are economies of scale and network effects, I believe that the industry is likely to have a diverse ecosystem of players. There will be Walmart and Target but also 7-Eleven, Neiman Marcus, Nordstrom, Barneys, mom-and-pop shops, and malls, competing respectively on operational excellence but also convenience, premium services, customer service, niche focus, local customer relationships, and breadth of portfolio as an aggregator.

The concentration of firms in an industry can be measured by a concentration ratio (e.g., the share held by the four largest firms in that industry) or the Herfindahl-Hirschman (HH) Index.24 The economies-of-scale argument, blindly applied, suggests that every industry would have a concentration ratio of 100%—say, among the four or eight largest firms—or a high HH index, or a single monopolistic competitor, yet that is not what we find.

Consider hotels, a real-world example ...