Cloudonomics: The Business Value of Cloud Computing, + Website

Competitive Advantage and Customer Value

Assertion 5: Large economies of scale lead to large price advantages.

 

There are two issues with this assertion. First, there are areas within the total cost structure of a provider that may have economies of scale, other areas where costs are scale invariant, and still other areas where there are diseconomies of scale. Consequently, it is not sufficient for there to be economies of scale; they must outweigh the areas where there are diseconomies. Second, the biggest competitor of a cloud provider may or may not be another cloud provider: It may be the do-it-yourself approach. It is not just differences in cost structure that matter; differences in the delivered price from a service provider versus the internal cost of do-it-yourself approaches matter. The challenge is that a service provider may exhibit net scale economies relative to, say, a midsize enterprise, but once additional elements are added to its total cost structure, a service provider actually may end up being priced higher. For example, service providers need to attend cloud computing industry events, put together brochures, hire salespeople and evangelists, hold industry analyst briefings to explain why their approach is the best, account for uncollectible or fraudulent charges where they incur cost to provide service without collecting any corresponding revenue, and so on.

Assertion 6: Scale and innovation enable proprietary technologies and thus sustainable competitive ...