The idea to create a distributed computing power had been on minds of lot of people for
decades to develop and utilize it to the full potential. It all started in 60’s, when J.C.R.
Licklider had an idea of connecting all the computer networks together to make data
accessible to each and every computing machine from remote locations and make a
‘Intergalactic computer network’, he was also responsible for the development of Research
Projects Agency Network (ARPNET) in 1969. In 1970 IBM was the first among the all other
firms who released virtual machine in the market. A VM operating system allows multiple
operating systems to run on a single host. The term ‘Cloud Computing’ was coined in 1997 by
University of Texas professor Ramnath Chellappa and the firm that became pioneer in this
field and started distributing the services at enterprise level – Salesforce.com. The change of
era was introduced in 2002 by Amazon with Amazon Web Services. These services included
storage, computation, and other offerings.
In 2006 Amazon introduced a new web services known as Elastic Compute Cloud that
allowed small level firms and individuals to rent computer virtual machines at a very cheaper
price, which allowed them to deploy their software on a very high computational machine and
running 24*7*365. This was really something different because it not only saved the
consumers a lot of cost but also provided a better service. In 2009 Google also jumped into
the cloud computing market by offering browser-based enterprise applications. As the new
technology became popular and people started utilizing it more, it grows more by each day.
Section two consist of several definitions of cloud computing. section three reflects this prior
technology from the point of economical view. Also i will explain the struggling issue that
this cloud computing ecosystem according to porters five forces model confronts. Section
four proposes results and Section five concludes opportunities in the economics of cloud
2. Theoretical foundations
There are several definitions of cloud computing but most of them are defined in the term of
IT but less in the terms of literature of Economics. According to United States National
Institute of Standards and Technology (NIST) , the definition of cloud computing seems to be
the most comprehensive and widely accepted (Mell and Grance (2009)) . The current and
15th revision defines cloud computing as:
“Cloud computing can be defined as a model that offers universal network access to a remote
pool of highly configured computational devices that can be servers, virtual machine, storage,
applications, utility such as electricity and services with less expertise and management
instead of building an in-house computing infrastructure” – (Mohamed, Arif . (2009). A
history of cloud computing. Web. 03 Dec. 2014). A brief definition according to NIST can be
find in appendix a).
It is known as cloud computing because the information is stored and processed in cloud
present in a remote location and has a strong connectivity with Internet, which makes it
accessible worldwide. Cloud computing firms offers storage of files and applications to the
users with encrypted channels keeping their data safe.
2.2 Different Types of Cloud Computing Services
Cloud computing is a very vast field and works generally by offering services to the
customers. It consist of three services: Infrastructure as a service (IaaS), Software as a service
(SaaS) and the last one, Platform as a service (PaaS).
Software as a Service (SaaS): Saas involves the licensing of the software application and
make it available to customers. Licenses can be offered on subscription basis and are
generally centrally hosted.( Paul, Gil. “What Is ‘SaaS’ (Software as a Service)?”. Access to the
software is provided to the users through a web browser, with login credentials they have
access to the software. Software is installed on remote external servers, such that users doesn’t
have to install the software on their computer and can access it with internet.5
In 2010 Gartner published that SaaS sales reached $10 billion. (McHall, Tom (7 July 2011).
“Gartner Says Worldwide Software as a Service Revenue Is Forecast to Grow 21 Percent in
2011”. Gartner. Retrieved 28 July 2011).
Infrastructure as a Service (IaaS):Infrastructure as a service involves delivering of entire
computational systems from servers to storage to the customers, they have the choice of
upgrading, modifying and removing computing components though IP-based connectivity.
This service is expensive but is essential when a large amount of data and privacy is
Platform as a Service (PaaS): This cloud based computing service is little bit similar to Saas.
In this service, Platform is being offered to the customers allowing them to develop, run, and
manage application instead of setting up the entire infrastructure on their own. An example
can be developers can create, change or modify application on Google Play Store, But they
don’t owe it.
2.3 Literature Review
Cloud computing started coming into the light from the last decade cause of the emergence on
interest arising in several firms to come up with new IT advancements that could help in cost
reduction and better quality services. Cloud computing is generally a collection of
virtualization, cluster computing, bundled networking and high computational data servers
established at low cost locations with an uninterrupted supply of electricity. This business
industry operates on offering of service-oriented software to the clients on the basis of service
level agreements(SLA). If these SLA’s are not met it means terms of business agreements are
According to John McCarthy, The rate of change of computing to a service oriented model
started to come into lime light from 1960s and has been favored by public utilities for
adoption , good examples can be such as the electricity or telephone system. Martin
Greenberger did a little research and commented in 1964 that;
“Barring unforeseen obstacles, an on-line interactive computer service, provided
commercially by an information utility, may be as commonplace by 2000 AD as telephone
service is today” (Qian (2009), Buyya et. al. (2008)) .
Cloud providers are able to save the expense from economies of scale by using statistical
multiplexing, virtualization and clustering which leads them to exploit the cloud computing to
wide range. Cloud providers, in order to setup a cloud station require large real estate with
uninterrupted availability of cooling system and electricity. While these machines require a
large amount of electricity, they generate excessive quantity of heat and data, therefore
availability of power grids, labor cost of an expert to maintain, Maintenance of cloud
infrastructure and high bandwidth network are economical points of cost savings and
economies of scale (Hamilton (2008)). Bandwidth also plays a major role in traffic
management of data from cloud station to client. Load Balancers are installed at every cloud
station to make sure that the flow of data keeps continuing according to the clients demand.
Encryption of the data is also a vital key factor that holds weight, because certain organization
doesn’t want their data to be public. Economies of scale affects the economies of scale; and is
to a vast extent is paid attention to, by cloud providers, cause security breach widely affects
the reputation of a firm.
So far, Economist haven’t shared much information around regarding the topics like
empirical literature or applications of theoretical industrial organization. Certain firms like,
Boundary, Couchbase, Cloudkick, Dotcloud, Fluid Info, Open Stack and Tidemark have
stepped into this market and are growing exponentially.
Forbes conducted a study and according to it market size for enterprise cloud-based services
will grow from $12.1 billion in 2010 to $35.6 billion in 2015. The year-on-year growth rate
will be 43% in 2011, but will not increase to 13% over the next five years. Software-as-a- service (SaaS) will generate 70% of revenue in 2010, while 30% will be related to
infrastructure-as-a-service (IaaS) (Evans, Bob. “Oracle Cloud Tops 10,000 Customers and 25
Million Users.” Forbes. Forbes Magazine, 18 Jan. 2013. Web. 09 Dec. 201). According to a
report by IDC states worldwide revenue from public IT cloud services exceeded $16 billion in
2009 and is predicted to reach $70.5 billion in 2017, representing a compound annual growth
rate (CAGR) of 27.4 percent. Worldwide spending on public cloud services will grow at
19.4% Compound Annual Growth Rate (CAGR) from nearly $70 billion in 2015 to more than
141 billion in 2019. Worldwide Public IT Cloud Service Revenue in 2018 is predicted to be
$127B. SaaS and PaaS portion of cloud hardware and infrastructure software spending are
projected to reach $55 billion in 2026 (Curtis, Joe. “10 Top Cloud Computing Providers for
2014.” Computer Business Review. N.p., 10 Oct. 2014. Web. 09 Dec. 2014)
3. Five Forces of Competition
Michael Porter’s Six Forces of Competition gives an insight of industry driving forces of
competition and factors that keeps a lead and determines profitability(Wheelen, Thomas L., J.
David Hunger, Alan N. Hoffman, and Charles E. Bamford. “Environmental Scanning and
Industry Analysis.” Concepts in Strategic Management and Business Policy: Globalization,
Innovation, and Sustainability. 14th ed. New Jersey: Pearson Education, 2015. 104-08. Print.).
Based on Porter’s model. Five forces of competitions are as follows:
1. Competitive Rivalry
2. Threat of New Entrants
3. Threat of Substitute Products or Services
4. Bargaining Power of Suppliers
5. Bargaining Power of Customers
According to Porter, these Five forces are the factors that determines how profitable the
industry is in the market6.Further these forces can be segmented into the category of low,
medium and High strength depending upon the impact these forces have on this particular
industry. The aspects and the key points on which a competitor can have an effect can be,
price discounting or improvement of service quality.
I. Threat of New Entrants
Cloud computing market has just emerged to the surface from the last decade and this market
is growing day by day, because of the new entrants popping up, the level of competition also
rises. As there is no entrance barrier in this market, it is relatively easier for the entrants to
setup and begin with economies of supply. It also depends on the type of cloud computing
market, the entrant is competing in. These cloud computing markets can be Saas, PaaS and
IaaS. Saas and PaaS has more entrants as compared to the IaaS because the fixed cost
required to run these market is lower in comparison to Traditional IT ( Loeffler, Bill. “Cloud
Computing: What Is Infrastructure as a Service.” Resources and Tools for IT Professionals.
TechNet Magazine, Oct. 2011. Web. 10 Dec. 2014.). Less entry barriers means that there is
high competition, decreased profitability and less uniqueness. Possible entrance barriers can
be: Government Policy, Brand Name. To not to interfere with the government policies and
regulation, cloud vendors implement hybrid clouds. Smaller companies and startups doesn’t
require much of financial budget and expertise to jump into this market and also sometimes,
once the customer gets used to the software based application it becomes difficult to switch to
another cloud unless training is provided (Buchanan, Jim. “Cloud Computing: 4 Tips for
Regulatory Compliance.” CIO. CXO Media Inc., 8 Aug. 2008. Web. 10 Dec. 2014.)
Therefore, i conclude that there are few entry barriers and according to porter five forces of
model the competitive strength can be rated Easy to moderate, because of the low expenses
and less expertise required for operations.
II. Rivalry among Existing Firms
As new entrants have started to join this market, there is one another factor that affects the
competition, Rivalry among existing Firms. As there are new articles being published with the
headlines about cloud computing industry costing almost small amount.
There are more than 200 recognized cloud computing firms like Amazon, IBM, Red Hat that
have broken down the fraction of cloud computing platforms to certain divisions in order to
stay ahead in the market. Microsoft has three divisions for cloud provisioning such that office
365, Azure and Microsoft Web services and there are other firms also that hold few
percentage of the market shares.
The rivalry among these firms is to utilize the cloud computation to the full potential with a
minimal cost saving structure, an example of this thing can be the rivalry among Amazon and
Google, Amazon started with cloud computing in 2002 with Amazon web services and again
launched another advanced cloud computing service Amazon Elastic Computing (EC2) in
2009, whereas Google started 7 years after Amazon with SaaS services such that Google
documents , Google+ and Google drive and at that time most of the market shares were
already under Amazon. Amazon already had the foresight against the competitor, cause of its
vision and mission ( Mims, Christopher. “Amazon and Google Are in an Epic Battle to
Dominate the Cloud-and Amazon May Already Have Won.” Quartz. Air Supremacy, 16 Apr.
2014. Web. 10 Dec. 2014.). Red hat is yet another company is aggressively competing in this
market with Open source cloud computing.
Market segmentation is done on the basis of services they offer. The fiercest competition
among all the firms is for Infrastructure-as-a-Service cause despite having the same product
and same customer, there is a lack of creativity. As level of competitiveness rises because of
similarity, firms tends to compete with each other on the basis of price wars. Exit barriers are
low in this market because of the locked in strategy used by cloud vendors because once the
customer decide to subscribe, they are locked-in to the cloud computing company.
Yasin, freelance technology writer for GCN, did a survey in 2011 and found out that almost
ninety percent of the firms in cloud market doesn’t have exit strategy (Yasin, Rutrell.
“Agencies Lack Cloud Exit Strategy.” GCN-What’s Missing from the Cloud? An Exit
Strategy. Media, Inc., 23 May 2011. Web. 11 Dec. 2014.).
As the expenses aren’t high and not that intense expertise is required entrance to this market is
smooth which makes quiet difficult to segregate companies from each other, as the products
offered are not that different. As result, the rate of competition in this category is relatively
III. Threat of Substitute Products or Services
The challenging opposition faced by cloud computing is from Traditional IT and Open- Source Computing.
To enter into this market, entrants are doing more and advanced research to cut down the
prices and offer better quality services. This widens the scope of R&D for different products
and services. Certain firms like Hitachi, Seagate develop diverse offline storage products with
better data transfer speed and less price which also is a challenge for cloud providers cause it
acts as a private storage at the same time subject to personal access only.
Customers subscribed to firms like Google, Microsoft, Oracle are “locked” to certain products
and services and is relatively tough for other firms to attract customers towards their services
and products (Rahman, Shibley. “The Business of Cloud Computing.” Shibley Rahman- Business Administration. N.p., 20 Nov. 2010. Web. 11 Dec. 2014). Also cloud computing is a
kind of virtualization, the traditional IT tries to tackle this thing with installation or
deployment of multiple PC components for customers. This way of doing business is
expensive but it’s still considered as a substitute.
Other than that one of the factor is, Open source cloud computing companies such as Red
Hat. As the customers are locked in to the firms like Amazon or Google and have to pay a
substantial amount of fee but this is quiet opposite with Red Hat as they charge very little for
Availability of IaaS is limited, therefore there aren’t many substitutes or replacements
available to fulfill customer needs. Limited substitutes are a positive for IaaS services. The rating of threat of Substitute products or service is rated high competitive force.
IV. The Bargaining Power of Buyers
Like other competing markets, customers also has the power to shift the prices of products
and services. As shifting from the traditional IT to the cloud computing, it becomes easier to
manipulate low prices from cloud vendors. Bargaining power of customers depends on two
things: Customer size for the particular demand and concentration of customers in that
particular geographical area (Fung, Han Ping. “Using Porter Five Forces and Technology
Acceptance Model to Predict Cloud Computing Adoption among IT Outsourcing Service
Providers.” Academia.edu. SciKnow Publications Ltd., 2 Sept. 2013. Web. 11 Dec. 2014).
Customers have the most power to affect Software-as-a-Service (SaaS) because of its low
switching cost and availability of several other products in this price range that can be
selected (Marc. “Bargaining Power Of Buyers | Porter’s Five Forces Model.” Entrepreneurial
Insights. N.p., 24 Aug. 2014. Web. 11 Dec. 2014.).
Platform-as-a-Service (Paas) has the least bargaining power because of the less abundance of
programming languages. In order to develop , modify, edit or up gradation of software,
programmers are required, which increases the complexity.
Infrastructure-as-a-Service (IaaS) has the also the least bargaining power, because the cost of
all the hardware, electricity, network bandwidth, management of the entire infrastructure is
expensive. Being a limited option has a least power for buyers. If consumers like the services
offered it increases the chances of getting paid more for that service.
Buyers as a high competitive force because buyers can bargain and costs to switch are
V. The Bargaining Power of Suppliers
Bargaining power shouldn’t be of much concern to the suppliers cause the ultimate goal is to
have and retain cutomers. Generally supplier tried to have a bargaining power in the market
by raising the price of the product or by reducing the quality of the product. This is entirely
opposite to the conditions mentioned in the bargaining power of buyers. There are certain
service areas where the suppliers have the power to control the price variation, but it’s limited
cause increasing the price also generates the fear to lose buyers.
There are three types of “as-a-service” model as we have discussed – Iaas, PaaS and SaaS. In
Infrastructure-as-a-Service, Suppliers have a moderate bargaining power because of the brand
loyalty and limited options available in market. Firms like Amazon and Google are already
doing good rendering services of IaaS. It’s not that difficult to raise the bar in IaaS because it’s
difficult for buyers to setup their own data centre and power services. Data centres consist of
large number of computational machines such as servers, routers, switches, monitors and a lot
of network cables packed with a lot ventilating devices and cooling system to prevent them
from overheating, one need a large grid of power. Consumption of power increases every
year, severe the load on grids thus affecting the cost associated with the power grid and IaaS.
In PaaS, also less options of language selection makes it also a positive key factor for
suppliers if they want to increase the price and the advantage of “lock-in” as we already
discussed earlier, allows a firm to retain a customer for a particular time period, while
receiving a generous amount. Creating a successful software requires a long period of time,
therefore it can be a little difficult for smaller firms to have a supplier power over this service.
If talk about SaaS, suppliers tend to have the least power because of the option: Low
switching cost (Bhowmik, Paragranjita. “Emerging Benefits and Trends of Cloud
Computing.” Competitive Landscape of Cloud Computing. N.p., 25 Mar. 2013. Web. 11 Dec.
2014 ). If a customer is not satisfied with the services there are several other options at low
cost are available, therefore quality service and on time delivery is necessary for suppliers.
The bargaining of suppliers can be rated as a moderate competitive force.
Find the pie chart in appendix. Industry Profitability
Cloud computing is a new phase of technology that has continued to evolve from the last
decades. As the setup cost of this industry isn’t that much high, so more and more companies
are switching to this advance and secure technology
By taking the Herfindahl index of the few top players in the market, the score was found to be
more than 1800, which implies that it’s a monopolistic market. and is profitable but at a slow
pace. Amazon, Microsoft, Alibaba, Google, Rackspace have been in this market for quiet few
years and seems to have been climbing up in terms of market share. HHI=Sum of Square of all market shares = 20.23%
Find the table in Appendix.
Cloud computing is a technology that is still in a growing phase and is evolving rapidly as
more and more companies are eagerly showing interest toward this field. It is not also
changing the phase of technology but also the IT industry. From technical point of view, the
little but magnificent changes in Cloud technology made several adjustments possible that
couldn’t be achieved previously. In economic sector changes like cost-reductions, rapid
scalability and flexibility are revolutionary. More and more companies are merging with other
companies to stay in competition, research all together and have more market share. In terms
of economics cloud computing can be divided into ‘wholesale’ and ‘retail’ cloud application.
Whole cloud application are primarily focused towards Business partners and Retails cloud
application is more concentrated towards consumers. When focusing on wholesale cloud
factors like large assimilate date projects, low costs and expansion of firms are considered,
while in retail applications are more designed in way that it transform the way the consumers
socialize, communicate, and consume entertainment .
IaaS, PaaS and SaaS are moving forward with technology to release better products as a
service to the consumers and the enterprise communities. Big firms that have successfully
understood this market now tend to reduce the competition by merging or acquiring little or
big companies, so that consumers can be retained. New technical advancements and
improvements needs to be done in order to offer better quality of service.