Cloud Computing & Natural Monopolies

by on February 24, 2010 · 10 comments

photo credit: Flickr user HarshLight

Mike Kirkwood of ReadWriteWeb recently wrote a piece asking the question “Will One Company Become the Dominant Player in Cloud Computing?” Kirkwood offered a series of arguments both for and against the idea of the market being one where a “natural monopoly” might occur and a few of his arguments are worth exploring in greater depth.

Addressing the potential for vendor lock-in (think Outlook .PST files), Kirkwood points out that cloud customers may demand data portability:

If customers demand solutions where they can move from vendor to vendor freely, it will impact the landscape. Companies with cloud solutions in the marketplace could be required by these customers to remove barriers to moving data and services between different entities.

Kirkwood should know that this is already happening.  CRM solutions like HighRise by 37Signals and cloud-based office solutions like Google Apps already have these features built in.  One of the biggest reasons that many companies are moving to cloud-based applications is because they’re weary of being locked-in to solutions that hold their data hostage.  It’s doubtful that these exit doors will disappear when things like office suites, CRMs, accounting software, and other software categories are almost exclusively offered as cloud applications or web apps.  Customers already expect and will continue to demand the freedom to move their data around—a new culture of data portability is being created as a part of the shift to the cloud and that consumer expectations may be permanently altered because of it.

So long as data is portable, it seems doubtful that any vendor will be able to gain anything near a monopoly status through the use of tired proprietary software shenanigans.   Huge capital expenses, like those associated with setting up an Exchange server and installing the latest version of Outlook on hundreds of desktop machines is also a thing of the past.  The massive upfront costs are being replaced by cheap subscription models that easily scale as a firm’s need for a given sort of software grows.  This means switching to a new vendor in the cloud involves little more than an export and important of data, followed by an email supplying co-workers with a new URL, username, and password.

The one area that Kirkwood doesn’t explore which may have some potential for a would-be monopolist is exploiting possible network effects—the idea that everyone uses brand X because everyone else uses brand X.  This makes sense when you think of something like Facebook, where the sole value of the product is derived from the fact that a lot of people use it—otherwise why would anyone use the abysmal site?  But does this sort of logic apply to accounting software?  Would I choose to use something from Intuit instead of FreshBooks because my friends use it?

No, but I might choose a software titles because my potential employees are more likely to already be familiar with it and those potential hires might choose to learn one software title over another because employers are more likely to be using it.  This is the kind of a snowball effect that could give one vendor an advantage that has nothing to do with the quality of their product.

But here too I see the culture of the emerging cloud applications market being a strong force against this kind of software/employee compatibility lock-in argument.  Aside from wanting to flee the world of proprietary standards, expensive servers, in-house IT staff, client-side software, and other technological nightmares that come with so many non-cloud applications, companies are fleeing the world of terrible user interfaces.  The cloud based-apps that I use—BaseCamp, HighRise, MailChimp, Google Apps, FormSpring, WuFoo, Mint, as well as many others—are all orders of magnitude less daunting and needlessly complex than something like the UX abomination that is the Microsoft Office suite.  (Hint: If the “plain and simple” guide to your software runs 384 pages, you’re doing it wrong.)

Cloud software creators seem to actually care about user interface, somewhat negating the notion of user training related network effects—fostering what I will now officially dub “user portability.”  Again, one could argue that when some software categories become predominantly cloud-based, and cloud software creators are not longer selling the concept of web software itself along with their specific services, that this emphasis on user interface could be phased out in favor of making more “ribbons.”  But because of the new culture of data portability, user portability is likely to be maintained as well because bad user interfaces will be punished through losing customers to a better UX that is just a export, import, and quick staff-wide email away.

I’m really interested to hear my fellow TLFers and our readers’ thoughts on this issue.  Is the cloud a near-perfect market or am I just a naive idealist who doesn’t see the vapory beginnings of a future cloud monopoly looming in the distance?

  • jhn

    I agree with you that web apps don't have many direct network effects , al la Facebook.

    You example of Word is good, though: Word doesn't have a direct network effect, but people still use it. Even today it's a pain to share Word docs with third-party apps that technically read them, like OpenOffice and Pages. It thus benefits from imperfect compatibility, that is nonetheless good enough that MS can claim there's no data captivity. Real standards don't have this kind of dependence on a single editor–particularly not text-based standards like HTML etc, as opposed to binary blobs. With web apps, data import/export is nowhere near the same level of data sharing allowing by saving a file to a file system and having it be read by multiple applications. (Additionally, the indirect network effects of user familiarity, tech support, etc, are quite strong.)

    I don't think Google is very hard to switch from, but then I'm a user. It sucks to be so dependent on a single portal for a lot of web players. Thus, the (baseless) antitrust suits.

    So, on balance, given imperfect data sharing, web apps are probably just as competitive as desktop apps within a single platform when the web apps depend on sharing data. Web-based imperfect and kludgy data-sharing is balanced out by not having to install anything locally.

    (One-off apps, of course, are enormously competitive, but hard to monetize.)

  • Berin Szoka

    It's worth noting, Cord, that Microsoft just yesterday made good on its promise to open-source the PST format. So Microsoft seems to be getting serious about data portability, just as Google has done with their cleverly-named Data Liberation Front.

  • cordblomquist

    That's great news if it's truly open-source, but I really can't tell if that's the case from reading the Microsoft documentation. They've made specs available, but what about the IP rights? Could I really write a .PST converter and distribute it under the GPL?

  • Berin Szoka

    Don't know but does it really matter? The important thing for data portability is that PST files can be used to take email, contacts, calendars, etc. in and out mail servers and clients, thus facilitating greater competition at every level of these services. For example, once i can just import a PST into Google Apps, it becomes a lot easier to switch from Exchange to Google Apps—or vice versa.

    Data liberation!

  • cordblomquist

    These issues are always tricky when you're dealing with Microsoft, but if the specs are out there and it's possible to build a .PST converter, you can bet that Google will be all over it.

  • cordblomquist

    These issues are always tricky when you're dealing with Microsoft, but if the specs are out there and it's possible to build a .PST converter, you can bet that Google will be all over it.

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