When I was in the formative stages of the ideas behind 6fusion, Chan Kim and Renee Mauborgne published their seminal work in Harvard Business Review called “Blue Ocean Strategy.” Blue Ocean strategy, say Kim and Mauborgne, is about the simultaneous pursuit of differentiation and low cost. Established industries, on the other hand, almost always compete on the pursuit of one or the other. When implemented effectively, Blue Ocean strategy-focused companies create demand rather than fight over it. Companies focused on Red Oceans, contrarily, build products and businesses that either carve out niches on differentiation or compete on price.
Microsoft, Google, Salesforce.com and Apple immediately come to mind as great examples of effective Blue Ocean strategies in IT. And as it relates to multi-tenant cloud computing, Amazon Web Services (AWS) is the obvious example.
Most companies that came after those vendors in the respective markets they created are competing in Red Oceans.
What about the market for private cloud software — the idea that privately owned IT infrastructure can be organized into a cloud service like AWS and its early competitors?
Unlike AWS, which clearly re-envisioned the Web hosting industry, you can’t quite find the genesis of a private cloud Blue Ocean. That’s because it doesn’t exist. In fact, it never existed.
The only real Blue Ocean to be created inside the specter of private infrastructure service operation in the last 10 years belongs to VMware. Virtualization of the x86 footprint was and remains the original Blue Ocean strategy behind what has emerged as a market for “private cloud.” Sure there has been innovation around automation and self-service capabilities, but I would argue there hasn’t been anything really transformational or wholly disruptive to speak of since virtualization emerged.
Seemingly overnight the market for “buy my software and you too can have a cloud solution” became a Red Ocean.
I watched with a slight sigh not too long ago while Rightscale sent out a press release basically in praise of itself and one of its principal competitors, Enstratius, piping up on Twitter to point out their platform “technically” integrates with more clouds.
Just before that experience I read a new report published by sharp-shooting analyst Krishnan Subramanian, highlighting the key features and value points of Randy Bias’s Cloudscaling business (funded about a year ago or so by Trinity Ventures). In his report he listed 10 (yes, 10) companies that were the most obvious direct competitors to Cloudscaling — most of which were large established software companies.
Almost at the same time news broke that AWS knock-off Eucalyptus had parted ways with a co-founder and the company’s sales leader. I don’t have any direct knowledge of what transpired there, but you don’t need an MBA to know you part ways with your sales leader in an early-stage company generally for one of two reasons:
- Either he/she isn’t selling enough or
- He/she lost faith in the market’s acceptance of what you have to sell.
Salespeople don’t leave because of creative differences. I’m not saying Eucalyptus is in trouble; but if they were, you could point back to that series of events and connect the dots.
Watching these tales unfold leads me to a few observations.
First, all of these signals clearly point to a Red Ocean market for private cloud technology. This should be a big signal for everyone in the industry, particularly investors. I would be surprised to see more startups in the “buy my software and you too can have a cloud” business secure any meaningful VC financing.
Further, I would expect to see an increase in the rate of M&A activity. Not because somehow the private cloud software market has come of age and the bidding wars have begun. Rather, I think the investor appetite for continuing to invest beyond A or B rounds will start to dry up, forcing once-ambitious startups in this market to find larger companies looking for fire sale acquisitions prior to achieving life cycle maturity.
It’s ironic in its timing, but last week it was announced that Oracle is purchasing Nimbula — one such private cloud software startup. I will be surprised if the Oracle purchase price for Nimbula eclipsed the M&A deals I profiled in my recent post on the subject.
Second, even Kim and Mauborgne would raise their eyebrows at the sheer pace of the waters bloodying in this space. Most industries, even in the IT sector, experience years of solid profit gains before seeing the types of reactionary posturing going on in the private cloud market. Seemingly overnight this market has sprung up with countless competitors pitching feature and benefits fly sheets as though the market for private cloud has always been around.
Lastly, where there are obvious Red Oceans there is opportunity for disruption. The market for private cloud computing is becoming a ripe fruit just waiting for disruption with a brilliant Blue Ocean strategy.
The result will be a toppling of the herd of private cloud competitors just as quickly as they emerged. And by the established cadence of M&A consolidation going on in this space I don’t think I’m the only one that sees that writing on the wall.
This Blue Ocean strategy will be not just the disruptor to the private cloud market, but it will also be the disruptor for the virtualization market currently dominated by VMware.
What constitutes a Blue Ocean strategy capable of rendering virtualization second fiddle? Stay tuned for my next post!
John Cowan is co-founder and CEO of 6fusion and co-inventor of 6fusion’s WAC algorithm. He is regarded as the company’s business model visionary. In addition to 6fusion’s day-to-day management responsibilities, John is responsible for the overall strategic vision and commercial direction of 6fusion. A 12-year veteran of business and product development within IT and Telecommunications, he successfully created new business during the period of telecommunications deregulation and developed and launched new technology products and services globally. Follow John on Twitter @cownet or @6fusion.