Skip to main content

Pop Goes the Cloud Bubble — Why Today’s Booming Cloud Market Won’t Result in a Dot-com-like Bust

By September 9, 2014Article

Throughout the tech sector, painful memories of the dot-com bubble and dramatic bust still linger, despite it happening more than 14 years ago. Today there is concern that investors are dooming themselves to repeat history with their over-exuberance for the cloud market. 

Many pundits claim the patterns are all too familiar — too much hype and investments in unprofitable companies are signaling a high potential for the cloud market to ultimately go bust. But there are some important differences in today’s marketplace that I believe will help foster continued cloud adoption and minimize the chance we’ll see another drastic downturn. 

Granted there are a few similarities to the dot-com era that can give even the most seasoned investor pause.  There is overwrought ambition and a high level of optimism that every cloud company will be expected to do an IPO. There is a huge influx of inexperienced, but capable, individuals, who will be feeling their way through the market, trying to make the best decisions. And there will be plenty of people expecting quick returns, only to be left disappointed in the end. 

But there are other factors that were not in play earlier, which I believe will keep the bubble from overinflating as the cloud market continues to grow. 

  • More enabling technology — When the Internet was in its infancy, there was a lot of experimenting with how such a revolutionary technology could be used. The Internet was an additive factor, which required companies to figure out how to leverage it in their personal and business lives. While many of the ideas were creative — selling pet food online (remember Pets.com?) — the majority of business models were not well thought out or sustainable.
  • Since the dot-com bust, however, infrastructure has been built out and a wealth of new technology — such as smartphones, ubiquitous broadband and a Cambrian explosion of new applications — has been created. This enabling technology is much more powerful and can be leveraged to make cloud solutions stronger and more beneficial to all users.  Rather than being an additive factor like the Internet was in its early days, the cloud is disintermediating an existing set of capabilities to transform the way people live, work and conduct business. 
  • Smarter investors— After having been stung during the dot-com bust, investors are taking the lessons they learned to ensure they don’t go down the same rabbit hole again. More than a decade ago, the focus was on how many impressions a company could get on its website, and very little attention was paid to how Internet startups were going to monetize those eyeballs. Now, good investors will press companies on how they plan to make money, to show that the business plan is strong and viable. 

    Plus, if you look at the 2014 Internet Trends report from Kleiner Perkins’ Mary Meeker, you’ll see that the number of U.S. tech companies receiving venture financing is down 50 percent, and the aggregate venture financing for U.S. tech companies has dropped 77 percent since 2000. All totaled, the numbers don’t send up the red flags that could signal another coming crash. 

  • Demand for revenue-generating cloud solutions — Not every cloud company will succeed; but for those with a strong business model that can meet the needs of key constituents, there is a definite upside potential. Cloud-related business spending will reach $235 billion by 2017 — up 60 percent from $145 billion last year according to research firm IHS.


    But the near-term progress could be herky-jerky, as organizations figure out how to deliver on the promise of the cloud. Gradually, though, businesses of all sizes, and consumers too, will see proof of how the cloud can help them save money, lower risk and reduce technology spends. Then the evolution will gain even more serious momentum. This pattern is very similar to what we went through when I was CEO of Salesforce.com. At first we were greeted with a lot of skepticism about our decision to deliver enterprise software as a service. But, with a strong business model and clear vision of the benefits we could provide over traditional solutions, we changed the way many businesses purchase software.
     

There is no question that during the dot-com boom too many people overreached the reality of what was possible and sustainable. Today’s cloud market, though, is founded on how existing technology can be used to solve basic problems. The Internet itself is just one tool in a user’s cache, along with smartphones, greater bandwidth, ubiquitous access and mobile apps. 

The cloud is still in its infancy, delivering on innovation and democratizing IT in a way that no one may have anticipated. Past experience with too much hype may lead many to worry cloud will be the next victim in a volatile Internet economy. But with sensible investment, a strong foundation in enabling technology, a focus on sustainable business models to meet customer demand and a path toward revenue creation, the cloud can avoid the fate of dot-coms more than a decade ago. 

John Dillon is CEO of Engine Yard, the leading Platform as a Service (PaaS). 

 

 

 

 

 

Copy link
Powered by Social Snap