On Cloud Computing Business Models

Last month I wrote a weekly post on the technology industry noting that the paradigm shift to cloud computing is in full swing. The most important facet of cloud computing in terms of business model disruption is its effects on platform stickiness and network effects. Basically, the cloud reduces them and means many incumbent businesses with barriers to entry in their existing model will find themselves disintermediated.

Here’s the 30,000 foot view. In technology, the phase transitions in computing have taken place predominantly because of advances in four areas: processing speed, network bandwidth, storage costs and form factor mobility. As computers have become faster and more mobile and as storage space and bandwidth have become cheaper and more plentiful, a whole new world has opened up. That world is one of “Streaming Content to Any Device, Anywhere and at Any Time“. And increasingly this is the world of today as opposed to the world of tomorrow.

The most important aspect of this mobile computing world is flexibility, both in terms of operating system or platform as well as in terms of space/time mobility. People are now able to compute and access their data and other people’s data on a number of different devices, anywhere in the world at any time. That’s huge because it means that your barrier to entry as a company was just knocked over. Here’s a good example from the world of taxi drivers:

Taxi and limousine regulators from 15 U.S. and Canadian cities plan to release proposed guidelines Friday aimed at reining in some of the smartphone applications and online services that are radically changing how customers hail cabs.

[…]

The proposals also take aim at other practices embraced by startups, such as using drivers without hack licenses and implementing “demand-pricing”—that is, charging more for a car when more customers are seeking a lift. Those practices aren’t allowed in standard taxi and livery operations and shouldn’t be in startup markets, Mr. Daus said.

“The regulators really resent being branded as cronies and antitechnology,” Mr. Daus said. “It couldn’t be further from the truth. But they have to do their job and make sure it’s safe, customers aren’t being ripped off, and people aren’t being hurt.”

Uber, Zimride, and SideCar were fined $20,000 apiece Tuesday by the California Public Utilities Commission for operating without proper licenses. Uber was also sued by San Francisco cabdrivers, and is fighting Chicago rules it said would threaten its business model.

Here’s what happened. In the old days, taxi companies had oligopolies due to regulatory controls. You needed a license from government to operate a taxi. It’s exactly the same model banks use. The ostensible reason for this was to regularize the market by putting controls on customer service, business practices and operating standards on everyone who operated a taxi. In a market like New York, the tourist areas are only served by licensed professionals who are supposed to know how to get all around the city efficiently and without running up fares through dodgy practices like meter tampering or circuitous route choice. Outside of central and downtown Manhattan, a fleet of unlicensed livery cabs serve the public.

Anyone who knows big cities like London, New York or San Francisco knows that these unlicensed operators are often just as good as the licensed taxis and are usually cheaper and cleaner; riding in style is not just for highly paid executives. I kept a list of go-to companies for pickups when I lived in New York and London. Here’s the thing though. In a world of always on communication and smartphones, an unlicensed operator can get to you and take you from point A to point B almost as quickly as a licensed taxi. Why wait 10 minutes on the corner in the cold to hail a taxi when you can just call one of these smartphone-enabled services to meet you at the corner in 5? People are now seeing that this works and so licensed taxi drivers are up in arms about it.

None of this would have been possible without cheap and high-powered mobile bandwidth. Hence the title of last month’s post: Cheap and high-powered mobile bandwidth will kill many outdated tech business models.

Therefore, for me companies like Facebook and Zynga are less interesting. They are more about Internet adoption rates and network effects. I am more interested in companies that are riding the cloud computing wave like Dropbox. Here’s a company that would never exist without a highspeed mobile cloud and it actively facilities the erosion of barriers to entry while increasing its own network effects.

Here’s how CEO Drew Houston put it to Tech Crunch:

Drew says Dropbox is fulfilling the promise of the cloud. For users, he believes “Dropbox is the first day of the rest of their life. I can take my laptop, throw it in the water, go to the Apple store, and start over like nothing happened.”

It really hit home for Drew when he heard the story of a panicked father who’d recorded the first years of his child’s life on his phone. Then one day he was pulling clothes out of the washing machine, heard a clanking sound, and saw his memories of his daughter dripping out of the phone. Then he remembered he’d turned on Dropbox Camera Upload, and all those moments were safe and sound.

Dropbox’s scale and that mission, to preserve our digital histories, are attracting great employees.

Translation: it doesn’t matter where I am, I always have access to my data. That’s a powerful paradigm. And the thing that makes this so powerful is that people want access to other people’s data too. So the more users you have, the more important your service becomes as a gateway to data from colleagues and friends and third parties.

I have used all of the major online data storage companies and I have increasingly gravitated toward Dropbox not just because of the network effects (which I think are still too small to be of over-riding concern). I have also found that Dropbox as the biggest player, also has the best integration into mobile and desktop applications, making it easier to use and making data stored there easier to access.

In my view, Dropbox is a prototype of the kind of business model we will see with Cloud Computing: disruptive, ubiquitous, data-centric, and dependent on high bandwidth low cost mobile data. Watch this company.

About 

Edward Harrison is the founder of Credit Writedowns and a former career diplomat, investment banker and technology executive with over twenty years of business experience. He is also a regular economic and financial commentator on BBC World News, CNBC Television, Business News Network, CBC, Fox Television and RT Television. He speaks six languages and reads another five, skills he uses to provide a more global perspective. Edward holds an MBA in Finance from Columbia University and a BA in Economics from Dartmouth College. Edward also writes a premium financial newsletter. Sign up here for a free trial.

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