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Amazon, Microsoft Azure, Google Cloud: The Big Short?

I’m getting a little worried about cloud computing. Not in terms of reliability and scalability. Cloud computing works and it lowers the barrier to entry for startups (i.e., high-risk businesses) that want to run atop Amazon Web Services (AMZN), Microsoft Azure (MSFT) and Google Cloud Platform (GOOG).

And that’s precisely the problem. It reminds me quite a bit of the movie and book, The Big Short. Here’s why.

The Big Short describes how the 2008 housing bubble and implosion occurred. It basically involved subprime loans (i.e., high-risk consumer home mortgages) getting rolled up into massive bond funds. In essence, the bond funds became polluted or infected with bad mortgages that were time bombs.

The tipping point arrived in late 2007 and early 2008, when adjustable rate mortgages reset at higher rates — and many homeowners couldn’t afford to pay those mortgages. That set off a chain reaction, exploding the bad mortgages hidden within the bond funds and bringing down major banks and toppling Wall Street firms along the way.

Only a select few investors saw the housing bubble coming. They bet against the housing market (hence, The Big Short) and made billions of dollars when the market collapsed.

The Big Short: How It Applies to Cloud Computing

Now, apply the 2008 U.S. housing bubble example to the current cloud computing market.

Right now, cloud computing looks fabulous. The technology works. Anyone can swipe a credit card and start running workloads on AWS, Azure and Google Cloud. In fact, I just spoke with a CSP that’s earning thousands of “free” cloud credits just to deploy his software on Azure, AWS and IBM Cloud.

Awesome. Absolutely anyone can run a workload on the cloud. As a result, cloud revenues at Amazon and Microsoft are skyrocketing.

Sounds wonderful. But isn’t that a bit like the housing crisis? Back around 2005, anybody could get a mortgage regardless of your credit. Heck, take out a second mortgage to go buy a second piece of property. And that all collapsed in 2008.

Those bad-credit consumers in the housing market are a bit like venture-backed technology companies in the cloud market. They are high risk investments. Some will go on to be ginormous successes. But many will implode. At some point, those cloud startups will need to turn a profit, raise more money, exit to a strategic buyer or IPO. But we all know that many companies never find a happy “exit.” They run out of time and money and at some point the venture capitalists say “sorry, we’re done writing checks.”

Don’t Panic. Do Stay Diversified

The big questions:

  • How many of those money-losing startups are running workloads in AWS, Azure and Google Cloud?
  • What percentage of AWS, Azure, and Google Cloud revenues come from those money-losing startups?
  • What percentage of those companies will survive, and what percentage will die?
  • When will the “bill come due” from startups that run out of funding — and what impact will that have on cloud revenues for AWS, Azure and Google Cloud?

Bottom line: Think of AWS, Azure and Google Cloud as bond funds. Each workload is a mortgage in those clouds. Some of the mortgages are healthy investments backed by companies that will pay their bills for the long haul. But some of the mortgages are sub-prime, high-risk offerings that could infect the entire system.

I’m not saying it’s time for a “Big Short” in the cloud services market. But I’m watching. And I’m remaining diversified.

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5 Comments

Comments

    Kirill:

    Good article. If you are interested in learning about how to establish a profitable managed services practice in AWS or Azure, take a look at Making Money in IaaS Clouds e-book.

    Steve Stewart:

    Yes there may be start up failures in the customer portfolios of the 3 kings of IaaS. But thier customer bases appears to be nicely diversified. When I talk to IT leaders at Fortune 500 firms — they all have, or are actively looking to move more workloads to the cloud with these 3 firms.

    I would say a greater risk is any SP trying to compete head on with the 3 IaaS kings. That window of opportunity appears to have closed. That would be a good short.

    Just judging by the energy and attendance that AWS re:Invent 2016 is creating. Would not short that one.

    Joe: Looking forward to hearing your observations from Vegas next week.

    Joe Panettieri:

    Thanks Kirill, Steve: I’ll definitely offer some updates from AWS Re:Invent. In terms of IaaS market opportunity, AWS and Azure are starting to remind me of the dual-platform standards that we often see emerge…

    1. LAN Servers: NetWare and NT
    2. Client-Server: NT and Linux
    3. Mobile: Android and iOS
    4. IaaS: AWS and Azure?

    I know there are other IaaS options (IBM, Google) along with channel-friendly options (ProfitBricks). But in terms of pure commodity IaaS, it’s hard to see anybody closing the gap vs AWS and Azure…
    -jp

    -jp

    Keith Ginsberg:

    Joe,

    Really enjoyed your cloud article and agree with you on the striking similarities between the huge marketing hype around the cloud, and the parallels of pretty much every other bubble going back to the Great Dutch Tulip Bulb Mania in the 1600s.

    Thanks for sharing

      Joe Panettieri:

      Hey Keith: Thanks for the note. I think the difference between a cloud bubble and the housing market bubble is as follows: The housing market bubble popped when a large number of adjustable rate mortgages all reset at the same time at their new higher rates. Basically, the bill came due for a lot of people at the same time — and a bunch of folks couldn’t pay. In contrast, I’m not sure all the venture-backed startups running in Amazon and Azure will have their bills come due at the same time. But we’ll see…
      -jp

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