So yesterday I spent the day thinking about things that influence, drive and ultimately will cause change in the world of cloud pricing. I considered a number of issues that I believe are going to be front and center in the pricing argument.
What I came to realize, however, out of the day was that the causality of pricing trends may not have as much impact as I’ve thought in the past.
A squeezed market in the end loses innovation steam. There are some things that still require a massive dose of R&D. Those are the things that are lost in an extreme commodity market.
The Red Ocean. From the great book the Blue Ocean Theory theory is an interesting concept that of the over competitive red ocean. You don’t jump into the red ocean unless, in the end you are willing to live with razor thin margins and not a lot of potential for growth in the margin.
You have to have competition. Monopolies in the end control both supply and price. But the reality of the red ocean is that it is a launch pad for innovation within reason. You have to cut the operational costs in order to continue to cut the external or customer cost. There is innovation there but it is innovation of desperation. The pressure of innovation by desperation in the end is that if you fail, you fail.
That pricing pressure of a Red Ocean and the resulting innovation by desperation is a pressure that most organizations seek to avoid if at all possible. There are tremendous risks on the back side of desperation. The biggest being as stated above when you fail, you fail. But there are others that appear as well. These pressures force many companies to reconsider their market position.
In the cloud space today there are a number of vendors that are positioned to absorb red ocean costs by moving the R&D required for innovation outside of the desperation component (the red ocean business).
Based on that shift I believe the interesting innovations are actually going to come from the smaller organizations that are in the Red Ocean up to their necks and have to innovate to survive. Without the pressure of survival desperation innovation just doesn’t happen.
In order to innovate out of a Red Ocean you have to create something that doesn’t exist in the market today. I believe there is a small company about to produce that.
Andersen’s law of innovation: The rate of innovation remains constant until there is a change in pressure applied or capabilities available.