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Could the cloud bubble burst? Is there a storm brewing on the horizon?

Whilst some might say the cloud market is maturing, we believe increasing competition will have a destabilising impact.  How much of a risk are you taking moving to the cloud?  What can you do to protect yourself?

The summer of 2013 saw some of the first cloud casualties.  Small providers, Nirvanix and Megacloud went bust.  Unprepared customers scrambled to move their services and data to other providers.  Even well know providers such as Symantec and more recently Rackspace have pulled out.  Rackspace was a pioneer in the industry and had invested over $20bn in cloud.

This puts into perspective just how big you need to be to compete in this market.  Rackspace invested $1.4bn last year, but this was dwarfed with both Google and Microsoft putting in ~ $20bn each.  A price war started this spring.  Google reduced prices by over 30%. Amazon and Microsoft swiftly followed suite.  Google cut prices by a further 10% in October.  You can see why middle marker players found the competition too hot to handle.  The reported growth rate is 50% but with such aggressive price drops, you have to wonder if any of them are making any money.  If that is the case, are they potential abusing their market dominance?

There are also uncomfortable parallels with the banking crisis of 2008/9.  The creation of complex financial instruments did not take into account unlikely scenarios.  Suddenly these rare events occurred and markets became illiquid.  This led to banks needing to extract themselves from positions moving rapidly against them at huge costs.  Cloud services have high initial build costs, so most oversell their capacity.  Given the rapid increase in demand, this will inevitably increase prices in the infrastructure market as they try to buy the short fall in capacity.  This could push some providers over the edge.

So what you can do? Firstly, the obvious point in this case is that size matters.  Larger providers with deep pockets have a wider diversity of revenue and are much more likely to withstand the pressure.  Conversely, as the shake out occurs, an oligopoly position could develop which might lead prices to push back up again.  Secondly, it means that expertise in business continuity/ disaster recovery planning, such as we have at DMW, is still as critical as ever.  Whilst some commentators and advisors have suggested that cloud has built in DR protection, I hope the points we have made in this article will make you think again.