Threat of New Entrants: MODERATE - HIGH
Different type of cloud service model has different levels of entry barrier.
For Infrastructure-as-a-Service, entry barriers are high due to the high fixed costs of developing and maintaining the infrastructures. Also, the type of services IaaS provide are more difficult to differentiate than those of PaaS and SaaS, which can tailor more towards certain industries or certain functions. There are fewer players in the field, and successful startups tend to be acquired by industry leaders to eliminate competition. As of June 2017, Amazon Web Services and Microsoft are the two top leaders that dominate all levels, Google, Oracle, IBM, and Alibaba Cloud trailing.
Similar to IaaS, entry barriers of Platform-as-a-Service are also high. Although most PaaS do not need to develop or manage its own infrastructures, they need to build the code or meta-data supported platforms for software application developers to utilize. The high development and maintenance costs and the relatively limited service types made PaaS field also dominated by major players, many of which coincide with IaaS dominant players.
For Software-as-a-Service, the entry barriers are very low. There are many new entrants every day, in every industry, and targeting serving nearly every possible function. The low expense and expertise requirement of developing software continuously reduce the barriers of entry. Yet, since SaaS has already reached the plateau of productivity, only startups with top technology, best market integration, and consistent revenue streams will continue to survive the battle. The majority of other startups either fails or gets acquired by other bigger players.
The overall cloud computing landscape is characterized by high competition, decreasing profitability and prices, high customer churn rate, frequent technology upgrades, and decreased creativity for a unique business.
Bargaining Power of Suppliers: LOW - MODERATE
IaaS and PaaS : LOW - MODERATE
Only a few years ago, bargaining power of suppliers could be from moderate to high, but not anymore today. With frequent mergers and acquisitions activities, major players become bigger than ever, with their services covering all aspects a customer can possibly ask for. Before, suppliers might have the bargaining power as they can still threaten to leave one cloud company, but now all suppliers lure to do business with AWS, Microsoft and Google.
SaaS : LOW
Bargaining power of suppliers to SaaS companies is limited. The IaaS and PaaS industries offer almost interchangeable services and charge for similarly low prices. SaaS companies have a variety of suppliers they can choose from. The more developed IaaS and PaaS industries are, the more limited the bargaining power of suppliers will be.
Bargaining Power of Customers: MODERATE - HIGH
IaaS and PaaS : MODERATE - HIGH
For IaaS and PaaS companies, although the threat of new entry is somewhat low, they are still in an extremely competitive market. Competing on fees and features, companies could easily lose new customers by not being on the top of the game.
Notice, I said ‘NEW’ customers, because once a customer is on board with one cloud provider (IaaS or PaaS), it is more difficult for it to get “off board.” IDG Enterprise had its surprising discovery in its 2014 Cloud Survey, that when asked if switching cloud providers is less difficult than switching on-premise provider, 29% of IT leaders said negative compared to 22% of non-IT leaders. Moreover, more than 40% of the non-IT leaders simply did not know. Most cloud providers have different network bandwidth provided to their virtual machines. Switching network bandwidth can have a direct impact on the software’s performance, and the re-integration process is expensive and tedious (just considering the amount of data a customer needs to move from one provider to the other). Therefore, for existing customers, bargaining power of suppliers is still quite high.
SaaS : HIGH
I recently saw a really good description about the SaaS market on SaaScribe, and it is true. The SaaS market is one of the paradigm of how to hand over as much as power to the customer as any industry could possibly achieve. First of all, many SaaS products are free of charge to users, or at least have a free trial before deducting money from users’ accounts. The amount of information available to users before payment means that if the product cannot meet the satisfaction of the user, it is unlikely for the company to get any revenue from that user in the future, because switching to an alternative SaaS provider with similar product is so easy. In this situation, product differentiation is the key. Yet, technology does not have patent. Once you had a successful launch of product, there will be 20 identical SaaS products on the market the next day, and with cheaper price! This is all due to the draining power of SaaS suppliers, those IaaS and PaaS companies. With lower cost of software development, new SaaS companies will blossom like flowers in the spring. But how long can each of them last?
Threat of Substitute Products of Services: LOW
The main substitute for IaaS, PaaS, and SaaS is the traditional on-premise IT products. IDC predicts, that by 2018, at least 50% of all global IT Spending will be cloud-based, with 60% of all IT Infrastructure and 60-70% if all software, services, and technology spending on cloud by 2020. Cloud computing is entering into our main life as a necessity to survive the competition or to live an easy life, rather than some new high-end technology that only the tech people can enjoy. In 2017, of the fortune global 50 companies, 48 have publicly announced their cloud adoption plans. Therefore, the external threat of substitute products of services is minimal.
Competitive Rivalry: HIGH
Jason Lemkin, founder of SaaStr, once said, “competition-to-the-almost-death seems the norm in SaaS.” One step behind, the entire enterprise is risking the fail next day. For the overall cloud computing industry, competitive rivalry is extremely high.