Aug 092010
 

How can we frame the cloud phenomenon within the technological innovation literature stream? Can we say it’s a naturally evolving creative destruction process where entrants offer services technologically superior to those of incumbents? Or is it more of a disruptive innovation, in the sense that the same standard servers we’ve used for years are now offered in a simpler and more cost-efficient manner appealing to the less demanding customers? If the cloud business model is technological discontinuity, is it competence enhancing or competence destroying? My conclusion is that the cloud is the fastest growing open innovation ecosystem we’ve seen yet, and however we frame it, it’s an exciting industry to study.

First, this article is not about what is or what is not cloud computing. The debate on what is cloud has been out there since long ago and NIST already has a fairly good and widespread definition. It is still interesting to learn how has the term evolved, but that’s not my focus here. Rather, this article views the cloud as an innovation in the IT industry and draws from the technology and innovation literature stream to try describe it. How can we frame the cloud within this literature stream?

The technology and innovation strategy stream comes all the way from Schumpeter’s (1934) early work on competition through creative destruction processes, in which he described how innovation by entrants with technologically superior products would displace incumbents, and how this cycle would repeat over and over again. In this sense, one could argue that the way that cloud computing is displacing the traditional client/server and even managed hosting architectures is a repetition of the creative destructive process already experienced by the IT industry when client/server architectures displaced the previously common mainframe architectures (Bresnahan et al., 1997). The automated scalability of the cloud simply can’t be achieved with prior IT architectures. The cloud is “destructive”.

The creative destruction framework also assumes that this is a natural evolutionary process. It is bound to happen. In line with this, we could argue that just as how the lowering of computation costs drove the change from mainframes to individual servers and workstations, the reductions in communication costs over the last years have enabled the cloud model to emerge (Siegele, 2008). Nowadays data communication is ubiquitous and in some places already a civil right, but this was not the case a decade back. So the cloud is a new iteration of the creative destruction process. Nonetheless, it is not clear if entrants (as posed by Schumpeter) or incumbents will dominate the new market. Are the entrants really bringing the “technologically superior products”?

Most cloud offerings do not involve radically new technologies. The way the IT stack is managed via APIs is new, but there are no new types of servers, storage hardware, or virtualization software. What the cloud has done new is to offer the servers, storage, development platforms, and software applications as “cheaper, simple, more convenient products or services that start by meeting the needs of less-demanding customers” (Christensen et al., 2000). Christensen’s concept of a disruptive innovation (Christensen, 1997) matches the fact that most of the cloud’s early adopters are startups and small vendors. On the other side of the market, in the cloud’s early days it was commonly said that the cloud was not yet ready for the enterprise or high-end consumers’ service quality requirements (Staten, 2008).

The new business model makes the cloud a radical innovation, since it “involves methods and materials that are novel to incumbents” (Hill et al., 2003). Selling servers on-demand and as-a-service is radically different from selling the hardware assets and then sustaining rents through technical support. Same goes for SaaS vs. the traditional software licensing model. With this in mind, it makes sense to believe that incumbents “will rationally invest less in innovation than entrants will, for fear of cannibalizing the stream of rents from their existing products” (Henderson, 1993; Reinganum, 1983). What is interesting this time around is that incumbents (i.e. Microsoft) are also aggressively entering the cloud. It seems their thinking is that if someone is going to take a large share of this new market with a new business model, even though it may kill their previous business model, it better be them.

With a different lens, the number of new entrants entering the cloud ecosystem makes the cloud computing phenomena also fit Tushman and Anderson’s (1986) definition of a technological discontinuity. They found that a technological discontinuity causes munificence and competitive uncertainty in the environment, which are both clearly seen in the cloud. Current important names in the cloud ecosystem are not the same names that have been around for long in the IT industry. Firms like Amazon.com, Rackspace, Google and Salesforce, established between 1994 and 1999, appeared way after traditional big players in the IT sector and that dominated the client/server paradigm like IBM (1896), Microsoft (1975), Sun Microsystems (1982) or Dell (1984). Moreover, there is an almost infinite list of start-ups coming into the cloud ecosystem. A lot of these start-ups are simply doing cloud washing, but that just adds to the uncertainty in the environment.

Nevertheless, under the technological discontinuity framework, it is not clear if the cloud is a competence destroying discontinuity that will require new skills or a competence enhancing one that will build on existing skills (Tushman et al., 1986). For incumbents, the traditional hardware sales model has been made obsolete, which would favor a competence destroying discontinuity definition in which entrants could take advantage. But, incumbents are still the ones who have the consumers’ trust, the established data centers, the development staff, and the resources to expand and offer new services. These complementary assets may allow them to maintain leadership in the IT industry (Rothaermel et al., 2005; Teece, 1986; Trispas, 1997). The cloud may just be a new way of exploiting these capabilities and thus the competence enhancing discontinuity concept fits it better.

The above mentioned frameworks can all explain part of how incumbents and entrants are reacting to the cloud innovation, but none of them can explain it completely. It is a disruptive service, but offered by both entrants and incumbents. Incumbents are willing to drive the creative destruction process and cannibalize their own offerings. It is a competence destroying business model, but that leverages on many of the incumbents’ complementary assets, and may thus just be a competence enhancing innovation. The cloud is a new kind of innovation that is not being sponsored specifically by entrants or incumbents, and in which the relationships and partnerships fostered among the actors in the cloud ecosystem may be more relevant than the technology itself.

My conclusion is that the cloud is the fastest growing open innovation ecosystem we’ve seen yet. In the cloud players must utilize “both external and internal ideas to create value, while defining internal mechanisms to claim some portion of the value” (Chesbrough, 2005). Adequate strategies in the cloud ecosystem will “allow firms to create value that no single firm could create alone” (Adner et al., 2009). All these nuances just make the cloud computing industry a very exciting one to do research about.


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