Seeding the Cloud

First-Mover Advantage: Technology and Market Dependencies

One of the most compelling models in first-mover advantage develops its dependencies on the pace of both technological change and market expansion (Suarez, 2005). Figure 1 presents first-mover advantage in four quadrants with distinct technology and market characteristics.

Look at the two extreme quadrants of technology and market dependencies, as shown in Figure 1. In “calm waters”, both the pace of technological change and market expansion are slow. A durable first-mover advantage can be secured in this quadrant where the critical success factors are a first-mover claim (Foster, 1986) and brand strength. Arguably, the first virtualized machines fell into this quadrant with the IBM CP-40 and CP-67 in 1966, followed by hardware-assisted virtualization with the IBM System/370 and VM/370 OS in 1972. IBM’s brand strength and first-mover claim helped the company flourish in this space with a durable first-mover advantage.

In the other extreme quadrant of “rough waters,” there is a frenetic pace of technological and market change. Cloud computing is currently in this quadrant along with many of its constituent parts. Winners often enjoy a short-lived first-mover advantage, relying on deep technological and marketing assets. Coupled with this is a keen sense of entry and exit strategies. Several years after the inception of the Internet, Netscape realized its first-mover advantage was short-lived, so the firm successfully positioned itself as an acquisition target for AOL for $10 billion. Similar strategies were employed by Savvis in its acquisition by CenturyLink, and 3Tera in its acquisition by Computer Associates. Virtualization firms are currently competing in this space. While VMware is widely regarded as the market leader, competitors including Microsoft and Citrix are differentiating their offerings through automation and management tools, virtualization workloads, and vendor partnerships.

The remaining two quadrants focus on where the market leads/technology lags, and where technology leads/market lags. A durable first-mover advantage can be obtained in both quadrants, although that is by no means a certainty. As an example, more than a decade ago VMware operated in a virtualization space of leading technology but lagging market. At that time, VMware’s technological strength, patents, intellectual property, and financial strength helped the company to achieve a durable first-mover advantage.

Tornadoes in the Cloud: The Market/Technology Perfect Storm

An interesting dynamic occurs in the quadrant where the pace of technology is growing and the market is expanding, as shown in Figure 2. This quadrant is where architectural and disruptive technologies are likely to occur, creating new markets and taking over incumbent ones tier by tier. Disruptive technologies are likely to spawn a first-mover advantage that can be either durable or short-lived.

But even more interesting is that rapid advances in technology can be augmented by the synergistic effect of an expanding market; that is, technologies are born, but the market creates an environment of competition and validation among them. This is a healthy dynamic. The market seeks the optimal technological solution whether it is architectural or component oriented. The market may even serve as a catalyst to wring out incremental improvements in existing component technologies. Component improvements rarely lead to a first-mover advantage, whereas architectural improvements often do. Therefore, the competition among technological solutions in this quadrant can lead to an unpredictable first-mover advantage.

Below are two compelling examples of this observation:

VLSI: In the early 1990s, the performance in silicon CMOS technology appeared to have peaked. The market demanded higher performance. Gallium arsenide (GaAs) and other Type III-V compound semiconductors had electron mobilities (measured in cm2 /V-s) an order of magnitude greater than n-type silicon. Heterojunction (Al/GaAs) materials had electron mobilities three orders of magnitude greater. The performance prospects were so compelling that the best minds in semiconductor device physics at the best universities stated that the integrated circuits industry would move to GaAs substrates in a wholesale fashion no later than 2010. That didn’t happen. GaAs had sufficient semiconductor processing difficulties that precluded its widespread substitution for silicon technology. Because of the market’s thirst for higher performance, the industry revisited silicon technology. The semiconductor industry was able to wring out performance enhancements in photolithography, transistor design, and voltage scaling. Without the dynamic of expanding technologies and markets, it is unlikely that substantive improvements in existing silicon technology would have occurred as quickly.

Cloud Computing/Hosting: The public cloud has a value proposition of offering services in a scalable, virtualized, and utility-priced manner accessible from the Internet browser. However, the market has concerns, both real and perceived, regarding security, compliance, and IT management. Against that backdrop, the industry has revisited every permutation of hosting and managed services to address these deficiencies. In addition, the industry has innovated private and hybrid clouds as new disruptive technologies to public clouds. Again, the symbiotic relationship of changing technologies and markets facilitated the vetting and validation of competing technologies.

Incumbent Ecosystem: Current Buyers and Suppliers

The competitive landscape captures the ecosystem generated from technology and market dynamics. The incumbent ecosystem of end-to-end cloud computing providers, buyers, and suppliers is shown in Figure 3. Suppliers can forward-integrate into the competitive space. Buyers can reverse-integrate. IBM is a classic example of a buyer that has reverse-integrated into the competitive space of end-to-end cloud computing solution providers. It is unlikely that the competitive forces in this ecosystem will achieve a first-mover advantage. After all, these competitive forces support and sustain current businesses and customers through component (incremental) improvements. This ecosystem can generate massive profits, but it is vulnerable to alternative disruptive technologies and niche providers, which can establish new markets.

Disruptive Ecosystem: New Entrants and Low-Cost Substitutes

The ecosystem that poses the greatest disruptive threat to the incumbents is shown in Figure 4. New entrants and low-cost substitutes incubate architectural (transformational) improvements that can create new and niche markets, especially at the low end. Architectural improvements often cost far less to develop than their component counterparts (Christensen, 1992). The main difference is that architectural improvements often create new markets and have performance trajectories capable of overtaking incumbent markets tier by tier. Architectural improvements also need to be developed and incubated in a setting that is minimally influenced by the incumbent ecosystem. On this basis, the competitive forces of new entrants and low-cost substitutes in this ecosystem have a greater likelihood for a first-mover advantage, whether durable or short-lived.

Cloud Computing Ecosystem: Migration Paths

The effective ecosystem for cloud computing is shown in Figure 5, which assembles incumbent and disruptive elements. This ecosystem embodies the interaction and relative strengths of technology and the market. The competitive forces of buyers, suppliers, new entrants, and low-cost substitutes have a primary migration path into the rivalry of end-to-end cloud providers. New entrants and low-cost substitutes can be acquired by the incumbents, which is often the case. However, new entrants and low-cost substitutes have a secondary migration path into the supplier domain, as these competitive forces have the potential to become the building blocks for future end-to-end cloud solutions.

Conclusion

While there is a paucity of data on what constitutes a composite performance metric in cloud computing, there is a wealth of data on individual performance attributes. Look no further than the competitive forces in the competitive landscape and ecosystem of cloud computing. End-to-end cloud computing providers that don’t possess the intellectual assets necessary to grow their ecosystem organically often build their ecosystem through the acquisition of niche skills and innovations from new entrants and low-cost substitutes.

Cloud computing is in a space where technology and markets are expanding. First-mover advantage can be short-lived or durable, depending on brand strength, financial assets, along with technological and marketing core competencies. A highly disruptive ecosystem emerges when technology and markets are expanding. At first glance, a disruptive ecosystem fosters architectural improvements and new markets, which are likely to lead to a first-mover advantage. However, disruptive ecosystems can have unintended technological consequences leading to all-out warfare between architectural and component improvements, owing to the market’s insatiable need to reach a stable, technological equilibrium. This equilibrium is constantly tested by the emergence of new disruptive technologies.

References

Michael E. Porter, “Competitive Strategy,” The Free Press, New York, 1980.

R. Foster, “Innovation: The Attacker’s Advantage,” Summit Books, New York, 1986.

Clayton Christensen, “Exploring the Limits of the Technology S-Curve Part I: Component Technologies,” Product and Operations Management, Volume I, No. 40. Fall, 1992.

Fernando F. Suarez and Gianvito Lanzolla, “The Half-Truth of First-Mover Advantage,” Harvard Business Review, Volume 83, Issue 4. April, 2005