Google boldly goes where no tech giant has gone before. The company’s stunning restructuring from Google to Alphabet signals a profound transformation in how the company will operate. The Alphabet structure should enable Google to continue growing its core ad business (which gushes cash) and provide multiple paths for top talent to run their own businesses. It’ll also allow the very smart, very rich Larry Page and Sergey Brin to finally have the focus they want to uncover new ways of impacting the world using data, movement, biology, and the electrical signals that now seem to link everything and everyone.
But what does it mean for Silicon Valley’s startup scene? In the short term, probably an end to the artificially low-priced cloud services Google has been pushing.
Google is one of the leaders in IaaS — infrastructure as a service — though it lags behind Amazon Web Services (AWS), Microsoft (Azure) and IBM. It’s Google, however, that has repeatedly shown a willingness to cut prices significantly to grow marketshare.
Will this continue?
For now, that’s hard to say, but it seems unlikely. At least, price cuts in excess of actual reductions in cost due to scale and Moore’s Law seem unlikely.
IaaS services are where a third-party provider, such as Google Cloud or Microsoft Azure, hosts the critical network infrastructure — the hardware, software, data storage and other elements — that allows companies to cost-effectively run their operations, test out new applications, and scale their business instantly. IaaS provides data storage, data backup, test environments, security, user management, and provides guaranteed uptime. These are all critical. Even large companies are transitioning their work away from on-premise servers and infrastructure and onto the cloud. For startups, IaaS is a must. They pay only for what they need. There is very little capital or upfront cost required, yet they can leverage the expertise, resources, and scale of a giant cloud provider. Build it, test it, unleash it onto the world. IaaS makes this possible.
According to Synergy Research Group, which tracks the IaaS market, AWS, Microsoft, IBM and Google “control well over half of the worldwide cloud infrastructure service market.” Their combined share is 54 percent — and it’s growing.
It’s Google’s marketshare, however, that’s growing faster than everyone else except Microsoft — which has made growing its cloud business a strategic focus. Indeed, before being named CEO, Satya Nadella ran Microsoft’s Azure business. A big reason for Google’s growth is undercutting the competition, which has proven particularly attractive to start-ups and small businesses.
John Dinsdale, Chief Analyst and Research Director at Synergy Research Group, told me that Google “absolutely” uses price cuts as a tool to garner marketshare from AWS and Microsoft. If the price cuts stop, no doubt the competition will gladly follow suit.
Building a better cloud
While the end of artificial price cuts may harm start-ups who have long benefitted from an IaaS cloud price war, it may also mean that ultimately everyone else gets a better product.
As Synergy’s Dinsdale told me, Google Cloud “is a high-growth business that has some decent scale to it, which sets it apart from a lot of the exploratory and highly speculative efforts that Google has been pushing.”
With Page and Brin now more focused on the big picture stuff, Google CEO Sundar Pichai could give the Google Cloud business the technical and business focus it demands — and which the market desires.
This sentiment was echoed by Jeff Ferry, analyst and founder of DailyCloud, a business site focused on the enterprise cloud market. Ferry told me that Google’s “cloud business has suffered from not being as glamorous as some of the moonshot projects.” Under this new structure, however, Ferry thinks that the Google leadership can focus on turning the “enterprise cloud business into a more important new opportunity.”
Ferry says that when it comes to the cloud, it’s less about “think big” because businesses that rely upon the service want to deal with someone fully focused on their unique needs and challenges. “They may admire technological geniuses,” he says, but they don’t buy from them.”
Transparency is good
In the official announcement, Larry Page said that “our company is operating well today, but we think we can make it cleaner and more accountable,” and that he intends to “improve the transparency and oversight of what we’re doing.”
By making Google — the Google we know and use — one of six separate entities, and pledging greater transparency and accountability, Page may have signaled the end of Google using money to build IaaS marketshare. Instead, these monies will likely go toward the many moonshots and experiments on the Alphabet side of the ledger. This is not necessarily a bad thing, not for Google, not for the market, not for cloud innovation. IaaS may be boring, and it’s no moonshot, but it is vital to our increasingly digital lives and to nearly every business. Building Google Cloud through innovation, not price cuts, may itself prove transformative.
Note: I asked Google for comment on how the restructuring might impact IaaS efforts. They told me that at this time they aren’t providing additional commentary beyond the official statement.