In the early days of computers, companies used a fee-for-shared-service model for technology. It was common to pay a company like IBM rent for use of its mainframe machines. As computers became smaller and less expensive, businesses began to purchase their own equipment and the computer rental model went the way of the dinosaur. Interestingly, we’re now seeing a return to that old model, but instead of computers, businesses are renting web and cloud infrastructure services for apps and storage.
This is great news for small- and medium-size companies, as building the data centers to run those services is exorbitantly expensive. By only purchasing the infrastructure cloud services that they need from large companies like Microsoft, Google and Amazon, they eliminate the risk of that huge financial investment.
Even better, we’ve seen recent price wars among those service providers. Some of them slashed their prices by as much as 85 percent this spring in an effort to attract and retain customers.
I sit on the board of several companies that are dependent on web services and have seen this decision to rent play out several times. A good example is Carbonite, which is launching its computer backup services across Europe and recently joined the ranks of Amazon customers for web services. The decision for Carbonite was simple: If it were to build its own data center, not only would it cost excessive funds, it would have to maintain it and then (all too soon) upgrade it. It would be akin to building its own telephone or cable company instead of simply renting what it needs from a provider like Verizon or Comcast.
While the computer rental model disappeared long ago, this rental model for infrastructure cloud and web services is here to stay. The costs for companies to build their own platform aren’t going down, and it’s unlikely that the rental prices are going to skyrocket any time soon. Instead, the service providers will continue to fight it out for the lion’s share of customers, as volume is the key to remaining a leader in this market.
Then, providers will start to offer additional services. Similar to cell phone companies, the basic plans may remain more or less the same, but those added services are where they’ll start to see real profits.
So what’s a company to do in this new environment? Sit back, watch this battle of the behemoths, and enjoy the lower rental prices for as long as they can.
Charles Kane is a senior lecturer in Finance at MIT Sloan School of Management and sits on the boards of numerous publically-traded technology companies as well as several social entrepreneurial ventures. He is the former president of One Laptop per Child and coauthor of the book Learning to Change the World: The Social Impact of One Laptop Per Child