When Amazon Web Services first started to demonstrate its market dominating ability in the public cloud, its competitors would often be heard saying, ‘we aren’t competing with them’ and ‘we are aiming at a specific area, that’s our differentiator’.
I would retort that AWS is competing with everyone because it offers everything, and if it doesn’t offer that specific SaaS service to that market vertical today, well it might just do that tomorrow.
Then along came Microsoft Azure, and the competition for market share became stiffer, the smaller fish in the pond find it harder to forage enough to stay alive.
The evidence is clear, HPE, Rackspace, and many more have effectively exited the public cloud market, and now offer managed services or a hybrid offering in partnership with others.
Choice certainly still matters, and there’s still space in the market for everyone else, but there is an oligopoly starting to form.
According to research from Forrester, AWS and Microsoft Azure will bring in around three fourths of all revenues in public cloud platforms this year, whilst in desktop applications, Microsoft, Google, and Adobe have a combined market share of nearly 90%.
The same kind of oligopoly can be seen in CRM solutions, with Salesforce, Microsoft Dynamics, and Oracle holding around 70% of all SaaS subscription revenues for sales force automation and service applications, whilst Adobe, Oracle, and Salesforce have close to 70% of the market share for SaaS marketing automation.
An oligopoly isn’t necessary a bad thing, as long as those running the market continue to invest in expanding their offerings at lower prices. However, they it can also result in negatives.
According to Forrester: “they can also penalize customers if those firms collectively agree (implicitly or explicitly) to raise prices or to neglect to improve their products to maximize profits.”
The analyst outfit believes that public cloud platforms and desktop apps already have an oligopolistic concentration, as do the CRM solutions, however, ePurchasing, supply chain management, and HRMS are yet to be consolidated, whilst eCommerce and FMS are also a long way from consolidation.
Whilst there can be benefits, it would appear that there’s more negatives associated with the rise of oligopolies.
Forrester points to there being a higher risk for SaaS applications like CRM, HR management, and financial management systems, to be hit by vendor lock-in.
Whilst the traditional software world may have been dominated with the likes of Oracle or SAP, and vendor lock-in was often cited as a concern, Forrester says that there were options to escape: “they can skip upgrades or turn to third-party maintenance providers to cut fees in half. Clients of SaaS vendors don’t have these options; if they stop paying the vendor, they lose access to the apps. And their processes and employees are just as tied to the SaaS app as they were to the licensed software apps, making switching costs almost as high.”
There’s also the risk that cloud vendors like Salesforce will eventually become so large that they can no longer grow faster than the overall technology market, leading to investors pressuring vendors to deliver more profits.
The analyst firm expects that to lead to a reduction in R&D and opting to no longer compete on price. CRM software is most at risk from this, but the firm doesn’t rule out it spreading to other SaaS apps.
A vendor opting to cut back on innovation is another risk pointed out. With the likes of Microsoft Office dominating a market the risk is that prices stay the same and innovation suffers. “Not until Google Docs and Slack came along was there real innovation in this market, in the form of SaaS offerings and multiparty access to and authoring of a shared document, spreadsheet, or presentation,” said Forrester.
With all that said, there is a potential reward for customer, lower costs and better capabilities. With the SaaS market being relatively easy to enter for new vendors, incumbents don’t have the luxury of resting on their laurels, or the scope to increase prices substantially. In effect, they are kept honest by competition.