The Dilemma Of Enterprise IT Vendors

THE Enterprise IT market is tough for startups. We recently saw Redis Labs moving to a more restrictive license to fend off competition from the cloud providers. This difficulty results from both open source and public cloud services. Look at Docker and its troubles monetizing their platform, despite its huge success with developers. Just a few years back, there was a huge ecosystem behind Docker and I don’t know what happened to some startups in that ecosystem. The same is happening in the Kubernetes ecosystem today. Despite marketing spin by many startups in the Kubernetes ecosystem, they are struggling for monetization.

Why enterprise software companies struggle?

Open source and public cloud services are completely reshaping the enterprise IT ecosystem. Whether you are a large traditional vendor or a startup, these two forces are disrupting these vendors or severely impacting their monetization. Look at Oracle and see the market pressure on their business due to both open source and public clouds. On one side, open-source software is severely impacting their margins and, on the other side, public cloud services are undercutting their database business. The same story applies to startups and they are getting hammered by both open source and cloud services.

When we talk about open source, the impact on startup is not just from a vendor in a particular market segment releasing the software under an open-source license but, also, from technology companies in areas not related to enterprise IT. For example, open-source software released by companies like Netflix, Capital One, Expedia, etc. disrupted many startups in the DevOps space. These companies released the tools developed for their internal use into open-source software and fostered a community around it. There is no way startups could monetize under these circumstances.

Now think of the Kubernetes ecosystem. According to certain estimates and from our own analysis of public data, AWS is making more money than any other vendor in the ecosystem. Apart from AWS, both Google and Microsoft are positioned to take advantage of the Kubernetes ecosystem. Among the legacy vendors and those focussed on on-premises deployments, Red Hat has established itself as a leader in the on-premises Kubernetes deployments and Pivotal has the potential to gain traction with PKS. Then there are few other vendors like Docker and Mesosphere that can take advantage of the ecosystem to compete against Red Hat and Pivotal. But, it will be tough for many other startups in the Kubernetes ecosystem to fend off both the impact of open source and the market share of AWS (and other cloud providers).

Open source and public cloud services are completely disrupting the infrastructure and platform market along with some layers above the platform. Large vendors struggle to effectively monetize with open source because of the onslaught of AWS and startups are facing a double whammy with both open source and public cloud providers severely restricting what is available in the market share pie.

How to compete in a world dominated by OSS and public cloud providers?

There are two strategies startups can use to compete in today’s enterprise IT market.

• Innovate on the business model that runs along with the cloud providers’ business model. SpotInst is a good example of this strategy. SpotInst takes advantage of spot instances provided by various cloud providers and offering an abstracted service on top. Spot instances will not go away as long as the need for maintaining excess capacity exists for the hyperscale providers (almost forever). As long as a startup feeds off its excess capacity without directly impacting the cloud providers’ revenue model, the cloud providers will not care about the business opportunity. SpotInst is well prepared to take advantage of the excess capacity from multiple cloud vendors. Serverless compute also fits well with this consumption model, providing SpotInst with another opportunity to monetize spot instances. Startups need to innovate on the business models that silently works along with hyperscale providers without attracting them into space
• If business model innovation described above is not an option, startups should focus on building a model that takes advantage of the following two factors
• Multi-cloud is key. None of the hyperscale providers care about multi-cloud. Even though Google and Microsoft talk about multi-cloud today, it is a marketing message focussed on stopping all the workloads from going to AWS. Offering a higher-order service that can help enterprises use multi-cloud seamlessly is still a good opportunity
• Open source is another important factor to consider. Open source is not a viable path for many startups, especially VC-funded startups. First, monetizing on open source is tough because the underlying economics is one of abundance and few startups have the appetite or wherewithal to effectively compete in this market dynamic. But, without open-source, another open-source project could easily disrupt the startup. However, for startups to compete effectively with open source, they need to be multi-cloud and, probably, use a license that protects them from the market muscle of public cloud providers. An even more effective strategy is to standardize one of the AWS services but make it available as a multi-cloud offering. Minio, an object storage platform with S3 compatible API, is a good example of this approach. Such an approach will keep AWS at a distance and the startup can take advantage of industry standardization with AWS API

Competing in today’s enterprise IT market is tough. Startups need a multi-cloud offering and an anchor in the open-source community to compete effectively in the market.