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Cloud Giants’ Strength Is Their Achilles Heel

The conventional wisdom is that the biggest cloud computing providers like Amazon, Microsoft and Google have an unstoppable lead because they’re big enough to buy superior custom hardware straight from suppliers. But some are beginning to question how durable the big players’ hardware advantages really are.

Some investors and entrepreneurs argue that the more specialized the behemoths become in terms of hardware, the more difficult it becomes for them to adapt to new software technologies. Fueling the debate is the emergence of a handful of cloud startups relying on commodity gear and open-source software.

To be sure, it’s unlikely that any startup will knock any of the big companies out of the market anytime in the foreseeable future. The hardware advantages enjoyed by Amazon, in particular, are hard to deny. The company works with Intel to design custom processors; it has networking boxes built to its own specs that run house-written software, and it even designs its own power substations to ensure a steady flow of electricity to data centers. The company keeps the margins of its cloud business a secret, but most analysts believe all the hardware and software customizations drive costs down and profits up.

Still, Amazon does have a vulnerability common to industry leaders in many sectors: Once a company has committed to a certain piece of software, it’s difficult to move to new things.

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