The Future of the Internet: The Four Horsemen of the Consumer Cloud, or is it Five?

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The web is a dominant force in daily life for consumers, defining new social memes for communicating, shopping, organizing, working, learning, and being entertained as it absorbs value from the industries surrounding it.  Trillions of dollars, in device purchases, in advertising, in content subscriptions, in retail sales, in service charges, in transaction fees, in voice minutes, in pay-per-views and other sources, are up for grabs.  From this primordial ooze come “meta-aggregators” to help consumers make order from the chaos, while consolidating the value to their own benefit.  Amazon, Apple, Facebook and Google have all embraced this opportunity from disparate corners of the transforming landscape, forcing once friendly web pioneers into bitter competition and laying most niche players to waste.  Assessing the strengths and weaknesses of each of these competitors, and of possible dark horse Microsoft, we see Google with strongest hand, followed by Amazon and Apple, and Microsoft and Facebook with the greatest challenges.

The simultaneous maturation of smartphones/tablets, fast and ubiquitous wireless, content delivery networks and cloud applications is catalyzing a generational paradigm shift.  Through its history, the technology industry has seen dramatic generational transformations every 25-30 years.  The last such upheaval occurred in the ‘80’s, when the arrival of the PC, the cell phone, widespread cable TV and the break-up of AT&T led many erstwhile industry leaders to ruin while establishing a new breed of companies that proceeded to dominate the next decades.  Today, a similar phenomenon is underway, potentially a death knell for many PC-era bellwethers and an impetus for new leadership.

This upheaval is accelerating the pace at which many traditional industries are being eroded, putting trillions of dollars in play.  We see the consumer PC market ($105B worldwide), stand alone electronic devices ($330B), advertising ($1.5T), channelized video ($175B), brick-and-mortar retail ($3.9T), transaction fees ($159B), print media ($75B), music/radio ($14B), consumer services ($100B), and many other business, all at risk to on-line competition on various timelines.

Much of this value will accrue to companies that integrate the vast resources moving to the web into a compelling experience for consumers.  Consumers are starting to demonstrate a preference for integrated web experiences that curate content, facilitate interaction, enable e-commerce, focus navigation, and simplify the web experience.  Increasingly, this means integrating from the physical device, through the on-line services, including the network and the data centers from which they are provided, essentially providing a customized, semi-private internet.

Amazon, Apple, Facebook and Google are extending their fiefdoms of dominance into broader roles that bring them into direct conflict with one another.  Not long ago, these companies were close collaborators, but familiarity breeds contempt.  Today, ambitions spill over into fierce competition in disparate areas – Apple iOS vs. Google Android, Amazon Prime vs. Apple iTunes, Facebook vs. Google+, to name a few.  Tomorrow, the competition will be comprehensive and direct.

In the inevitable 4-way confrontation, each brings valuable assets and burdensome handicaps to their pursuit of leadership in the integrated consumer cloud.  The strengths are obvious: Amazon’s e-tail infrastructure, Apple’s design, integration and music dominance, Facebook’s 800M active users, and Google’s advertising, search and content delivery leadership.  The biggest weaknesses are less apparent: Amazon’s thin retail margins, Apple’s insular culture and weak infrastructure, Facebook’s reliance on others’ platforms, and Google’s fragmentation and IPR vulnerability.

Microsoft is a potential dark horse candidate to crash the 4-way party, with its own strengths and weaknesses.  Wireless carriers, device makers, electronics retailers, and software developers would all like a sustainable third platform to challenge iOS and Android.  The only real candidate is Microsoft, and with the support of its ecosystem, it stands a chance of success.  After years of misfires, it has finally delivered a strong mobile OS with an array of company assets – xBox live, Bing, Skype, Office 365, SkyDrive, etc. – in support.  Adoption of mobile platforms by enterprises, where Microsoft has a clear edge, could be its biggest advantage.

The “meta-aggregators” will consolidate much of this opportunity through alliance, acquisition or competition, leaving only truly compelling and protected businesses independent.  The land grab has already begun, with Amazon’s relentless roll up of on-line retailers, Google’s appetite for specialized advertising and web services niche players, and the slow roll of all four (five?) into adjacent markets.  Eventually, each will offer a comprehensive, well-integrated suite of cloud-based services, favoring their own properties via superior cross application integration and performance.  Independent applications will survive only if they can establish critical mass, sustainable differentiation and barriers to switching.  Most will fail and either be swallowed up or driven out.

We believe Google and Amazon are positioned to be the biggest winners, followed by Apple and then Microsoft and Facebook.   The opportunity is large enough that all five “meta-aggregators” could share long term success, but we believe that the spoils will be divided unequally.  Of the leaders, Amazon’s order and fulfillment infrastructure is a formidable barrier ensuring the company’s leadership in the largest revenue opportunity on the web.  Google’s massive distributed data processing network gives it performance advantages that will be difficult to replicate.  Apple’s device focus and aspirational branding are set in its Jobsian DNA, and will likely contain the company to its wildly profitable corner and deny it manifest destiny.  Facebook lacks a platform and Microsoft lacks users – hmmmm….

For the full research note, please visit our published research site.

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