Hass and Associates Cyber Security The Dawn Of Cloud 2.0 And Why Google Started A Price War

Editor’s note: Peter Relan is serial entrepreneur-turned-founder of two incubators: YouWeb (focused on gaming), and Studio 9+ (focused on big data, IoT, wearables, and P2P marketplaces). His incubations include OpenFeint, Crowdstar, Hammer and Chisel, Spaceport, and Agawi. Prior to founding his incubators, Peter held founding roles at Webvan and Business Signatures, as well as executive roles at Oracle and HP.

Google recently announced up to 85 percent reduction in pricing for its PaaS and BigQuery services. Soon after, AWS and Microsoft followed suit. Welcome to Cloud 2.0.

Google did this because it could

Google’s core cash engine is its paid web search/advertising business, which generates almost $4 billion a quarter from 29 percent net profit margin. Amazon’s core business, on the other hand, is retail e-commerce, which generates almost no profit.

So Google can muscle its way into the cloud IaaS and PaaS space even though Amazon was the pioneer with AWS. Microsoft can, too, with its huge Office and Windows profit engines. AWS may well be the pioneer of Cloud 1.0, but it’s not clear whether it can play a full-on price war with Google and Microsoft — and others waiting in the wings to pounce on new opportunities.

Even though Jeff Bezos has always convinced the street that he can pull a rabbit out of a hat, this one is going to be a tougher sell. But don’t bet against him yet. There is still Cloud 2.0 and he can acquire things in that space. But back to Google for now.

Google did this because it had to

Even if Google could do it, why did it have to? As mobile takes off, Google’s growth on the web is slowing, and it has new challengers, including Facebook, which is killing it in mobile. Mobile usage continues to eat away into desktop usage, browser usage on mobile versus app usage continues to decline, and mobile clicks generate less money than desktop clicks.

YouTube is certainly now generating revenues, and Google Docs is certainly taking some share away from Microsoft Office, especially in the SMB market. But guess what? They are basically both cloud plays.

So the next growth engine in five years is self-driving cars, drones or Google Glass? Unlikely. The ATAP (Advanced Technologies and Projects) groups are exciting but not huge growth businesses yet. Cloud services and apps, however, are expected to grow dramatically to over $100 billion of the $1 trillion of spend on software.

So Google needs to aggressively gain share in the cloud market. It needs to double down on the cloud plays that are working and offer even more in the cloud to capture growth in markets other than web advertising where its growth is slowing.

What does this mean for innovation?

Price wars don’t usually bode well for innovation. It’s often a signal that the offering has become a commodity. But what it really means is that, while Cloud 1.0 is moving toward commodity, Cloud 2.0 is already gearing up — and it will be disruptive again.

So what can we expect from the gorillas and the next Cloud startups? They’re muscling for market share with Cloud 1.0. Surely there will be some innovation like Google BigQuery, which came out only last year and is based on Dremel, Google’s internal big-data engine. But the disruptive innovation will come from startups. Surprised?

What will Cloud 2.0 innovation look like?

There will be two types of startups in the next generation of cloud computing.  One will be startups that leverage the incredible cost structure Cloud 1.0 just achieved for them to build cloud apps. Of the $100 billion cloud market, this is the largest category — possibly half of it, according to research analysts. Google is already in there with its own cloud apps like Google Docs. Both enterprise and consumer apps will combine with mobile in new and interesting ways to create huge new companies.

The second type of innovation will be from startups that invent new Cloud 2.0 services, while the gorillas focus on the market-share war of Cloud 1.0 services in IaaS, PaaS and now BaaS.

IaaS innovations will include software-defined networking, virtualization, edge computing, storage and security advances. At the end of the day mobile apps with cloud-based backends are a new architecture. How will virtualization, networking, security, storage tech adapt to the mobile era? Look at Fastly, a new August Capital-backed Edge Computing CDN built just for Mobile architectures. A new CDN? Not something we look to AWS and Google for. Yet.

PaaS innovations will include new programming environments and web services like Pantheon that make it easier and faster to build breakthrough content and app experiences. And BaaS innovations will include new cloud based back-ends like Kinvey, along with data-mining and analytic services in the cloud.

Cloud 2.0 will be heralded by a bevy of startups already innovating for the next wave while the gorillas who can and have to fight for Cloud 1.0 market share divvy up the market. Then there will be a wave of acquisitions as Cloud 2.0 companies gain scale, and Cloud 1.0 gorillas have to differentiate. What do you think? Please comment and let me know.